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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-261284
PROSPECTUS SUPPLEMENT NO. 3
(to Prospectus dated April 11, 2023)
Up to 1,582,025 Shares of Class A Common Stock
This prospectus supplement updates and supplements
the prospectus dated April 11, 2023 (the “Prospectus”), which forms a part of our Registration Statement on Form S-3 (No.
333-261284), as amended by Post-Effective Amendment No. 1 to Form S-3 on Form S-1 filed with the U.S. Securities and Exchange Commission
(the “SEC”) on April 3, 2023 (the “Registration Statement”), relating to the offer and sale from time to time
by the selling stockholders identified in the Prospectus, and any of their respective permitted assignees, (each, a “Selling Stockholder”
and collectively, the “Selling Stockholders”) of up to 1,582,025 shares of Class A common stock, par value $0.0001 (the “common
stock”), of Shift Technologies, Inc. (the “Company”). These shares are issuable upon conversion or redemption of the
Company’s 4.75% Convertible Senior Notes due 2026. We are not selling any shares covered by the Prospectus and will not receive
any proceeds from the sale of shares of common stock by the Selling Stockholders pursuant to the Prospectus.
This prospectus
supplement is being filed to update and supplement the information in the Prospectus with the information contained in our (i) Current
Report on Form 8-K, filed with the SEC on April 24, 2023 (the “Current Report No. 1”), (ii) Current Report on Form 8-K, filed
with the SEC on June 28, 2023 (the “Current Report No. 2” and, together with the Current Report No. 1, the “Current
Reports”), (iii) Amendment No.1 to the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2022, filed with the
SEC on June 29, 2023 (the “Annual Report”) and (iv) Amendment No. 1 to the Quarterly
Report on Form 10-Q/A for the quarterly period ended March 31, 2023, filed with the SEC on June 29, 2023 (the “Quarterly Report”).
Accordingly, we have attached the Current Reports, Annual Report and Quarterly Report to this prospectus supplement.
This prospectus supplement updates and supplements
the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus,
including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus, and if
there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information
in this prospectus supplement.
We are an “emerging growth company”
as defined under U.S. federal securities laws and, as such, are subject to reduced public company reporting requirements.
Investing in our securities involves risks that
are described in the “Risk Factors” section beginning on page 7 of the Prospectus and under similar headings in any amendments
or supplements to the Prospectus.
Neither the SEC, nor any state securities commission
has approved or disapproved of these securities or determined if the Prospectus or this prospectus supplement is truthful or complete.
Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is June
29, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported) April
24, 2023 (April 19, 2023)
SHIFT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
|
001-38839 |
|
82-5325852 |
(State or other jurisdiction of
incorporation or organization) |
|
(Commission File Number) |
|
(I.R.S. Employer
Identification No.) |
| 290 Division Street, Suite 400, 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 240a-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 240.13a-4(c)) |
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 |
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) if the Exchange Act. ☐
Item 3.01 Notice of Delisting or Failure to
Satisfy a Continued Listing Rule or Standard; Transfer of Listing.
On April 19, 2023, Shift Technologies, Inc. (the “Company”)
received a written notice (the “Notice”) from the Listing Qualifications Department (the “Staff”) of The Nasdaq
Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the Company’s Market
Value of Listed Securities ("MVLS") was below the minimum of $35 million required for continued listing on the Nasdaq Capital
Market pursuant to Nasdaq Listing Rule 5550(b)(2) (the “Market Value Standard”). The Staff also noted that the Company does
not meet the requirements under Nasdaq Listing Rules 5550(b)(1) (Equity Standard) and 5550(b)(3) (Net Income Standard). The Notice does
not impact the listing of the Company’s Class A common stock, par value $0.0001 per share (“Class A common stock”),
on the Nasdaq Capital Market at this time.
The Notice provided that, in accordance with Nasdaq
Listing Rule 5810(c)(3)(C) (the “Compliance Period Rule”), the Company has a period of 180 calendar days from the date of
the Notice, or until October 16, 2023 (the “Compliance Date”), to regain compliance with the Market Value Standard. During
this period, Class A common stock will continue to trade on the Nasdaq Capital Market. If at any time before the Compliance Date the Company’s
MVLS closes at or above $35 million for a minimum of 10 consecutive business days as required under the Compliance Period Rule, the Staff
will provide written notification to the Company that it has regained compliance with the Market Value Standard and will close the matter
(unless the Staff exercises its discretion to extend this 10 business day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H)).
If the Company does not regain compliance with the
Market Value Standard by the Compliance Date, the Staff will provide a written notification to the Company that Class A common stock will
be subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Hearings Panel (the “Panel”).
However, there can be no assurance that, if the Company receives a delisting notice and appeals the delisting determination by the Staff
to the Panel, such appeal would be successful.
The Company intends to monitor its MLVS between now
and the Compliance Date, and may, if appropriate, evaluate available options to resolve the deficiency under the Market Value Standard
and regain compliance with the Market Value Standard. The Company may also try to comply with another Nasdaq listing criteria, such as
the one under Nasdaq Listing Rule 5550(b)(1) (Equity Standard). However, there can be no assurance that the Company will be able to regain
or maintain compliance with Nasdaq listing criteria.
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: April 24, 2023 |
/s/ Jeff Clementz |
| |
Name: |
Jeff Clementz |
| |
Title: |
Chief Executive Officer |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported) June
28, 2023 (June 23, 2023)
SHIFT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
|
001-38839 |
|
82-5325852 |
(State or other jurisdiction of
incorporation or organization) |
|
(Commission File Number) |
|
(I.R.S. Employer
Identification No.) |
| 290 Division Street, Suite 400, 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 240a-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 240.13a-4(c)) |
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 |
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) if the Exchange Act. ☐
Item 5.02 Departure of Directors or Principal Officers;
Election of Directors; Appointment of Principal Officers; Compensatory Arrangements of Certain Officers.
Shift Technologies, Inc. (the “Company”)
is announcing that Sean Foy is no longer the Chief Operating Officer of the Company, effective June 23, 2023 (the “Effective
Date”).
The Company presently does not have any plans to fill
the position of Chief Operating Officer, and Ayman Moussa, Chief Executive Officer of the Company, assumed oversight of the majority of
Mr. Foy’s operational duties as of the Effective Date.
The Company expects to enter into a separation agreement
with Mr. Foy, the material terms of which will be disclosed in a subsequent Current Report on Form 8-K.
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: June 28, 2023 |
/s/ Oded Shein |
| |
Name: |
Oded Shein |
| |
Title: |
Chief Financial Officer |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
|
|
|
|
|
|
|
(Mark
One) |
| ☒ |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For
the fiscal year ended December 31,
2022 |
| ☐ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For
the transition period from _______ to _______ |
Commission
file number: 001-38839
Shift
Technologies, Inc.
(Exact
name of registrant as specified in its charter)
|
|
|
|
|
|
| Delaware |
82-5325852 |
| (State
or other jurisdiction of incorporation or organization) |
(IRS
Employer Identification No.) |
|
|
|
290
Division Street, Suite
400, San
Francisco, California
94103-4893
(Address
of principal executive offices) |
Registrant's
telephone number, including area code: (855)
575-6739
Securities
registered pursuant to Section 12(b) of the Exchange 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 |
Securities
registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
No
☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes
☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”,
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large accelerated
filer |
☐ |
|
Accelerated filer |
☐ |
|
Non-accelerated
filer |
☒ |
|
Smaller reporting
company |
☒ |
|
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. ☐ |
Indicate by check
mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. ☐
If securities
are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check
mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The
aggregate market value of the registrant's common stock held by non-affiliates of the registrant (without admitting that any person whose
shares are not included in such calculation is an affiliate), computed by reference to the price at which the common stock was last sold
on June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was $54,978,700.
As
of March 30, 2023 the registrant had 17,228,479
shares of Class A common stock outstanding.
EXPLANATORY
NOTE
Shift Technologies,
Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to the Company’s Annual
Report on Form 10-K for the annual period ended December 31, 2022, which was originally filed with the Securities and Exchange Commission
(the “SEC”) on March 31, 2023 (the “Original Report”), for the sole purpose of amending Exhibits 31.1 and 31.2
(the "Exhibits") that were filed with the Original Report. The Exhibits were amended to include the required certifications of internal
control over financial reporting in paragraph 4 of the Exhibits, which were omitted due to administrative oversight.
Except as described
above, no other changes have been made to the Original Report and this Amendment does not modify or update disclosures in the Original
Report and does not reflect subsequent events occurring after the date of the Original Report. Accordingly, this Amendment should be read
in conjunction with the Original Report, which continues to speak as of the date of the Original Report, and the Company’s other
filings with the SEC. The filing of this Amendment is not an admission that the Original Report, when filed, included any untrue statement
of a material fact or omitted to state a material fact necessary to make a statement not misleading.
TABLE
OF CONTENTS
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained
in this Annual Report on Form 10-K that reflect our current views with respect to future events and financial performance, business strategies,
and expectations for our business constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. 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,”
the negative of any of these and any similar expressions may identify forward-looking statements, but the absence of these words does
not mean that a statement is not forward-looking.
Some factors
that could cause actual results to differ include, but are not limited to:
•general
business and economic conditions
and risks
related to the larger automotive ecosystem, including, but not limited to, unemployment levels, consumer confidence, fuel prices, changes
in the prices of used vehicles, and interest rates;
•competition,
and the ability of the Company to grow and manage growth profitably;
•our
history of losses and ability to achieve or maintain profitability in the future;
•our
ability to establish our software as a platform to be used by automotive dealers;
•risks
relating to our inspection, reconditioning and storage facilities;
•impacts
of COVID-19 and other pandemics;
•our
reliance on third-party carriers for transportation:
•our
current geographic concentration where we provide reconditioning services and store inventory;
•cyber-attacks
or other privacy or data security incidents;
•the
impact of copycat websites;
•failure
to adequately protect our intellectual property, technology and confidential information;
•our
reliance on third-party service providers to provide financing;
•the
impact of federal and state laws related to financial services on our third-party service providers;
•risks
that impact the quality of our customer experience, our reputation, or our brand;
•changes
in the prices of new and used vehicles;
•our
ability to correctly appraise and price vehicles;
•access
to desirable vehicle inventory;
•our
ability to expeditiously sell inventory;
•our
ability to expand product offerings;
•risks
that impact the affordability and availability of consumer credit;
•changes
in applicable laws and regulations and our ability to comply with applicable laws and regulations;
•risks
related to income taxes and examinations by tax authorities;
•access
to additional debt and equity capital;
•potential
dilution resulting from future sales or issuances of our equity securities;
•risks
related to compliance with NASDAQ listing standards;
•risks
related to compliance with the Telephone Consumer Protection Act;
•changes
in government regulation of ecommerce;
•changes
in technology and consumer acceptance of such changes;
•risks
related to online payment methods;
•risks
related to our marketing and branding efforts;
•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;
•our
reliance on Lithia Motors for certain support services;
•seasonal
and other fluctuations in our quarterly results of operations;
•changes
in the auto industry and conditions affecting automotive manufacturers;
•customers
choosing not to shop online;
•natural
disasters, adverse weather events and other catastrophic events;
•adequacy
and availability of insurance coverage;
•our
dependence on key personnel;
•increases
in labor costs and compliance with labor laws;
•our
reliance on third-party technology and information systems;
•our
use of open-source software;
•claims
asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former
employers;
•significant
disruptions in service on our platform;
•impairment
charges;
•our
level of indebtedness, changes in interest rates, and reliance on our Flooring Line of Credit with Ally Bank;
•volatility
in the price of our common stock;
•issuances
of our Class A common stock and future sales of our Class A common stock;
•anti-takeover
provisions in Delaware corporate law;
•risks
related to our financial guidance and coverage by securities analysts;
•our
ability to establish and maintain effective internal control over financial reporting;
•the
effect of the announcement of the restructuring on our ability to retain and hire key personnel and maintain relationships with its customers,
suppliers and others with whom we do business;
•our
ability to successfully realize the anticipated benefits of the Restructuring Plan;
•our
ability to successfully integrate Fair Dealer Services, LLC’s operations, technologies and employees;
•the
ability to realize anticipated benefits and synergies of the Fair acquisition, including the expectation of enhancements to our products
and services, greater revenue or growth opportunities, operating efficiencies and cost savings;
•the
ability to realize anticipated benefits and synergies of the CarLotz Merger, including the expectation of enhancements to our products
and services, greater revenue or growth opportunities, operating efficiencies and cost savings; and
•the
ability to ensure continued performance and market growth of the combined company’s business.
•other
economic, business and/or competitive factors, risks and uncertainties, including those described in “Item 1A. Risk Factors.”
We do not undertake,
and expressly disclaim, any 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. We caution you not to place undue reliance on the forward-looking
statements, which speak only as of the date of this filing.
Part
I
Item 1. Business
Overview
Shift
Technologies, Inc. ("Shift", the "Company") is a consumer-centric omnichannel retailer transforming the used car industry by leveraging
its end-to-end ecommerce platform and retail locations to provide a technology-driven, hassle-free customer experience.
Formed
in 2013 and launched in 2014, Shift started as a pure ecommerce seller and buyer of used cars, aimed at transforming the customer experience
within the industry. Since inception, Shift has invested significantly in its technology platform in an effort to create an exceptional
customer experience and to support and leverage the internal operations of the Company.
In
August 2022, Shift announced both a strategic and operational restructuring and a merger with CarLotz, Inc. ("CarLotz"), a consignment-to-retail
used vehicle marketplace that operated a technology-enabled buying, sourcing, and selling model with an omnichannel experience. With the
implementation of the restructuring in the second half of 2022 and the close of the merger on December 9, 2022, Shift evolved into an
omnichannel used vehicle retailer and established a plan to position the Company for long-term profitable growth by prioritizing unit
economics, reducing operating expenses and maximizing liquidity.
The
Company has three markets in California and Oregon, where customers can test drive vehicles and work with sales associates during any
point of the sale process. Each market has Shift-managed reconditioning centers to prepare each vehicle for sale using a 150+ point inspection
process. In-house reconditioning provides better control of timing and greater efficiency within our operations. In addition to performing
the 150+ point inspection, we offer customers a seven-day, 200-mile return policy, to ensure consumer confidence in their purchase from
Shift.
Following
the merger with CarLotz, Shift has adopted an omnichannel distribution strategy. A car purchase can be complicated and is typically one
of the largest purchases in an individual’s life. Because diverse buyers and sellers like to transact differently, the omnichannel
business model allows Shift to meet our customers where they would like to be served. For those who embrace a fully online experience,
Shift has a highly rated end-to-end ecommerce platform. For those who would like personal help, Shift has three markets with trained sales
consultants who will walk a customer through the entire research and sales process.
Shift's
approach has always been driven by technology. Our technology enables a superior customer experience and is critical to our scalability
in many areas of our operations.
•The
Shift technology platform provides a seamless consumer experience for buying a car - from the search and discover experience on the website
to a seamless digitally-driven purchase transaction including financing and vehicle protection products.
◦The
Shift technology platform provides a comprehensive experience for those selling cars as well. Customers go online, enter information about
their car, and get an instant online quote. The machine learning-driven acquisition engine predicts the price we will pay for the vehicle,
the price at which we can resell the vehicle, the level of reconditioning required to determine impact on margin and operations, and the
likelihood that consumers will purchase ancillary products in connection with the sale of the vehicle.
We
use proprietary technology in many areas of our operations including inventory acquisition, pricing, and reconditioning processes to improve
efficiency and allow us to scale operations. For example, mechanics use an app that displays a step-by-step guide for inspection and reconditioning,
while tracking this data in a cloud database for real-time analytics and decision engine processing to provide optimized reconditioning
standards.
Industry and
Market Opportunity
The
U.S. used automotive market is massive, fragmented, and ripe for disruption.
•Massive
market: According
to Cox Automotive, the U.S. used vehicle market hit an all-time record of 40.9 million units in 2021. At an average selling price in 2021
of approximately $26,700 per Statista, the industry generated over $1 trillion in sales.
•Highly
fragmented:
Market share in the US is extremely fragmented with the top 100 used vehicle retailers accounting for only approximately 11.1% of total
used car sales in the US, according to Automotive News.
•Ripe
for disruption:
The used car buying process suffers from poor overall consumer experience, which is attributable to opaque pricing, high pressure sales
tactics, inventory of questionable and widely varying quality, and a generally arduous and lengthy sales process. The peer-to-peer market
has even greater challenges for consumers including lack of transparency, the possibility of fraud, logistical challenges, limited or
no ability to test drive or return vehicles, lack of financing or warranty options.
•Limited
ecommerce penetration:
The used automotive market remains among the least penetrated ecommerce markets in the US with consumer interest in online auto purchases
increasing. According to Data Feed Watch, 61% of US car buyers are open to purchasing online versus only 32% before COVID-19.
•Consumer
desire for omnichannel experience: While
Shift was founded as a pure e-commerce used auto buyer and seller and has invested heavily in technology to provide a consumer-centric
platform, we believe many consumers would like to choose how they shop. According to Auto Success Online, roughly 90% of consumers now
expect retail businesses to offer omni-channel experiences and many in the auto industry believe shopping for a car will become a true
omnichannel approach, allowing customers to research and build deals online, but still meet someone at a dealership if desired and convenient.
We
are focused on the largest segment of the used car market, which comprises inventory between 3 and 10 years of age — a category
that makes up approximately 84% of all used vehicle transactions based on a 2019 NIADA report. We believe this makes us well positioned
to take market share from legacy auto retailers as its inventory is most heavily concentrated in the deepest pool of demand in the used
auto market. In mid-2019, to address a perceived need in the lower price point market, we classified our inventory into two categories,
Shift Value and Shift Certified. Shift Value inventory is made up of cars that are over 8 years old or have more than 80,000 miles. Shift
Certified inventory consists of vehicles less than 8 years old with less than 80,000 miles. While all vehicles are subjected to the same
150+ point inspection and our high mechanical and safety standards, this segmentation allows us to focus sales and marketing strategies,
as well as optimize cosmetic reconditioning costs, for cars with a lower overall purchase price. Consumers seeking Shift Value vehicles
are generally less concerned with cosmetic deficiencies; therefore, we have focused our reconditioning on these vehicles to safety and
longevity issues, passing on savings to customers while also increasing profitability. This strategy allows us to effectively sell selected
older and higher-mileage inventory. In addition, in-house reconditioning provides better control of timing and greater efficiency, especially
amongst Shift Value vehicles, and provides the ability to customer standards by distinct categories.
__________________________________________
2Based
on a 2018 survey by UBS Evidence Lab
How Shift Delivers
on its Mission to Make Car Purchase and Ownership Simple
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.
•Unique
Inventory:
We source
the vast majority of our vehicles from consumers and third-party consumer facing partners who use the Shift platform. We believe our differentiated
ability to purchase vehicles directly from consumer-sellers utilizing proprietary software provides Shift with access to a deep pool of
scarce, highly desirable inventory. The proprietary software predicts real-time market-based demand and establishes a profitable market
clearing price for the vehicles. Shift’s strategy offers a wide variety of vehicles across the entire spectrum of model, price,
age, and mileage to provide the right car for buyers regardless of interest, need, budget, or credit. For the year ended December 31,
2022, Shift sourced 95% of its inventory from consumer-sellers and partners driving improved margins and nearly eliminating reliance on
volatile auction markets to source inventory.
•Omnichannel
Experience:
We believe customers value convenience and choice in inventory, vehicle products and services, and especially in how they purchase a vehicle.
By providing an omnichannel experience, we can deliver the experience the customer chooses and prefers. Our end-to-end ecommerce platform
and our three markets in California and Oregon support all experiences.
◦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,
200-mile return policy as is offered on cars bought in person.
◦In-person
at a Shift location: Customers may come to a location to see and test drive multiple cars. Sales consultants on-site can answer questions
and walk a customer through the entire search for and purchase of a car. However, if customers would like to search inventory at a location
on their own, when they arrive, they 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, giving
customers control in this stage of the search process.
◦A
combination of the online experience and in-person experience at a Shift location. A customer may start a transaction online and, at any
point in the process, pick up where they left off at a location and finish in-person.
•Customized
Research and Discovery:
The vast majority
of consumer auto purchases involve online research. Our continued investments in our research and discovery functionality, including our
machine learning-enabled recommendation engine, create a platform that draws customers to engage with the Shift website and provide a
seamless search experience.
•Value-Added
Products to Support Ownership:
Like other
used car dealerships, Shift offers a full suite of products to finance and protect their vehicle. However, unlike traditional used car
dealership where these products and services are sold in a high pressured in-person environment, Shift makes this process hassle-free.
Products include vehicle service contracts, guaranteed asset protection and wheel and tire coverage. If a customer chooses an in-person
experience at one of our locations, a trained sales consultant can walk each customer through the financing and product options in a low-pressure
environment, partnering with the customer to find the best products for their situation. If a customer chooses an online experience, 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 likely to be 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.
•Easy
Tech-Enabled Selling Experience: Shift’s
technology makes selling a car just as easy as buying a car.
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, Shift provides an immediate quote for a customer’s trade-in vehicle, and will schedule a pickup at the customer’s
location. 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.
•Exceptional
Overall Customer Experience:
Shift was
born from a dissatisfaction with the traditional used car-buying experience, which can feel time-consuming, stressful, and dishonest.
Our goal is to turn what is generally regarded as a burdensome necessity into a delightful and convenient experience. We achieve this
by offering customers no-haggle pricing and a “partner not push” buying experience all within our omnichannel sales model.
And, unlike many traditional used car dealers, we don’t employ pushy salespeople.
Competition
The
used vehicle market in the United States is highly fragmented, with the top 100 used vehicle retailers accounting for only approximately
11.1% of total used car sales according to Automotive News as well as a large number of transactions occurring in the peer-to-peer market.
Competitors in the used vehicle market include:
•traditional
new and used car dealerships;
•the
peer-to-peer market, utilizing sites such as Facebook, Craigslist, OfferUp, eBay Motors and Nextdoor;
•used
car ecommerce businesses or online platforms, mainly Carvana and Vroom; and
•sales
by rental car companies directly to consumers of used vehicles which were previously utilized in rental fleets, such as Hertz Car Sales
and Enterprise Car Sales.
Our
primary competitors, traditional brick-and-mortar used auto dealers, are operating under an outdated business model, which relies on a
lack of transparency, high pressure sales tactics, limited inventory, and scarce physical locations to which the customer must travel.
These drawbacks in the traditional retail model have allowed ecommerce and omnichannel competitors to rapidly gain share of the used car
dealer market in recent years. Additionally, we are well-positioned to gain share from the peer-to-peer market given our focus on acquiring
inventory from consumers rather than auctions.
Our
Competitive Strengths
•Omnichannel
experience: We
believe an omnichannel experience broadens our customer base by including all sales channels and increases customer satisfaction by offering
convenience and more choices in how they can transact. With these benefits of an omnichannel model, there is opportunity to drive retail
unit sales given and increase product attach rate with knowledgeable sales consultants supporting the in-store purchases.
•Purpose-built
ecommerce platform:
The Shift platform was built to be an end-to-end online auto solution for consumers who yearn for a differentiated, simple and efficient
transaction. The streamlined nature of our business allows for scalability and efficiency in costs compared to our competitors in the
auto retail industry, and technology creates a better overall experience for the consumer.
•Consumer-centric
technology:
Our technology enhances the auto shopping experience while making the process fun and easy compared to the poorly rated experience of
dealing with a traditional brick-and-mortar dealer. Most customers begin their car search online and spend most of their car-shopping
experience online. Therefore, we believe the best way to enhance the overall process is to provide a digitally driven omnichannel approach
to not only begin, but seamlessly complete, the car-buying experience online.
•Exceptional
Customer Experience: Customer
response to the Shift experience is extremely positive, resulting in a rating of 4.1 out of 5 starts on Trustpilot as of March 2023, compared
to an average review of 2.6 out of 5 stars for our two largest ecommerce peers. These positive experiences are expected to 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, we will continue to establish a long-term
customer base that we expect will return for future transactions, thereby reducing our customer acquisition costs over time.
•Broad
Inventory Selection Including the Shift Value Segment:
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 and OEMs, provides Shift access to a deeper pool of scarce, highly desirable inventory.
In addition, our data-driven vehicle evaluations help ensure acquisition of the right inventory at the right price to reduce days to sale.
Our
unique acquisition strategy allows us to offer inventory that includes a wide spectrum of ages and price, rather than focusing exclusively
on newer and more expensive cars. We focus on vehicle models over five years old, with selling prices that are accessible to a broader
array of customers. We also have a differentiated “Shift Value” segment of vehicles which are over eight years old or have
more than 80,000 miles. This category of inventory is highly desirable to a large market segment, and counter-cyclical, with demand increasing
in poor economic conditions. Our inventory is thus diverse enough and better positioned to weather a down economy and shifting consumer
preferences. We believe that to be successful in the value segment, it is critical to own the reconditioning process in our markets and
offer consumers a test drive option at a Shift location during the purchase process.
Our Growth Strategies
and Path to Profitability
During
2022, to improve the financial performance of the business and the Company’s liquidity position, Shift implemented the Project Focus
Restructuring Plan (the "Restructuring Plan") in August 2022 and acquired CarLotz in December 2022. The Restructuring Plan outlined a
plan to position the Company for long-term profitable growth by prioritizing unit economics, reducing operating expenses, and maximizing
liquidity.
•Improve
Unit Economics:
Our short-term
priority is to achieve positive unit economics including customer acquisition costs through gross profit per unit ("GPU") expansion and
leveraging selling and marketing expenses. To achieve this goal, first, we are carefully managing our vehicle acquisition costs in the
volatile pricing environment using our proprietary software and algorithms. Second, we are optimizing marketing spend through focusing
on lower-funnel activities to drive higher conversion and targeting more efficient customer acquisition channels. And third, we believe
the addition of in-person selling as part of our omnichannel selling experience will drive higher conversion rates for cars and products.
•Increase
Market Penetration in Existing Markets: Our
plan is to increase share in existing markets given the large and highly fragmented industry in which we operate. We are focused on our
mature markets where we can leverage our large markets with reconditioning facilities and brand recognition to drive retail unit sales.
We believe our omnichannel model has appeal to a broader base of customers who would like to have choice in how they transact.
•Geographic
Expansion:
We currently operate three markets in California and Oregon. Over time, we will evaluate entering new markets that meet our requirements
for regional market demand, desirable real estate to deliver our omnichannel experience, and estimated store economics.
•Enhanced
Cost Control:
The Company has taken significant steps to right-size the cost structure for the omnichannel business model and will manage costs judiciously
to achieve long-term profitable growth.
•Support
Vehicle Ownership Throughout the Entire Lifecycle and Capitalize on Ancillary Product Offering:
We offer service, maintenance, and repair work at each of our three markets in an effort to support the entire lifecycle of vehicle ownership.
We seek to become the single company consumers think of every time they want to do anything with a car — buy, sell, service or protect
— to make car ownership simple. The service and maintenance business has the opportunity to add recurring revenue and gross profit
while increasing customer loyalty and reducing future customer acquisition costs.
•Leverage
Scalable Proprietary Marketplace and Logistics Platform:
Not only do we use our technology to buy, sell, and maintain the cars we sell through our own markets, but we have also built modular,
scalable proprietary technology solutions for a logistics management and mobile transactions platform that can be leveraged by other car
sellers including other dealers. Our vision is to evolve into a true platform marketplace that lists and fulfills third-party inventory,
enabling traditional dealers to modernize through this platform and those who might otherwise build a traditional dealership channel to
make use of the Shift platform instead. By becoming the online destination for consumers who want to buy or sell a car, we also plan to
become the platform for dealers who want to transact with those consumers.
•Accelerate
Growth Through Strategic M&A:
The market for used cars is highly fragmented. We intend to consider acquisitions that further our strategy of developing an omnichannel
distribution platform, combining digital delivery and strategic retail presence.
Marketing
We
believe our customer base is representative of the overall market for used cars as our vehicles cover the full spectrum of used car price
points. Our sales and marketing efforts utilize a multi-channel approach, built on a seasonality-adjusted, market-based model budget.
We direct marketing to both buyers and sellers, which is part of why we are able to acquire a majority of our inventory directly from
customers. We believe our strong customer focus ensures customer loyalty which will drive both repeat purchases and referrals. We drive
Buyer and Seller traffic to the Shift platform with SEM, Paid Social, SEO, and Affiliate programs. In addition, for Buyer, we also leverage
third-party auto lead sources to drive traffic.
Service Providers
We
utilize several top banking partners to finance purchases of our vehicles by customers who desire or need such financing. We also offer
value-added products to our customers through third-party partners, including vehicle service contracts, guaranteed asset protection and
wheel and tire coverage. None of these third-party partners are individually significant to our operations.
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.
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. However, we recognize that in the future our revenues may be
affected by these seasonal trends (including any disruptions to normal seasonal trends arising from the COVID-19 pandemic), as well as
cyclical trends affecting the overall economy, specifically the automotive retail industry.
Intellectual
Property
The
protection of our technology and other intellectual property is an important aspect of our business. We seek to protect our intellectual
property through patent, trademark, trade secret and copyright law, as well as confidentiality agreements, other contractual commitments
and security procedures. We generally enter into confidentiality agreements and invention assignment agreements with our employees and
consultants to control access to, and clarify ownership of, our technology and other proprietary information.
We
own one issued U.S. patent and have one pending U.S. patent application. We also have an application pending to register Shift™
as a trademark in the United States. We regularly review our technology development efforts and branding strategy to identify and assess
the protection of new intellectual property.
Intellectual
property laws, contractual commitments and security procedures provide only limited protection, and any of our intellectual property rights
may be challenged, invalidated, circumvented, infringed or misappropriated. Further, intellectual property laws vary from country to country,
and we have not sought patents or trademark registrations outside of the United States. Therefore, in other jurisdictions, we may be unable
to protect certain of our proprietary technology, brands, or other intellectual property.
Government Regulation
Our
business is and will continue to be subject to extensive U.S. federal, state and local laws and regulations. The advertising, sale, purchase,
financing and transportation of used vehicles are regulated by every state in which we operate and by the U.S. federal government. We
also are subject to state laws related to titling and registration and wholesale vehicle sales, and our sale of value-added products is
subject to state licensing requirements, as well as federal and state consumer protection laws. These laws can vary significantly from
state to state. In addition, we are subject to regulations and laws specifically governing the internet and ecommerce and the collection,
storage and use of personal information and other customer data. We are also subject to federal and state consumer protection laws, including
the Equal Credit Opportunities Act and prohibitions against unfair or deceptive acts or practices. The federal governmental agencies that
regulate our business and have the authority to enforce such regulations and laws against us include the Federal Trade Commission (FTC),
the U.S. Department of Transportation, the U.S. Occupational Health and Safety Administration, the U.S. Department of Justice and the
U.S. Federal Communications Commission. For example, the FTC has jurisdiction to investigate and enforce our compliance with certain consumer
protection laws and has brought enforcement actions against auto dealers relating to a broad range of practices, including the sale and
financing of value-added or add-on products. Additionally, we are subject to regulation by individual state dealer licensing authorities,
state consumer protection agencies and state financial regulatory agencies. We also are subject to audit by such state regulatory authorities.
State
dealer licensing authorities regulate the purchase and sale of used vehicles by dealers within their respective states. The applicability
of these regulatory and legal compliance obligations to our ecommerce business is dependent on evolving interpretations of these laws
and regulations and how our operations are, or are not, subject to them. We are licensed as a dealer in California and Oregon and all
of our vehicle transactions are conducted under our California and Oregon licenses. We believe that our activities in other states are
not currently subject to their vehicle dealer licensing laws, however if we determine that obtaining a license in another state is necessary,
either due to expansion or otherwise, we may not be able to obtain such a license within the timeframe we expect or at all.
Some
states regulate retail installment sales, including setting a maximum interest rate, caps on certain fees or maximum amounts financed.
In addition, certain states require that retail installment sellers file a notice of intent or have a sales finance license or an installment
sellers license in order to solicit or originate installment sales in that state. All of our installment sale transactions are currently
conducted under our California or Oregon dealer licenses. However, as we seek to expand to other states, we may be required to obtain
additional licenses and our ability to do so cannot be assured.
In
addition to these laws and regulations that apply specifically to the sale and financing of used vehicles, our facilities and business
operations are subject to laws and regulations relating to environmental protection, occupational health and safety, and other broadly
applicable business regulations. We also are subject to laws and regulations involving taxes, tariffs, privacy and data security, anti-spam,
pricing, content protection, electronic contracts and communications, mobile communications, consumer protection, information-reporting
requirements, unencumbered internet access to our platform, the design and operation of websites and internet neutrality. In connection
with the closing of the merger, we are also now subject to laws and regulations affecting public companies, including securities laws
and exchange listing rules.
For
a discussion of the various risks we face from regulation and compliance matters, see “Item 1A. Risk Factors.”
Insurance
We
maintain insurance policies to cover directors’ and officers’ liability, fiduciary, crime, property, workers’ compensation,
automobile, cyber, general liability and umbrella insurance.
All
of our insurance policies are with third-party carriers and syndicates with financial ratings of A or better. We and our global insurance
broker regularly review our insurance policies and believe the premiums, deductibles, coverage limits and scope of coverage under such
policies are reasonable and appropriate for our business.
Employees
During
the year ended December 31, 2022, we had an average of approximately 970 employees. As of March 30, 2023 we had approximately 360
full-time employees. As discussed further in Note 16 - Impairment and Restructuring to the accompanying consolidated financial statements,
headcount has been reduced pursuant to a Restructuring Plan and scaled to match a reduced geographic footprint. None of our employees
are represented by a labor union. We consider our relationships with our employees to be good and have not experienced any interruptions
of operations due to labor disagreements.
Available Information
Our
website is www.shift.com. The Company files annual, quarterly and current reports, proxy statements and other information with the SEC
under the Exchange Act. The Company makes available, free of charge, on its website its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company's
reports filed with, or furnished to, the SEC are also available on the SEC's website at www.sec.gov.
In
addition, we have posted on our website the charters for our (i) Audit Committee and (ii) Leadership Development, Compensation and Governance
Committee, as well as our Code of Ethics and Business Conduct and Corporate Governance Guidelines. We will provide a copy of these documents
without charge to stockholders upon written request to Investor Relations, Shift Technologies, Inc., 290 Division Street, Fourth Floor
San Francisco, California 94103-4234. Our website and information included in or linked to our website are not part of this Form 10-K.
ITEM
1A. RISK FACTORS
Described
below are certain risks to our business and the industry in which we operate. Our business, prospects, financial condition or operating
results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial.
You should carefully consider the risks described below, together with the financial and other information contained in this Annual Report
on Form 10-K and in our other public disclosures.
The
trading price of our securities could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Before deciding whether to invest in our securities you should also refer to the other information contained in this annual report.
Summary of Risk
Factors
The
following is a summary of the key risks and uncertainties described below that we believe are material to us at this time:
•general
business and economic conditions
and risks
related to the larger automotive ecosystem, including, but not limited to, unemployment levels, consumer confidence, fuel prices, changes
in the prices of used vehicles, and interest rates;
•competition,
and the ability of the Company to grow and manage growth profitably;
•our
history of losses and ability to achieve or maintain profitability in the future;
•our
ability to establish our software as a platform to be used by automotive dealers;
•risks
relating to our inspection, reconditioning and storage facilities;
•impacts
of COVID-19 and other pandemics;
•our
reliance on third-party carriers for transportation:
•our
current geographic concentration where we provide reconditioning services and store inventory;
•cyber-attacks
or other privacy or data security incidents;
•the
impact of copycat websites;
•failure
to adequately protect our intellectual property, technology and confidential information;
•our
reliance on third-party service providers to provide financing;
•the
impact of federal and state laws related to financial services on our third-party service providers;
•risks
that impact the quality of our customer experience, our reputation, or our brand;
•changes
in the prices of new and used vehicles;
•our
ability to correctly appraise and price vehicles;
•access
to desirable vehicle inventory;
•our
ability to expeditiously sell inventory;
•our
ability to expand product offerings;
•risks
that impact the affordability and availability of consumer credit;
•changes
in applicable laws and regulations and our ability to comply with applicable laws and regulations;
•risks
related to income taxes and examinations by tax authorities;
•access
to additional debt and equity capital;
•potential
dilution resulting from future sales or issuances of our equity securities;
•risks
related to compliance with NASDAQ listing standards;
•risks
related to compliance with the Telephone Consumer Protection Act;
•changes
in government regulation of ecommerce;
•changes
in technology and consumer acceptance of such changes;
•risks
related to online payment methods;
•risks
related to our marketing and branding efforts;
•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;
•our
reliance on Lithia Motors for certain support services;
•seasonal
and other fluctuations in our quarterly results of operations;
•changes
in the auto industry and conditions affecting automotive manufacturers;
•customers
choosing not to shop online;
•natural
disasters, adverse weather events and other catastrophic events;
•adequacy
and availability of insurance coverage;
•our
dependence on key personnel;
•increases
in labor costs and compliance with labor laws;
•our
reliance on third-party technology and information systems;
•our
use of open-source software;
•claims
asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former
employers;
•significant
disruptions in service on our platform;
•impairment
charges;
•our
level of indebtedness, changes in interest rates, and reliance on our Flooring Line of Credit with Ally Bank;
•volatility
in the price of our common stock;
•issuances
of our Class A common stock and future sales of our Class A common stock;
•anti-takeover
provisions in Delaware corporate law;
•risks
related to our financial guidance and coverage by securities analysts;
•our
ability to establish and maintain effective internal control over financial reporting;
•the
effect of the announcement of the restructuring on our ability to retain and hire key personnel and maintain relationships with its customers,
suppliers and others with whom we do business;
•our
ability to successfully realize the anticipated benefits of the Restructuring Plan;
•our
ability to successfully integrate Fair Dealer Services, LLC’s operations, technologies and employees;
•the
ability to realize anticipated benefits and synergies of the Fair acquisition, including the expectation of enhancements to our products
and services, greater revenue or growth opportunities, operating efficiencies and cost savings;
•the
ability to realize anticipated benefits and synergies of the CarLotz Merger, including the expectation of enhancements to our products
and services, greater revenue or growth opportunities, operating efficiencies and cost savings; and
•the
ability to ensure continued performance and market growth of the combined company’s business.
Risks
Relating to Our Business
General
business and economic conditions, and risks related to the larger automotive ecosystem, including consumer demand, could adversely affect
the market for used cars, which could reduce our sales and profitability.
The
market for used cars in the United States is affected by general business and economic conditions. The United States economy often experiences
periods of instability, and this volatility may result in reduced demand for our vehicles and value-added products, reduced spending on
vehicles, the inability of customers to obtain credit to finance purchases of vehicles, and decreased consumer confidence to make discretionary
purchases. Consumer purchases of vehicles generally decline during recessionary periods and other periods in which disposable income is
adversely affected.
Purchases
of used vehicles are discretionary for consumers and have been, and may continue to be, affected by negative trends in the economy and
other factors, including rising interest rates, the cost of energy and gasoline, the availability and cost of consumer credit, reductions
in consumer confidence and fears of recession, stock market volatility, increased regulation and increased unemployment. Increased environmental
regulation has made, and may in the future make, the used vehicles that we sell more expensive and less desirable for consumers.
In
the event of a sustained revenue decline suffered by participants in the automotive markets, our competitors may attempt to increase their
sales by reducing prices or increasing marketing expenditures, car manufacturers may increase incentives to stimulate new car sales, and
rental car companies may seek to reduce the sizes of their rental car fleets by selling vehicles, each of which may depress used car values.
Additionally, increases in unemployment rates may increase the number of loan and lease defaults, leading to repossessions, which are
typically then re-sold by lenders in the wholesale market, which also may depress used car values. While lower used vehicle prices reduce
our cost of acquiring new inventory, lower prices could lead to reductions in the value of inventory we currently hold, which could have
a negative impact on gross profit. Moreover, any significant changes in retail prices due to scarcity or competition for used vehicles
could impact our ability to source desirable inventory for our customers, which could have a material adverse effect on our results of
operations and could result in fewer used-car sales and lower revenue. Furthermore, any significant increases in wholesale prices for
used vehicles could have a negative impact on our results of operations by reducing wholesale margins.
In
addition, changing trends in consumer tastes, negative business and economic conditions and market volatility may make it difficult for
us to accurately forecast vehicle demand trends, which could cause us to increase our inventory carrying costs and could materially and
adversely affect our business, financial condition and results of operations.
We
participate in a highly competitive industry, and pressure from existing and new companies may adversely affect our business and results
of operations.
As
described in greater detail in “Description
of Business,”
our business is involved in the purchase and sale of used vehicles. Companies that provide listings, information, and lead generation,
as well as car-buying and car-selling services designed to help potential customers and to enable dealers to reach these customers, produce
significant competition to our business. Some of these companies include:
•traditional
used vehicle dealerships, including those which may increase investment in their technology and infrastructure in order to compete directly
with our digital business model;
•large,
national car dealers, such as CarMax and AutoNation, which are expanding into online sales, including “omnichannel” offerings;
•used
car dealers or marketplaces that currently have existing ecommerce businesses or online platforms, such as Carvana and Vroom;
•the
peer-to-peer market, utilizing sites such as Facebook, Craigslist.com, eBay Motors and Nextdoor.com; and
•sales
by rental car companies directly to consumers of used vehicles which were previously utilized in rental fleets, such as Hertz Car Sales
and Enterprise Car Sales.
Internet
and online automotive sites, such as Google, Amazon, AutoTrader.com, Edmunds.com, KBB.com, Autobytel.com, TrueCar.com, CarGurus, and Cars.com,
could change their models to directly compete with us. In addition, automobile manufacturers such as General Motors, Ford, and Volkswagen
could change their sales models to better compete with our model through technology and infrastructure investments. While such enterprises
may change their business models and endeavor to compete with us, the purchase and sale of used vehicles through ecommerce presents unique
challenges.
Our
competitors also compete in the online market through companies that provide listings, information, lead generation and car buying services
designed to reach customers and enable dealers to reach these customers and providers of offline, membership-based car buying services
such as the Costco Auto Program. We also expect that new competitors will continue to enter the traditional and ecommerce automotive retail
industry with competing brands, business models and products and services, which could have an adverse effect on our revenue, business
and financial results. For example, traditional car dealers could transition their selling efforts to the internet, allowing them to sell
vehicles across state lines and compete directly with our online offering and no-negotiating pricing model.
Our
current and potential competitors may have significantly greater financial, technical, marketing and other resources than we have, and
the ability to devote greater resources to the development, promotion and support of their businesses, platforms, and related products
and services. Additionally, they may have more extensive automotive industry relationships, longer operating histories and greater name
recognition than we have. As a result, these competitors may be able to respond more quickly to consumer needs with new technologies and
to undertake more extensive marketing or promotional campaigns. If we are unable to compete with these companies, the demand for our used
vehicles and value-added products could substantially decline.
In
addition, if one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape
could adversely affect our ability to compete effectively. We may not be able to compete successfully against current or future competitors,
and competitive pressures may harm our business, financial condition and results of operations. Furthermore, if our competitors develop
business models, products or services with similar or superior functionality to our platform, it may adversely affect our business. Additionally,
our competitors could use their political influence and increase lobbying efforts to encourage new regulations or interpretations of existing
regulations that would prevent us from operating in certain markets.
We
face significant challenges in establishing our software as a platform to be used by automotive dealers.
Our
current business model relies in part upon the establishment of our ecommerce solutions as a platform to be used by existing automobile
dealers, most of whom are not familiar with and have not used our software platform, and also may not recognize our brand and corporate
identity. Acceptance of our software platform by automotive dealers will depend on many factors, including consumer acceptance of our
software, price, reliability, performance, and service accessibility and effectiveness. In addition, some of our primary ecommerce competitors
may offer a similar software platform to automobile dealers, which may make it more difficult for us to differentiate our offering, attract
automobile dealers to our platform, and derive the results we hope to achieve from this channel.
We
face a variety of risks associated with the operation of our inspection, reconditioning and storage facilities.
We
operate our inspection, reconditioning and storage centers in California and Oregon. If we are unable to operate our inspection, reconditioning
and storage centers efficiently, we could experience delivery delays, a decrease in the quality of our reconditioning services, delays
in listing our inventory, additional expenses and loss of potential and existing customers and related revenues, which may materially
and adversely affect our business, financial condition and results of operations.
Moreover,
our future growth depends in part on scaling and expanding our inspection and reconditioning operations. Our business model relies on
centralized inspection, reconditioning and storage centers, which have an average radius of service equal to 2 hours of driving time.
We anticipate that in order to expand our geographic footprint, we will need to open additional inspection, reconditioning and storage
centers. If for any reason we are unable to expand our reconditioning operations as planned, this could limit our ability to expand our
geographic footprint.
Additionally,
our business model assumes that we will yield efficiencies from our internal inspection and reconditioning capability, but we also rely
on third-party providers to perform inspection and reconditioning services for us to the extent we are not currently able to fully absorb
those operations internally. If our third-party providers of inspection and reconditioning services are unable to provide those services
reliably, we may experience delays in delivery and listing of our inventory. In addition, to the extent our third-party providers do not
maintain the quality of our reconditioning services, we may suffer reputational harm and be subject to claims by consumers. In addition,
if we are not able to meet our goals of bringing inspection and reconditioning fully in house, or if we are not able to obtain the efficiencies
we expect to gain from doing so, our business, financial condition and results of operations may be materially and adversely affected.
Additionally,
we are required to obtain approvals, permits and licenses from state regulators and local municipalities to operate our centers. We may
face delays in obtaining the requisite approvals, permits, financing and licenses to operate our centers or we may not be able to obtain
them at all. If we encounter delays in obtaining or cannot obtain the requisite approvals, permits, financing and licenses to operate
our centers in desirable markets, our business, financial condition and results of operations may be materially and adversely affected.
We
rely on third-party carriers to transport our vehicle inventory throughout the United States. Thus, we are subject to business risks and
costs associated with such carriers and with the transportation industry, many of which are out of our control.
We
rely on third-party carriers to transport vehicles from auctions or individual sellers to our facilities, and then from our facilities
to our customers. As a result, we are exposed to risks associated with the transportation industry such as weather, traffic patterns,
local and federal regulations, vehicular crashes, gasoline prices and lack of reliability of many independent carriers. In addition, our
transportation costs may increase as carriers have increased prices. Our third-party carriers’ failure to successfully manage our
logistics and fulfillment process could cause a disruption in our inventory supply chain and decrease our inventory sales velocity, which
may materially and adversely affect our business, financial condition and results of operations. In addition, third-party carriers that
deliver vehicles to our customers could adversely affect the customer experience if they do not perform to our standards of professionalism
and courtesy, which could adversely impact our business (including our reputation), financial condition and results of operations.
The
current geographic concentration where we provide reconditioning services and store inventory creates an exposure to local and regional
downturns or severe weather or catastrophic occurrences that may materially and adversely affect our business, financial condition, and
results of operations.
We
currently conduct our business through our inspection, reconditioning and storage centers in California and Oregon. Any unforeseen events
or circumstances that negatively affect areas where we operate or may operate in the future, particularly our facilities in California,
a state that has experienced significant natural and other disasters in the past including earthquakes, wildfires and blackouts, could
materially and adversely affect our revenues and results of operations. Changes in demographics and population or severe weather conditions
and other catastrophic occurrences in areas in which we operate or from which we obtain inventory may materially and adversely affect
our results of operations. Such conditions may result in physical damage to our properties, loss of inventory, and delays in the delivery
of vehicles to our customers. In addition, our geographic concentration means that changes in policy at the state level, including regulatory
changes and government shutdowns in response to pandemics and other crises, may have more significant impact on our business.
If
we sustain cyber-attacks or other privacy or data security incidents that result in security breaches, we could suffer a loss of sales
and increased costs, exposure to significant liability, reputational harm and other negative consequences.
Our
information technology has been and may in the future be subject to cyber-attacks, viruses, malicious software, break-ins, theft, computer
hacking, phishing, employee error or malfeasance or other security breaches or loss of service. Hackers and data thieves are becoming
increasingly sophisticated and large-scale and complex automated attacks are becoming more prevalent. Experienced computer programmers
and hackers may be able to penetrate our security controls and misappropriate or compromise sensitive personal, proprietary or confidential
information, create system disruptions or cause shutdowns. They also may be able to develop and deploy malicious software programs that
attack our systems or otherwise exploit any security vulnerabilities. Our systems and the data stored on those systems also may be vulnerable
to security incidents or security attacks, acts of vandalism or theft, coordinated attacks by activist entities, misplaced, blocked or
lost data, human errors, or other similar events that could negatively affect our systems and the data stored on or transmitted by those
systems, including the data of our customers or business partners. Further, third parties that provide services to us, such as hosted
solution providers, also could be a source of security risks in the event of a failure of their own security systems and infrastructure.
Our technology infrastructure may be subject to increased risk of slowdown or interruption as a result of integration with third-party
services, including cloud services, and/or failures by such third parties, which may be out of our control.
The
costs to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber-incident could be significant.
Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service and loss of existing or
potential suppliers or players. As threats related to cyber-attacks develop and grow, we may also find it necessary to make further investments
to protect our data and infrastructure, which may impact our results of operations. Although we have insurance coverage for losses associated
with cyber-attacks, as with all insurance policies, there are coverage exclusions and limitations, and our coverage may not be sufficient
to cover all possible losses and claims, and we may still suffer losses that could have a material adverse effect on our business (including
reputational damage). We could also be negatively impacted by existing and proposed U.S. laws and regulations, and government policies
and practices related to cybersecurity, data privacy, data localization and data protection. In the event that we or our service providers
are unable to prevent, detect, and remediate the foregoing security threats and vulnerabilities in a timely manner, our operations could
be disrupted, or we could incur financial, legal or reputational losses arising from misappropriation, misuse, leakage, falsification
or intentional or accidental release or loss of information maintained in our information systems and networks, including personal information
of our employees and our customers. In addition, outside parties may attempt to fraudulently induce our employees or employees of our
vendors to disclose sensitive information in order to gain access to our data. The number and complexity of these threats continue to
increase over time. Although we develop and maintain systems and controls designed to prevent these events from occurring, and we have
a process to identify and mitigate threats, the development and maintenance of these systems, controls, and processes require ongoing
monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Despite our efforts,
the possibility of these events occurring cannot be eliminated entirely.
We
may be subject to adverse impacts from the existence of copycat websites that attempt to defraud our potential customers.
We
have in the past, and may in the future, experience disruption in our business and adverse impacts to our brand from the posting by third
parties of copycat websites that attempt to imitate the branding and functionality of our website and defraud our consumers. If we become
aware of such activities, we intend to employ technological or legal measures in an attempt to halt these operations. However, we may
be unable to detect all such activities or operations in a timely manner and, even if we do detect such activities or operations, our
attempts and implementing technological measures and seeking legal recourse from appropriate governmental authorities may be insufficient
to halt these operations. In some cases, particularly in the case of entities operating outside of the United States, our available remedies
may not be adequate to protect us or our consumers against the impact of the operation of such websites. Regardless of whether we can
successfully enforce our rights against the operators of these websites, any measures that we may take could require us to expend significant
financial or other resources, which could harm our business, results of operations, and financial condition. In addition, to the extent
that such activity creates confusion among consumers, our brand and business could be materially harmed.
Failure
to adequately protect our intellectual property, technology and confidential information could harm our business, financial condition
and results of operations.
The
protection of intellectual property, technology and confidential information is crucial to the success of our business. We rely on a combination
of patent, trademark, trade secret and copyright law, as well as contractual restrictions, to protect our intellectual property (including
our brand, technology and confidential information). While it is our policy to protect and defend our rights to our intellectual property,
we cannot predict whether steps taken by us to protect our intellectual property will be adequate to prevent infringement, misappropriation,
dilution or other violations of our intellectual property rights. We also cannot guarantee that others will not independently develop
technology that has the same or similar functionality as our technology. Unauthorized parties may also attempt to copy or obtain and use
our technology to develop competing solutions and policing unauthorized use of our technology and intellectual property rights may be
difficult and may not be effective. Furthermore, we have faced and may in the future face claims of infringement of third-party intellectual
property that could interfere with our ability to market, promote and sell our vehicles and related services. Any litigation to enforce
our intellectual property rights or defend ourselves against claims of infringement of third-party intellectual property rights could
be costly, divert attention of management and may not ultimately be resolved in our favor. Moreover, if we are unable to successfully
defend against claims that we have infringed the intellectual property rights of others, we may be prevented from using certain intellectual
property and may be liable for damages, which in turn could materially adversely affect our business, financial condition or results of
operations.
As
part of our efforts to protect our intellectual property, technology and confidential information, we require certain of our employees
and consultants to enter into confidentiality and assignment of inventions agreements, and we also require certain third parties to enter
into nondisclosure agreements. These agreements may not effectively grant all necessary rights to any inventions that may have been developed
by our employees and consultants. In addition, these agreements may not effectively prevent unauthorized use or disclosure of our confidential
information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure
of our confidential information, intellectual property or technology. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our website features, software and functionality or obtain and use information that we consider
proprietary. Changes in the law or adverse court rulings may also negatively affect our ability to prevent others from using our technology.
We
are currently the registrant of the shift.com internet domain name and various other related domain names. The regulation of domain names
in the United States is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain domain names that
are important for our business.
In
addition, the Shift®
trademark is important to our business. We may not be able to protect our rights in this trademark, which we need in order to build name
recognition with consumers. If we fail to adequately protect or enforce our rights under this trademark, we may lose the ability to use
it, or to prevent others from using it, which could adversely harm our reputation and our business, financial condition and results of
operations. While we are actively seeking registration of the Shift trademark in the U.S., it is possible that others may assert senior
rights to similar trademarks and seek to prevent our use and registration of our trademark in certain jurisdictions. In addition, registered
or unregistered trademarks or trade names that we own may be challenged, infringed, circumvented, declared generic, lapsed or determined
to be infringing on or dilutive of other marks. If third parties succeed in registering or developing common law rights in our trademarks
or trade names, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks or trade
names to develop brand recognition of our technologies, products or services. If we are unable to establish name recognition based on
our trademarks and trade names, we may not be able to compete effectively. Further, it is possible that our trademark “Shift”
may be deemed to be generic and therefore ineligible for registration. If any of these events were to occur, our pending trademark application
for Shift®
may not result in such mark being registered, which could adversely affect our branding, or require us to adopt new branding, which would
cause us to incur increased marketing, infrastructure and capital expense, and all of which could adversely affect our business, financial
performance and results of operations. In addition, even if we are able to protect our trademarks, scammers may attempt to mimic our website
in order to defraud potential customers.
While
software is protected under copyright law, we have chosen not to register any copyrights in our software. We also rely on trade secret
law to protect our proprietary software. In order to bring a copyright infringement lawsuit in the United States, the copyright would
need to be registered. Accordingly, the remedies and damages available to us for unauthorized use of our software may be limited. Our
trade secrets, know-how and other proprietary materials may be revealed to the public or our competitors or independently developed by
our competitors and no longer provide protection for the related intellectual property. Furthermore, our trade secrets, know-how and other
proprietary materials may be revealed to the public or our competitors or independently developed by our competitors and no longer provide
protection for the related intellectual property.
We
rely on third-party service providers to provide financing, as well as value-added products, to our customers, and we cannot control the
quality or fulfillment of these products and services.
We
rely on third-party lenders to finance purchases of our vehicles by customers who desire or need such financing. We also offer value-added
products to our customers through third-party service providers, including vehicle service contracts, guaranteed asset protection (“GAP”),
and wheel and tire coverage. Because we utilize third-party service providers, we cannot control all of the factors that might affect
the quality and fulfillment of these services and products, including (i) lack of day-to-day control over the activities of third-party
service providers, (ii) that such service providers may not fulfill their obligations to us or our customers or may otherwise fail to
meet expectations, which in the case of vehicle service contracts, could require us to refund amounts paid or underwrite the risk ourselves,
and (iii) that such service providers may terminate their arrangements with us on limited or no notice or may change the terms of these
arrangements in a manner unfavorable to us for reasons outside of our control. Such providers also are subject to state and federal regulations
and any failure by such third-party service providers to comply with applicable legal requirements could cause us financial or reputational
harm.
Our
revenues and results of operations are partially dependent on the actions of these third parties. If one or more of these third-party
service providers cease to provide these services or products to our customers, tighten their credit standards or otherwise provide services
to fewer customers or are no longer able to provide them on competitive terms, it could have a material adverse effect on our business,
revenues and results of operations. If we were unable to replace the current third-party providers upon the occurrence of one or more
of the foregoing events, it could also have a material adverse effect on our business, revenues and results of operations. Delays or errors
by these third-party service providers are not in the Company’s control but may cause dissatisfaction with our customers that could
result in reputational harm to us. In addition, disagreements with such third-party service providers could require or result in costly
and time-consuming litigation or arbitration.
Moreover,
we receive fees from these third-party service providers in connection with finance, service and vehicle protection products purchased
by our customers. A portion of the fees we receive on such products is subject to chargebacks in the event of early termination, default
or prepayment of the contracts by end-customers, which could adversely affect our business, revenues and results of operations.
Certain
of our third-party service providers are highly regulated financial institutions, and the federal and state laws related to financial
services could have a direct or indirect materially adverse effect on our business.
We
have entered into agreements with various third-party financial institutions related to the financing by those institutions of our customers’
vehicle purchases as well as the provision of various value-added products. Our financial institution counterparties are subject to extensive
federal and state laws and regulations related to the provision of financial services, and their ability to provide financing and other
products and services could be materially limited or eliminated at any time as a result of financial regulatory or supervisory issues
as well as changes in federal or state laws, regulations, or guidance related to the provision of financial services. In the event of
such disruptions, our business could be materially adversely affected if we are unable in a commercially reasonable manner to identify
and enter into replacement arrangements with other institutions on substantially similar terms as those that exist with our current providers.
Moreover, we are subject to contractual obligations requiring that we comply with, or help to facilitate compliance by our financial institution
counterparties with, a broad range of regulatory requirements and obligations, including without limitation those related to customer
data, data security, privacy, anti-money laundering, and the detection and prevention of financial crimes. The federal and state regulators
responsible for implementing and enforcing these laws and regulations routinely examine our financial institution counterparties with
respect to their compliance with such laws and regulations, including the extent to which these institutions’ third-party relationships
may present compliance risks. Despite our best efforts to comply with all applicable regulatory and contractual obligations, it is possible
that there could be some perceived or actual deficiency in our ability to adequately satisfy financial regulatory requirements or to serve
as a contractual counterparty to a regulated financial institution. Any such perceived or actual deficiency or risk to a regulated financial
institution could result in a disruption of our relationship with that institution as well as with other lenders and other financial services
counterparties, which could have a materially adverse impact on our business.
If
the quality of our customer experience, our reputation, or our brand were negatively affected, our business, sales, and results of operations
could be materially adversely affected.
Our
business model is based on our ability to enable consumers to buy and sell used vehicles through our ecommerce platform in a seamless,
transparent and hassle-free transaction. If we fail to sustain a high level of integrity and our reputation suffers as a result, customers,
partners, and vendors may lose trust in our business, and our revenues and results of operations could be materially adversely affected.
Even if, despite our best efforts, there is a perceived deterioration in quality of our value proposition, our revenues and results of
operations could decline. Additionally, to the extent our historic rapid growth continues in the future, it may become challenging to
maintain the quality of our customer experience.
We
operate a consumer-facing business and are likely to receive complaints or negative publicity about our business. For example, we may
receive complaints about our business practices, marketing and advertising campaigns, vehicle quality, compliance with applicable laws
and regulations, data privacy and security or other aspects of our business, especially on blogs and social media websites. Such complaints,
irrespective of their validity, could diminish customer confidence in our vehicles, products, and services and adversely affect our reputation.
If we fail to correct or mitigate misinformation or negative information about any aspect of our business in a timely manner, our business,
financial condition, and results of operations could be materially adversely affected.
Our
business is sensitive to changes in the prices of new vehicles as compared to the price of used vehicles.
If
the prices of new vehicles decline relative to the prices of used vehicles, our customers may become more likely to purchase a new vehicle
rather than a used vehicle, which could reduce our vehicle sales and lower our revenue. A potential contributing factor to the narrowing
of the price gap between new and used vehicles is manufacturers providing incentives for the purchase of new vehicles, such as favorable
financing terms. Additionally, factors that cause used vehicle prices to increase, such as a decrease in the number of new vehicle lease
returns or a decrease in vehicle stock from rental car companies could cause consumers to favor the purchases of new vehicles. In addition,
supply chain issues impacted new vehicle production throughout 2021 and 2022. As a result of these factors, automotive vehicle pricing
and demand continues to be difficult to predict.
Our
business and inventory are dependent on our ability to correctly appraise and price vehicles we buy and sell.
When
purchasing a vehicle from us, our customers sometimes trade in their current vehicle and apply the trade-in value towards their purchase.
We also acquire vehicles from consumers independent of any purchase of a vehicle from us. We appraise and price vehicles we buy and sell
based on a field evaluation of the vehicle using data science and proprietary algorithms based on a number of factors, including mechanical
soundness, consumer desirability and demand, vehicle history, market prices and relative value as prospective inventory. If we are unable
to correctly appraise and price both the vehicles we buy and the vehicles we sell, we may be unable to acquire or sell inventory at attractive
prices or to manage inventory effectively, and accordingly our revenue, gross margins and results of operations would be affected, which
could have a material adverse effect on our business, financial condition and results of operations. In particular, when a customer trades
in their current vehicle and applies the trade-in value towards their purchase, our ability to effectively appraise the vehicle based
on a field evaluation is important, as we believe that unwinding a transaction due to the discovery of a defect in the vehicle would negatively
affect the customer’s experience.
Our
business is dependent upon access to desirable vehicle inventory. Obstacles to acquiring attractive inventory, whether because of supply,
competition or other factors, may have a material adverse effect on our business, financial condition, and results of operations.
In
the year ended December 31, 2022, we obtained 95% of the vehicles we sell in our retail segment from customers and partners. If we are
unable to purchase a sufficient number of vehicles directly from consumer-sellers and our partners, we will need to find alternative sources
of vehicles and we may not be able to purchase vehicles of the same quality and at the same price as the vehicles we currently purchase.
A reduction in the availability of or access to sources of inventory for any reason could have a material adverse effect on our business,
financial condition and results of operations.
Our
business is dependent upon our ability to expeditiously sell inventory. Failure to expeditiously sell our inventory could have a material
adverse effect on our business, financial condition, and results of operations.
We
regularly project demand for used vehicles purchased by customers on our platform and purchase inventory in accordance with those projections.
If we fail to accurately project demand, we could experience an over-supply of used vehicle inventory that may create a downward pressure
on our used vehicle sales prices and margins. As well, an over-supply of used vehicle inventory would be expected to increase the average
number of days required to sell a unit of inventory.
Used
vehicle inventory comprises the largest component of our total assets other than cash, and used vehicle inventories generally depreciate
rapidly. An increase in the average number of days required to sell a unit of inventory could materially adversely impact our ability
to liquidate inventory at prices that allow us to recover costs and generate profit. Additionally, an increase in the rate at which customers
return vehicles, which in turn increases our used vehicle inventory, could have the same effect.
Our
ability to expand value-added product offerings and introduce additional products and services may be limited, which could have a material
adverse effect on our business, financial condition, and results of operations.
Currently,
our third-party value-added products consist of finance and vehicle protection products, which includes third-party financing of customers’
vehicle purchases, as well as other value-added products, such as vehicle service contracts, guaranteed asset protection, and wheel and
tire coverage. If we introduce new value-added products or expand existing offerings on our platform, such as insurance and/or insurance
referral services, music services or vehicle diagnostic and tracking services and maintenance, we may incur losses or otherwise fail to
enter these markets successfully. Entry into new markets may require us to compete with new companies, cater to new customer expectations,
and comply with new complex regulations and licensing requirements, each of which will be unfamiliar. Accordingly, we could need to invest
significant resources in market research, legal counsel, and our organizational infrastructure, and a return on such investments may not
be achieved for several years, if at all. Additionally, failure to comply with applicable regulations or to obtain required licenses could
result in penalties or fines. Further, we may fail in demonstrating the value of any new value-added product to customers, which would
compromise our ability to successfully create new revenue streams or receive returns in excess of investments. Any of these risks, if
realized, could materially and adversely affect our business, financial condition, and results of operations.
Vehicle
retail sales depend heavily on affordable interest rates and availability of credit for vehicle financing and a substantial increase in
interest rates could materially and adversely affect our business, prospects, financial condition, results of operations, and cash flows.
If
interest rates continue to rise, market rates for vehicle financing will generally be expected to rise as well, which may make our vehicles
less affordable to customers or steer customers to less expensive vehicles that would be less profitable for us, adversely affecting our
financial condition and results of operations. Additionally, if consumer interest rates increase substantially or if financial service
providers tighten lending standards or restrict their lending to certain classes of credit, customers may not desire or be able to obtain
financing to purchase our vehicles. As a result, a substantial increase in customer interest rates or tightening of lending standards
could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows.
Failure
to comply with federal, state and local laws and regulations relating to privacy, data protection and consumer protection, or the expansion
of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, as well as our actual
or perceived failure to protect such information, could harm our reputation and could adversely affect our business, financial condition
and results of operations.
We
collect, store, process, and use personal information and other customer data, and we rely in part on third parties that are not directly
under our control to manage certain of these operations. For example, we rely on encryption, storage and processing technology developed
by third parties to securely transmit, operate on and store such information. Due to the volume and sensitivity of the personal information
and data we and these third parties manage and expect to manage in the future, as well as the nature of our customer base, the security
features of our information systems are critical. We expend significant resources to protect against security breaches and may need to
expend more resources in the event we need to address problems caused by potential breaches. Any failure or perceived failure to maintain
the security of personal and other data that is provided to us by customers and vendors could harm our reputation and brand and expose
us to a risk of loss or litigation and possible liability, any of which could adversely affect our business, financial condition and results
of operations. Additionally, concerns about our practices with regard to the collection, use or disclosure of personal information or
other privacy-related matters, even if unfounded, could harm our business, financial condition and results of operations.
We
have in the past experienced security vulnerabilities, though such vulnerabilities have not had a material impact on our operations. While
we have implemented security procedures and virus protection software, intrusion prevention systems, access control and emergency recovery
processes to mitigate risks like these with respect to information systems that are under our control, they are not fail-safe and may
be subject to breaches. Further, we cannot ensure that third parties upon whom we rely for various services will maintain sufficient vigilance
and controls over their systems. Our inability to use or access those information systems at critical points in time, or unauthorized
releases of personal or confidential information, could unfavorably impact the timely and efficient operation of our business, including
our results of operations, and our reputation, as well as our relationships with our customers, employees or other individuals whose information
may have been affected by such cybersecurity incidents.
There
are numerous federal, state and local laws regarding privacy and the collection, processing, storing, sharing, disclosing, using and protecting
of personal information and other data, the scope of which are changing and expanding as we move into new markets, subject to differing
interpretations, and which may be costly to comply with, inconsistent between jurisdictions or conflicting with other rules. We are also
subject to specific contractual requirements contained in third-party agreements governing our use and protection of personal information
and other data. We generally seek to comply with industry standards and are subject to the terms of our privacy policies and the privacy-
and security-related obligations to third parties. We strive to comply with applicable laws, policies, legal obligations and industry
codes of conduct relating to privacy and data protection, to the extent possible. However, it is possible that these obligations may be
interpreted and applied in new ways or in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules
or our practices. Additionally, new regulations could be enacted with which we are not familiar. Any failure or perceived failure by us
to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal
obligations or any compromise of security that results in the unauthorized release or transfer of sensitive information, which may include
personally identifiable information or other customer data, may result in governmental enforcement actions, litigation or public statements
against us by consumer advocacy groups or others and could cause customers, vendors and receivable-purchasers to lose trust in us, which
could have a material adverse effect on our business, financial condition and results of operations. Additionally, if vendors, developers
or other third parties that we work with violate applicable laws or our policies, such violations may also put customers’ or vendors’
information at risk and could in turn harm our business, financial condition and results of operations.
We
expect that new industry standards, laws and regulations will continue to be proposed and implemented regarding privacy, data protection
and information security where we do business. For example, the California Consumer Privacy Act (the “CCPA”), which went into
effect on January 1, 2020, gives California residents expanded rights to access and delete their personal information, opt out of certain
personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil
penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation.
The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of
a trend toward more stringent state privacy legislation in the U.S., which could increase our potential liability and adversely affect
our business. Further, if individual U.S. states pass data privacy laws that place different obligations or limitations on the processing
of personal data of individuals in those states, it will become more complex to comply with these laws and our compliance costs may increase.
A
significant data breach or any failure, or perceived failure, by us to comply with any federal, state or local privacy or consumer protection-related
laws, regulations or other principles or orders to which we may be subject or other legal obligations relating to privacy or consumer
protection could adversely affect our reputation, brand and business, and may result in claims, investigations, proceedings or actions
against us by governmental entities or others or other penalties or liabilities or require us to change our operations and/or cease using
certain data sets. Depending on the nature of the information compromised, we may also have obligations to notify users, law enforcement
or payment companies about the incident and may need to provide some form of remedy, such as refunds, for the individuals affected by
the incident.
We
operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations. Failure to comply
with these laws and regulations could have a material adverse effect on our business, financial condition and results of operations. In
addition, some of these laws establish either a private right of action or permit private individuals and entities to enforce the same
in the name of the relevant government entity.
Our
business is and will continue to be subject to a wide range of federal, state, and local laws and regulations, some of which are novel
and without relevant precedent. Such laws and regulations include, but are not limited to:
•state
and local licensing requirements;
•state
and local titling and registration requirements;
•state
laws regulating the sale of motor vehicles and related products and services;
•federal
and state laws regulating vehicle financing;
•federal
and state consumer protection laws; and
•federal
and state data privacy laws.
The
federal governmental agencies that regulate our business and have the authority to enforce such regulations and laws against us include
the U.S. Federal Trade Commission (the “FTC”), the U.S. Department of Transportation, the U.S. Occupational Health and Safety
Administration, the U.S. Department of Justice and the U.S. Federal Communications Commission. For example, the FTC has jurisdiction to
investigate and enforce our compliance with certain consumer protection laws and has brought enforcement actions against auto dealers
relating to a broad range of practices, including the sale and financing of value-added or add-on products. We are also subject to a variety
of federal laws that may require us to incur costs in order to be in compliance with such laws, including the United States Americans
with Disabilities Act of 1990, or the ADA and any state equivalents. Additionally, we are subject to regulation and audit by individual
state dealer licensing authorities, state consumer protection agencies and state financial regulatory agencies and are subject to a variety
of state laws, including California’s Lemon Law. We are also subject to audit by such state regulatory authorities.
Our
marketing and disclosure regarding the sale and servicing of vehicles is regulated by federal, state and local agencies, including the
FTC and state attorneys general. Some of these authorities either establish a private right of action or permit a private individual or
entity to enforce on behalf of a state entity (“private attorney general”). We have in the past experienced claims under these
laws, and we may experience additional claims in the future.
State
dealer licensing authorities regulate the purchase and sale of used vehicles by dealers within their respective states. The applicability
of these regulatory and legal compliance obligations to our ecommerce business is dependent on evolving interpretations of these laws
and regulations and how our operations are, or are not, subject to them, and we may face regulatory action if regulators believe that
we are not in compliance with such obligations. We are licensed as a dealer in California and Oregon and all of our vehicle transactions
are conducted under our California and Oregon licenses. We believe that our activities in other states are not currently subject to their
vehicle dealer licensing laws, however regulators could seek to enforce those laws against us. In addition, if we determine or are instructed
by state regulators that obtaining a license in another state is necessary, either due to expansion or otherwise, we may not be able to
obtain such a license within the timeframe we expect or at all.
Some
states regulate retail installment sales, including setting a maximum interest rate, caps on certain fees or maximum amounts financed.
In addition, certain states require that retail installment sellers file a notice of intent or have a sales finance license or an installment
sellers license in order to solicit or originate installment sales in that state. All vehicle sale transactions and applicable retail
installment financings are conducted under our California and Oregon dealer licenses. As we seek to expand our operations and presence
into other states, we may be required to obtain additional finance or other licenses, and we may not be able to obtain such licenses within
the timeframe we expect or at all.
Any
failure to renew or maintain any of the foregoing licenses would materially and adversely affect our business, financial condition and
results of operations. Many aspects of our business are subject to regulatory regimes at the state and local level, and we may not have
all licenses required to conduct business in every jurisdiction in which we operate. In addition, as we expand nationally to operate in
new jurisdictions, we may face regulatory action if regulators believe we are not compliant with local rules. Despite our belief that
we are not subject to certain licensing requirements of those state and local jurisdictions, regulators may seek to impose punitive fines
for operating without a license or demand we seek a license in those state and local jurisdictions, any of which may inhibit our ability
to do business in those state and local jurisdictions, increase our operating expenses and adversely affect our business, financial condition
and results of operations.
In
addition to these laws and regulations that apply specifically to the purchase and sale of used vehicles, our facilities and business
operations are subject to laws and regulations relating to environmental protection, occupational health and safety, and other broadly
applicable business regulations. We also are subject to laws and regulations involving taxes, tariffs, privacy and data security, anti-spam,
pricing, content protection, credit and financing, electronic contracts and communications, mobile communications, consumer protection,
information reporting requirements, unencumbered internet access to our platform, the design and operation of websites and internet neutrality.
We
are also subject to laws and regulations affecting public companies, including securities laws and exchange listing rules. The violation
of any of these laws or regulations could result in administrative, civil or criminal penalties or in a cease-and-desist order against
our business operations, any of which could damage our reputation and have a material adverse effect on our business, financial condition
and results of operations. We have incurred and will continue to incur capital and operating expenses and other costs to comply with these
laws and regulations.
The
foregoing description of laws and regulations to which we are or may be subject is not exhaustive, and the regulatory framework governing
our operations is subject to evolving interpretations and continuous change.
Unanticipated
changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect
our operating results and financial condition.
We
are subject to income taxes in the United States, and our tax liabilities will be subject to the allocation of expenses in differing jurisdictions.
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
•changes
in the valuation of our deferred tax assets and liabilities;
•expected
timing and amount of the release of any tax valuation allowances;
•expiration
of or detrimental changes in research and development tax credit laws; or
•changes
in tax laws, regulations, or interpretations thereof.
In
addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes
from these audits could have an adverse effect on our operating results and financial condition.
We
may require additional debt and equity capital to pursue our business objectives and respond to business opportunities, challenges or
unforeseen circumstances. If such capital is not available to us, our business, financial condition and results of operations may be materially
and adversely affected.
We
expect to make significant capital investments to grow and innovate our business, and our response to business challenges and unforeseen
circumstances may also require significant capital. To fund these expenditures, we may need to conduct equity or debt financings to secure
additional liquidity. There is a risk that we may not be able to secure such additional liquidity in a timely manner, on terms which are
acceptable to us, or at all. If we raise additional funds through further issuances of equity or convertible debt securities, our existing
stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior
to those of holders of our common stock.
As
a result of a late Current Report on Form 8-K filing in 2023, we are not eligible to use our “shelf” registration statement
for the remainder of the 2023 fiscal year. Because of that limitation, our ability to quickly access U.S. capital markets will be somewhat
constrained.
Our
flooring line of credit facility with Ally Bank expires on December 9, 2023. The Senior Unsecured Notes with SB LL Holdco will mature
on May 11, 2025. Additionally, our Convertible Senior Notes mature on May 15, 2026. Please see Note 10 - Borrowings to the accompanying
consolidated financial statements for additional information. The terms of any future debt financing may be on less favorable economic
terms or include restrictive covenants which could limit our ability to secure additional liquidity and pursue business opportunities.
Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing and may impact the ability or
willingness of our lenders or guarantors to fulfill their obligations under their agreements with us. If we are unable to obtain adequate
financing or financing on terms satisfactory to us when we require it, we may be forced to obtain financing on undesirable terms or our
ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances
could be significantly limited, and our business, financial condition and results of operations could be materially and adversely affected.
Future
sales or issuances of equity securities could decrease the value of our common stock, dilute investors’ voting power and reduce
our earnings per share.
We
may sell additional equity securities in subsequent offerings (including through the sale of securities convertible into equity securities
and may issue equity securities in acquisitions). We cannot predict the size of future issuances of equity securities or the size and
terms of future issuances of debt instruments or other securities convertible into equity securities or the effect, if any, that future
issuances and sales of our securities will have on the market price of our common stock.
Additional
issuances of our securities may involve the issuance of a significant number of common stock at prices less than the current market price
for the common stock. Issuances of substantial numbers of common stock, or the perception that such issuances could occur, may adversely
affect prevailing market prices of our common stock. Any transaction involving the issuance of previously authorized but unissued common
stock, or securities convertible into common stock, would result in dilution, possibly substantial, to security holders.
Sales
of substantial amounts of our securities by us or our existing shareholders, or the availability of such securities for sale, could adversely
affect the prevailing market prices for our securities and dilute investors’ earnings per share. Exercises of presently outstanding
share options or warrants may also result in dilution to security holders. A decline in the market prices of our securities could impair
our ability to raise additional capital through the sale of securities should we desire to do so.
As
of March 30, 2023, we had outstanding approximately 17,228,479 shares of our common stock and securities exercisable for and convertible
into approximately 2,533,116 shares of common stock (of which approximately 521,969 were exercisable as of that date). We also had convertible
debt outstanding that is convertible into a maximum of 2,269,289 shares of our common stock. The sale or the availability for sale of
a large number of our common stock in the public market could cause the price of our common stock to decline.
There
is no assurance we will continue to meet the Nasdaq listing standards.
We
must meet continuing listing standards to maintain the listing of our common stock on Nasdaq. If we fail to comply with listing standards
and Nasdaq delists our common stock, we and our shareholders could face significant material adverse consequences, including:
•a
limited availability of market quotations for our common stock;
•reduced
liquidity for our common stock;
•a
determination that our common stock are “penny stock,” which would require brokers trading in our common stock to adhere to
more stringent rules and possible result in a reduced level of trading activity in the secondary trading market for our common stock;
•a
limited amount of news about us and analyst coverage of us; and
•a
decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future.
If
we fail to comply with the Telephone Consumer Protection Act, we may face significant damages, which could harm our business, financial
condition, and results of operations.
We
utilize telephone calls and text messages as a means of responding to and marketing to customers interested in purchasing, trading in
and/or selling vehicles and value-added products. We generate leads from our website and online advertising by prompting potential customers
to provide their phone numbers so that we can contact them in response to their interest in selling a vehicle, purchasing a vehicle, trading
in a vehicle or obtaining financing terms. We must ensure that our SMS texting practices comply with regulations and agency guidance under
the Telephone Consumer Protection Act (the “TCPA”), a federal statute that protects consumers from unwanted telephone calls,
faxes and text messages. While we strive to adhere to strict policies and procedures that comply with the TCPA, the Federal Communications
Commission, as the agency that implements and enforces the TCPA, may disagree with our interpretation of the TCPA and subject us to penalties
and other consequences for noncompliance. Determination by a court or regulatory agency that our SMS texting practices violate the TCPA
could subject us to civil penalties and could require us to change some portions of our business.
Government
regulation of the internet and ecommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could
substantially harm our business, financial condition and results of operations.
Our
business model relies extensively on the internet and ecommerce, and accordingly we are subject to laws and regulations which specifically
govern the internet and ecommerce. The evolution of existing laws and regulations, and the passage of new laws and regulations, could
limit how we can use the internet and ecommerce and in turn could materially adversely affect our business, financial condition, and results
of operations. These laws and regulations may affect a number of aspects of our business, including taxes, tariffs, privacy and data security,
anti-spam, pricing, content protection, electronic contracts and communications, mobile communications, consumer protection, information
reporting requirements, unencumbered internet access to our platform, the design and operation of websites and internet neutrality. It
is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the internet
as the vast majority of these laws were adopted prior to the advent of the internet and do not contemplate or address the unique issues
raised by the internet or ecommerce. Similarly, existing laws governing state regulation of automotive dealers largely predate the advent
of the internet and it is not clear how these laws apply to ecommerce automotive retailers. It is possible that general business regulations
and laws, or those specifically governing the internet or ecommerce, may be interpreted and applied in a manner that is inconsistent from
one market segment to another and may conflict with other rules or our practices. For example, federal, state and local regulation regarding
privacy, data protection and information security has become more significant, and proposed or newly implemented regulations such as the
CCPA may increase our costs of compliance. We cannot be sure that our practices have complied, comply or will comply fully with all such
laws and regulations. The enactment of new laws and regulations or the interpretation of existing laws and regulations in an unfavorable
way may affect the operation of our business, directly or indirectly, which could result in substantial regulatory compliance costs, civil
or criminal penalties, including fines, adverse publicity, decreased revenues and increased expenses.
We
actively use anonymous online data for targeting ads online and if ad networks are compelled by regulatory bodies to limit use of this
data, it could materially affect our ability to do effective performance modeling. Any failure, or perceived failure, by us to comply
with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against
us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts
in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our sites by customers
and suppliers and result in the imposition of monetary liability. We also may be contractually liable to indemnify and hold harmless third
parties from the costs or consequences of non-compliance with any such laws or regulations. Adverse legal or regulatory developments could
substantially harm our business, our ability to attract new customers may be adversely affected, and we may not be able to maintain or
grow our revenue and expand our business as anticipated.
If
we do not adequately address our customers’ desire to utilize mobile device technology, our results of operations could be harmed
and our growth could be negatively affected.
Shift.com
is a mobile-friendly website that consumers can access and utilize from their mobile devices. As customers rely more on mobile technology
for buying and selling products and services, the future success of our business will be significantly driven by our ability to provide
an effective and customer-friendly mobile application for buying and selling used vehicles. The shift to mobile technology by our users
may harm our business in the following ways:
•customers
visiting our website from a mobile device may not accept mobile technology as a viable long-term platform to buy or sell a vehicle. This
may occur for a number of reasons, including our ability to provide the same level of website functionality to a mobile device that we
provide on a desktop computer, the actual or perceived lack of security of information on a mobile device and possible disruptions of
service or connectivity;
•we
may be unable to provide sufficient website functionality to mobile device users, which may cause customers using mobile devices to believe
that our competitors offer superior products and features;
•problems
may arise in developing applications for alternative devices and platforms and the need to devote significant resources to the creation,
support and maintenance of such applications; or
•regulations
related to consumer finance disclosures, including the Truth in Lending Act and the Fair Credit Reporting Act, may be interpreted, in
the context of mobile devices, in a manner which could expose us to legal liability in the event we are found to have violated applicable
laws.
If
customers do not respond positively to using our mobile application, our business, financial condition, and results of operations could
be harmed.
We
are subject to risks related to online payment methods.
We
accept payments, including payments on deposits and on recurring payments that are due to us, through a variety of methods, including
credit card and debit card through a third-party processor. As we offer new payment options to customers, we may be subject to additional
regulations, compliance requirements or fraud. For certain payment methods, including credit and debit cards, we pay interchange and other
fees, which may increase over time and raise our operating costs. We are also subject to payment card association operating rules and
certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers,
which could change or be reinterpreted to make it difficult or impossible for us to comply. As our business changes, we also may be subject
to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance.
If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions
limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems,
we may, among other things, be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability
to accept credit card and debit card payments from customers or facilitate other types of online payments. If any of these events were
to occur, our business, financial condition and results of operations could be materially adversely affected.
We
occasionally receive orders placed with fraudulent credit card data, including stolen credit card numbers, or from clients who have closed
bank accounts or have insufficient funds in open bank accounts to satisfy payment obligations. We may suffer losses as a result of orders
placed with fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit
card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card or other fraud,
our liability for these transactions could harm our business, financial condition and results of operations.
Our
future growth and profitability rely heavily on the effectiveness and efficiency of our marketing and branding efforts, and these efforts
may not be successful.
We
rely heavily on marketing and advertising to attract new customers, connect with existing customers, and further build our brand and reputation.
A significant amount of our operating expenses are and will continue to be attributed to marketing and advertising, but there is no assurance
that we will achieve a significant, or even positive, return on our investment on such expenditures, or that such expenditures will be
otherwise effective. As a result, our future growth and profitability will depend in part on:
•the
effectiveness of our performance-based digital marketing efforts;
•the
effectiveness and efficiency of our online advertising and search marketing programs in generating consumer awareness of, and sales on,
our platform;
•our
ability to prevent confusion among customers that can result from search engines that allow competitors to use or bid on our trademarks
to direct customers to competitors’ websites;
•our
ability to prevent internet publication of false or misleading information regarding our platform or our competitors’ offerings;
and
•the
effectiveness of our direct-to-consumer advertising to reduce our dependency on third-party aggregation websites.
We
currently advertise primarily through a blend of direct-advertising channels and are expanding our brand advertising channels in the future
with the goal of increasing the strength, recognition and trust in the Shift brand and driving more unique visitors to our platform. Our
marketing strategy includes performance marketing through digital platforms, including both auto-centric lead generation platforms and
broader consumer-facing platforms. We have also strategically use targeted television and radio campaigns and other local advertising
in key markets. As such, a significant component of our marketing spend involves the use of various marketing techniques, including programmatic
ad-buying, interest targeting, retargeting and email nurturing. Future growth and profitability will depend in part on the cost and efficiency
of our promotional advertising and marketing programs and related expenditures, including our ability to create greater awareness of our
platform and brand name, to appropriately plan for future expenditures, and to drive the promotion of our platform.
We
rely on internet search engines, vehicle listing sites and social networking sites to help drive traffic to our website, and if we fail
to appear prominently in the search results or fail to drive traffic through paid advertising, our traffic would decline and our business,
financial condition and results of operations could be materially and adversely affected.
We
depend in part on internet search engines, such as Google and Bing, vehicle listing sites, and social networking sites such as Facebook
and Instagram, to drive traffic to our website. Our ability to maintain and increase the number of visitors directed to our platform is
not entirely within our control. Search engines frequently change the algorithms that determine the ranking and display of results of
a user’s search, which could reduce the number of organic visits to our websites, in turn reducing new client acquisition and adversely
affecting our operating results. Our competitors may increase their search engine marketing efforts and outbid us for placement on various
vehicle listing sites or for search terms on various search engines, resulting in their websites receiving a higher search result page
ranking than ours. Additionally, internet search engines could revise their methodologies in a way that would adversely affect our search
result rankings. If internet search engines modify their search algorithms in ways that are detrimental to us, if vehicle listing sites
refuse to display any or all of our inventory in certain geographic locations, or if our competitors’ efforts are more successful
than ours, overall growth in our customer base could slow or our customer base could decline. Internet search engine providers could provide
automotive dealer and pricing information directly in search results, align with our competitors or choose to develop competing services.
Our platform has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future.
We could reach a point of inventory saturation at third-party aggregation websites whereby we will exceed the maximum allowable inventory
that will require us to spend greater than market rates to list our inventory.
In
addition, social networks are important as a source of new clients and as a means by which to connect with current clients, and their
importance may be increasing. We may be unable to effectively maintain a presence within these networks, which could lead to lower than
anticipated brand affinity and awareness, and in turn could adversely affect our operating results. Further, mobile operating system and
web browser providers, such as Apple and Google, have announced or recently implemented product changes to limit the ability of advertisers
to collect and use data to target and measure advertising. For example, Apple recently made a change to iOS 14 to require apps to get
a user’s opt-in permission before tracking or sharing the user’s data across apps or websites owned by companies other than
the app’s owner. Google further restricted the use of third-party cookies in its Chrome browser in 2022, consistent with similar
actions taken by the owners of other browsers, such as Apple in its Safari browser, and Mozilla in its Firefox browser. These changes
are expected to reduce our ability to efficiently target and measure advertising, in particular through online social networks, making
our advertising less cost effective and successful. Any reduction in the number of users directed to our platform through internet search
engines, vehicle listings sites or social networking sites could harm our business, financial condition and results of operations.
Our
business relies on email and other messaging services, and any restrictions on the sending of emails or messages or an inability to timely
deliver such communications could materially and adversely affect our business, financial condition and results of operations.
Our
business is dependent in part upon email and other messaging services for promoting our platform and vehicles available for purchase.
Promotions offered through email and other messages sent by us are an important part of our marketing strategy. We provide emails to customers
and other visitors informing them of the convenience and value of using our platform, as well as updates on new inventory and price updates
on listed inventory, and we believe these emails, coupled with our general marketing efforts, are an important part of our customer experience
and help generate revenue. If we are unable to successfully deliver emails or other messages to our subscribers, or if subscribers decline
to open our emails or other messages, our revenues could be materially and adversely affected. Any changes in how webmail applications
organize and prioritize email may reduce the number of subscribers opening our emails. For example, Google’s Gmail service has a
feature that organizes incoming emails into categories (such as primary, social and promotions). Such categorization or similar inbox
organizational features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed
as “spam” by our subscribers and may reduce the likelihood of that subscriber opening our emails.
In
addition, actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also
adversely impact our business. From time to time, internet service providers or other third parties may block bulk email transmissions
or otherwise experience technical difficulties that result in our inability to successfully deliver email or other messages to third parties.
Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection
with sending such communications could also materially and adversely affect our business, financial condition and results of operations.
Our use of email and other messaging services to send communications about our sites or other matters may also result in legal claims
against us, which may cause us to incur increased expenses, and if successful might result in fines and orders with costly reporting and
compliance obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging
services to send communications and to encourage customers to send communications. Changes to the terms of these social networking services
to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications
through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement
with social networking services by customers and potential customers could materially and adversely affect our business, financial condition
and results of operations.
Seasonal
and other fluctuations in our quarterly results of operations are likely and may not fully reflect the underlying performance of our business.
We
expect our quarterly results of operations, including our revenue, cash flow, and net profit or loss, to vary significantly in the future
based in part on, among other things, seasonal and cyclical patterns in vehicle sales in the United States. Vehicle sales generally exhibit
seasonality, with sales increasing in the first quarter and continuing through the end of the summer, before exhibiting a steep drop in
the fall. This seasonality historically corresponds with the timing of income tax refunds, which can provide a primary source of funds
for customers’ payments on used vehicle purchases. Used vehicle prices also exhibit seasonality, with used vehicles depreciating
at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. COVID-19 and related
supply chain disruptions have somewhat disrupted these seasonal patterns in 2021 and 2022, posing additional challenges to buying and
selling inventory at favorable prices.
Additionally,
a significant portion of our expenses are fixed and do not vary proportionately with fluctuations in revenues. In total, our results in
any quarter may not be indicative of the results we may achieve in any subsequent quarter or for the full year, and period-to-period comparisons
of our results of operations may not be meaningful.
Changes
in the auto industry may threaten our business model if we are unable to adapt.
The
market for used vehicles may be impacted by the significant, and likely accelerating, changes to the broader automotive industry, which
may render our existing or future business model or our ability to sell vehicles, products, and services less competitive, unmarketable,
or obsolete. Consumer purchases of new and used vehicles generally decline during recessionary periods and other periods in which disposable
income is adversely affected. For example, the number of used vehicle sales in the United States decreased from approximately 41.4 million
in 2007 to approximately 35.5 million in 2009, according to CNW Research Retail Automotive Summary. Purchases of new and used vehicles
are typically discretionary for consumers and have been, and may continue to be, affected by negative trends in the economy and other
factors, including the COVID-19 pandemic, rising interest rates, the cost of energy and gasoline, the availability and cost of credit,
reductions in business and consumer confidence, stock market volatility, increased regulation and increased unemployment. Increased environmental
regulation has made, and may in the future make, used vehicles more expensive and less desirable for consumers. In addition, ride-hailing
and ride-sharing services are becoming increasingly popular as a means of transportation and may decrease consumer demand for the used
vehicles we sell, particularly as urbanization increases. The availability of ride-hailing and ride-sharing services may also encourage
urban consumers to rely on public transportation, bicycles and other alternatives to car ownership. More long-term technology is currently
being developed to produce automated, driverless vehicles that could reduce the demand for, or replace, traditional vehicles, including
the used vehicles that we acquire and sell. Furthermore, new technologies such as autonomous driving software have the potential to change
the dynamics of vehicle ownership in the future. If we are unable to or otherwise fail to successfully adapt to such industry changes,
our business, financial condition and results of operations could be materially and adversely affected.
Our
business is sensitive to conditions affecting automotive manufacturers, including manufacturer recalls.
Adverse
conditions affecting one or more automotive manufacturers could have a material adverse effect on our business, financial condition and
results of operations and could impact our supply of used vehicles. In addition, manufacturer recalls are a common occurrence that have
accelerated in frequency and scope in recent years. In the instance of an open recall, we may have to temporarily remove vehicles from
inventory and may be unable to liquidate such inventory in a timely manner or at all. Because we do not have manufacturer authorization
to complete recall-related repairs, some vehicles we sell may have unrepaired safety recalls. Such recalls, and our lack of authorization
to make recall-related repairs or potential unavailability of parts needed to make such repairs, could (i) adversely affect used vehicle
sales or valuations, (ii) cause us to temporarily remove vehicles from inventory, (iii) cause us to sell any affected vehicles at a loss,
(iv) force us to incur increased costs and (v) expose us to litigation and adverse publicity related to the sale of recalled vehicles,
which could have a material adverse effect on our business, financial condition and results of operations.
Prospective
purchasers of vehicles may choose not to shop online, which would prevent us from growing our business.
Our
success will depend, in part, on our ability to attract additional customers who have historically purchased vehicles through traditional
dealers. The online market for vehicles is significantly less developed than the online market for other goods and services such as books,
music, travel and other consumer products. If this market does not gain widespread acceptance, our business may suffer. Furthermore, we
may have to incur significantly higher and more sustained advertising and promotional expenditures or offer more incentives than we currently
anticipate in order to attract additional consumers to our platform and convert them into purchasing customers. Specific factors that
could prevent consumers from purchasing vehicles through our ecommerce platform include:
•pricing
that does not meet consumer expectations;
•delayed
deliveries;
•inconvenience
with returning or exchanging vehicles purchased online;
•concerns
about the security of online transactions and the privacy of personal information; and
•usability,
functionality and features of our platform.
If
the online market for vehicles does not continue to develop and grow, our business will not grow and our business, financial condition
and results of operations could be materially and adversely affected. In addition, while we have experienced increased ecommerce sales
during the pendency of the COVID-19 pandemic, we can offer no assurance that these increased levels will be sustained following the cessation
of the pandemic.
Our
business is subject to the risk of natural disasters, adverse weather events and other catastrophic events, and to interruption by man-made
problems such as terrorism.
Our
business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist
attacks, acts of war, global pandemics, human errors and similar events. The third-party systems and operations on which we rely are subject
to similar risks. For example, a significant natural disaster, such as an earthquake, fire or flood, could have an adverse effect on our
business, financial condition and operating results, and our insurance coverage may be insufficient to compensate us for losses that may
occur. Acts of terrorism could also cause disruptions in our businesses, consumer demand or the economy as a whole. We may not have sufficient
protection or recovery plans in some circumstances, such as if a natural disaster affects locations that store a significant amount of
our inventory vehicles. As we rely heavily on our computer and communications systems and the internet to conduct our business and provide
high-quality customer service, any disruptions in the same could negatively affect our ability to run our business, which could have an
adverse effect on our business, financial condition, and operating results.
We
could be negatively affected if losses for which we do not have third-party insurance coverage increase or our insurance coverages prove
to be inadequate.
We
maintain third-party insurance coverage, subject to limits, for risks that we face in the operation of our business that we believe is
reasonable and customary for businesses of our size and type. Nevertheless, we may incur losses that we are unable to insure against or
with respect to matters for which we have determined that obtaining insurance is not economical. Claims filed against us in excess of
insurance limits, or for which we are otherwise self-insured, or the inability of our insurance carriers to pay otherwise insured claims,
could have an adverse effect on our financial condition. These risks include the risk of theft or destruction of the vehicles we own,
which account for a substantial percentage of our net assets. In addition, insurance we maintain may not continue to be available on terms
acceptable to us and such coverage may not be adequate to cover the types of liabilities actually incurred. A significant loss, if not
covered by available insurance coverage, could materially and adversely affect our business, financial condition and results of operations.
We
depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, our ability
to develop and successfully grow our business could be harmed.
We
believe our success has depended, and continues to depend, on the efforts and talents of our executives and employees. The Company’s
success is highly dependent on its continuing ability to identify, hire, train, motivate and retain highly qualified personnel and employees.
The competition for qualified personnel in the industries in which we operate is intense and there can be no assurance that we will be
able to continue to attract and retain all personnel necessary for the development and operation of our business. In periods of higher
activity, it may become more difficult to find and retain qualified employees which could limit growth, increase operating costs, or have
other material adverse effects on our operations. In addition, the loss of any of our key employees or senior management could materially
and adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a
timely basis, or at all. Our executive officers and other employees are at-will employees, which means they may terminate their employment
relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We may not
be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified
employees or retaining and motivating existing employees, our business, financial condition and results of operations could be materially
and adversely affected.
In
addition, as a result of the COVID-19 pandemic and the spread of new variants, our hiring, training, and retention efforts may be hindered
by the constraints placed on our business, including measures that we take proactively and those that are imposed upon us by government
authorities. As a result of such measures, it is possible that we may lose a portion of our workforce. In addition, labor shortages, the
inability to hire or retain qualified employees nationally, regionally or locally or increased labor costs could have a material adverse
effect on our ability to control expenses and efficiently conduct operations.
Increases
in labor costs, including wages, could adversely affect our business, financial condition and results of operations.
The
labor costs associated with our operations, including our inspection, reconditioning and storage centers, are subject to many external
factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health
insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. From time to
time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in a number
of individual states and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. As minimum
wage rates increase or related laws and regulations change, our labor costs may increase. Any increase in the cost of our labor could
have an adverse effect on our business, financial condition and results of operations or if we fail to pay such higher wages we could
suffer increased employee turnover. Increases in labor costs could force us to increase prices, which could adversely impact our sales.
If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may
decline and could have a material adverse effect on our business, financial condition and results of operations.
Our
failure to comply with various applicable federal and state employment and labor laws and regulations could have a material, adverse impact
on our business, financial condition and results of operations.
Various
federal and state employment and labor laws and regulations govern our relationships with our employees. These laws and regulations relate
to matters such as employment discrimination, wage and hour laws, requirements to provide meal and rest periods or other benefits, family
leave mandates, employee and independent contractor classification rules, requirements regarding working conditions and accommodations
to certain employees, citizenship or work authorization and related requirements, insurance and workers’ compensation rules, healthcare
laws, scheduling notification requirements and anti-discrimination and anti-harassment laws. While the scope of these laws and regulations
are subject to change in all jurisdictions, California routinely makes changes to the scope of such laws and regulations, many of which
may be strictly enforced, and some of which have been in the past, and may be in the future, implemented on a retrospective basis (meaning
we may not have an opportunity to change our employment practices in advance to avoid non-compliance). Complying with these laws and regulations,
including ongoing changes thereto, subjects us to substantial expense and non-compliance could expose us to significant liabilities. In
particular, we have been subject to employment litigation with respect to classification and wage and hour issues in the past. While we
have not incurred material losses with respect to this litigation in the past, we may be subject to material claims in the future.
We
rely on third-party technology and information systems to complete critical business functions. If that technology fails to adequately
serve our needs, and we cannot find alternatives, it may negatively impact our business, financial condition and results of operations.
We
rely on third-party technology for certain of our critical business functions, including customer identity verification for financing,
transportation fleet telemetry, network infrastructure for hosting our website and inventory and supply chain data, software libraries,
development environments and tools, services to allow customers to digitally sign contracts and customer experience center management.
Our business is dependent on the integrity, security and efficient operation of these systems and technologies. Our systems and operations
or those of our third-party vendors and partners could be exposed to damage or interruption from, among other things, fire, natural disaster,
power loss, telecommunications failure, unauthorized entry, computer viruses, denial-of-service attacks, acts of terrorism, human error,
vandalism or sabotage, financial insolvency, bankruptcy and similar events. The failure of these systems to perform as designed, the failure
to maintain or update these systems as necessary, the vulnerability of these systems to security breaches or attacks or the inability
to enhance our information technology capabilities, and our inability to find suitable alternatives could disrupt our operations and have
a material adverse effect on our business, financial condition and results of operations.
Our
platform utilizes open-source software, and any defects or security vulnerabilities in the open-source software could negatively affect
our business.
Our
platform employs open-source software, and we expect to use open-source software in the future. To the extent that our platform depends
upon the successful operation of open-source software, any undetected errors or defects in this open-source software could prevent the
deployment or impair the functionality of our platform, delay the introduction of new solutions, result in a failure of our platform and
injure our reputation. For example, undetected errors or defects in open-source software could render it vulnerable to breaches or security
attacks, and, in conjunction, make our systems more vulnerable to data breaches.
In
addition, the terms of various open-source licenses are sometimes ambiguous and have not been interpreted by United States courts, and
there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability
to market our platform. Some open-source licenses might require us to make our source code available at no cost or require us to make
our source code publicly available for modifications or derivative works if our source code is based upon, incorporates, or was created
using the open-source software. While we try to insulate our proprietary code from the effects of such open-source license provisions,
we cannot guarantee we will be successful. In addition to risks related to open-source license requirements, usage of open-source software
can lead to greater risks than use of third-party commercial software, as open-source licenses generally do not provide warranties or
controls on the origin of the software. Many of the risks associated with usage of open-source software cannot be eliminated and could
materially and adversely affect our business, financial condition and results of operations.
We
may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets
of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Although
we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work
for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets
or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against
these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property
rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management.
In
addition, while it is our policy to require our employees and contractors who may be involved in the creation or development of intellectual
property on our behalf to execute agreements assigning such intellectual property to us, we may be unsuccessful in having all such employees
and contractors execute such an agreement. The assignment of intellectual property may not be self-executing or the assignment agreement
may be breached, and we may be forced to bring claims against third parties or defend claims that they may bring against us to determine
the ownership of what we regard as our intellectual property.
We
may be accused of infringing intellectual property rights of third parties.
We
are also at risk of claims by others that we have infringed their copyrights, trademarks, or patents, or improperly used or disclosed
their trade secrets. The costs of supporting any litigation or disputes related to these claims can be considerable, and we cannot assure
you that we will achieve a favorable outcome of any such claim. If any such claims are valid, we may be compelled to cease our use of
such intellectual property and pay damages, which could adversely affect our business. Even if such claims are not valid, defending them
could be expensive and distracting, adversely affecting our operating results.
A
significant disruption in service on our platform could damage our reputation and result in a loss of customers, which could harm our
brand or our business, financial condition and results of operations.
Our
brand, reputation and ability to attract customers depend on the reliable performance of our platform and the supporting systems, technology
and infrastructure. We may experience significant interruptions to our systems in the future. Interruptions in these systems, whether
due to system failures, programming or configuration errors, computer viruses or physical or electronic break-ins, could affect the availability
of our inventory on our platform and prevent or inhibit the ability of customers to access our platform. Problems with the reliability
or security of our systems could harm our reputation, result in a loss of customers and result in additional costs.
Problems
faced by our third-party web-hosting providers, such as AWS and Google Cloud, could inhibit the functionality of our platform. For example,
our third-party web-hosting providers could close their facilities without adequate notice or suffer interruptions in service caused by
cyber-attacks, natural disasters or other phenomena. Disruption of their services could cause our website to be inoperable and could have
a material adverse effect on our business, financial condition and results of operations. Any financial difficulties, up to and including
bankruptcy, faced by our third-party web-hosting providers or any of the service providers with whom they contract may have negative effects
on our business, the nature and extent of which are difficult to predict. In addition, if our third-party web-hosting providers are unable
to keep up with our growing capacity needs, our business, financial condition and results of operations could be harmed.
Any
errors, defects, disruptions, or other performance or reliability problems with our platform could interrupt our customers’ access
to our inventory and our access to data that drives our inventory purchase operations, which could harm our reputation or our business,
financial condition and results of operations.
We
have recognized impairment charges related to long-lived assets.
We
are required to test intangible assets with an indefinite life and other long-lived assets for possible impairment on the same date each
year and on an interim basis if there are indicators of a possible impairment. There is significant judgment required in the analysis
of a potential impairment of long-lived assets. If, as a result of a general economic slowdown or deterioration in one or more of the
markets in which we operate or in our financial performance or future outlook, or if the estimated fair value of our long-lived assets
decreases, we may determine that one or more of our long-lived assets is impaired. An impairment charge would be determined based on the
estimated fair value of the assets and any such impairment charge could have a material adverse effect on our business, financial condition
and results of operations.
Our
level of indebtedness could have a material adverse effect on our ability to generate sufficient cash to fulfill our obligations under
such indebtedness, to react to changes in our business and to incur additional indebtedness to fund future needs.
As
of December 31, 2022, we had outstanding $150.0 million in principal amount under Senior Convertible Notes which mature on May 15,
2026, as well as $20.0 million in principal amount under Senior Unsecured Notes due May 11, 2025. Additionally, we had $24.8 million aggregate
principal amount of borrowings under our Flooring Line of Credit with Ally Bank (as defined in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”)
as of December 31, 2022, which expires on December 9, 2023 (the "Ally FLOC"). Our interest expense resulting from indebtedness outstanding
from time to time during fiscal 2022 was $11.5 million for the year ended December 31, 2022.
If
our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments
and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure,
refinance or replace our current or future debt will depend on the condition of the capital markets and our financial condition at such
time. Any refinancing or replacement of our existing debt could be at higher interest rates and may require it to comply with more onerous
covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from
adopting some of these alternatives. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely
basis or failure to comply with certain restrictions in its debt instruments, including the maintenance of certain liquidity requirements
that further restrict its cash usage, would result in a default under its debt instruments. In the event of a default under any of our
current or future debt instruments, the lenders could elect to declare all amounts outstanding under such debt instruments to be due and
payable. Furthermore, our flooring line of credit is secured by substantially all of our assets and contains customary restrictive covenants
which, among other things, restrict our ability to dispose of assets and/or use the proceeds from the disposition. We may not be able
to consummate any such dispositions or to obtain the proceeds that it could realize from them and these proceeds may not be adequate to
meet any debt service obligations then due.
In
addition, our indebtedness under our flooring line of credit bears interest at variable rates. Because we have variable rate debt, fluctuations
in interest rates may affect its cash flows or business, financial condition and results of operations. We may attempt to minimize interest
rate risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps.
We
currently rely on an agreement with Ally Bank to finance our vehicle inventory purchases under our Flooring Line of Credit. If our relationship
with this lender were to terminate, and we fail to acquire alternative sources of funding to finance our vehicle inventory purchases,
we may be unable to maintain sufficient inventory, which would adversely affect our business, financial condition and results of operations.
We
rely on a revolving credit agreement with Ally to finance our vehicle inventory purchases under our flooring line of credit will Ally
Bank. Outstanding borrowings are due as financed vehicles are sold, and the flooring line of credit is secured by our vehicle inventory
and certain other assets. If we are unable to maintain our flooring line of credit, which expires in December 2023, absent renewal, on
favorable terms or at all, or if the agreement is terminated or expires and is not renewed with our existing third-party lender or we
are unable to find a satisfactory replacement, our inventory supply may decline, resulting in fewer vehicles available for sale on our
website. Moreover, new funding arrangements may be at higher interest rates or subject to other less favorable terms. These financing
risks, in addition to potential rising interest rates and changes in market conditions, if realized, could negatively impact our business,
financial condition and results of operations. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Risks
Relating to Our Securities
Our
common stock price may be volatile and the value of our common stock may decline regardless of our operating performance.
It
is possible that an active trading market for shares of our common stock will not be sustained. If an active trading market for our common
stock is not sustained, the liquidity of our common stock, your ability to sell your shares of our common stock when desired and the prices
that you may obtain for your shares of common stock will be adversely affected.
Many
factors, some of which are outside our control, may cause the market price of our common stock to fluctuate significantly, including those
described elsewhere in this “Risk Factors” section and this prospectus, as well as the following:
•our
operating and financial performance and prospects;
•our
quarterly or annual earnings or those of other companies in our industry compared to market expectations;
•conditions
that impact demand for our offerings and platform, including demand in the automotive industry generally and the performance of the third
parties through whom we conduct significant parts of our business;
•future
announcements concerning our business or our competitors’ businesses;
•the
public’s reaction to our press releases, other public announcements and filings with the SEC;
•coverage
by or changes in financial estimates by securities analysts or failure to meet their expectations;
•market
and industry perception of our success, or lack thereof, in pursuing our growth strategy;
•strategic
actions by us or our competitors, such as acquisitions or restructurings;
•changes
in laws or regulations which adversely affect our industry or us;
•changes
in accounting standards, policies, guidance, interpretations or principles;
•changes
in senior management or key personnel;
•issuances,
exchanges, sales or stock splits, or expected issuances, exchanges, sales or stock splits of our capital stock;
•changes
in our dividend policy;
•adverse
resolution of new or pending litigation or other claims against us; and
•changes
in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting
from natural disasters, terrorist attacks, global pandemics, acts of war and responses to such events.
As
a result, volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above
the public offering price. As a result, you may suffer a loss on your investment. Broad market and industry fluctuations, as well as general
economic, political, regulatory, and market conditions, may negatively impact the market price of our common stock. In addition, extreme
price and volume fluctuations in the stock markets have affected and continue to affect many ecommerce and other technology companies’
stock prices. Often, their stock prices have fluctuated in ways unrelated or disproportionate to the companies’ operating performance,
and because of these fluctuations, comparing companies’ operating results on a period-to-period basis may not be meaningful.
In
the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action
litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s
attention. In addition, you should not rely on our past results as an indication of our future performance. This variability and unpredictability
could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue
or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the
forecasts we provide to the market are below the expectations of analysts or investors, the price of our Class A common stock could decline
substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings forecasts
that we may provide.
We
do not intend to pay dividends on our common stock for the foreseeable future.
We
currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result,
we do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. Any decision to declare and
pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our business
prospects, results of operations, financial condition, cash requirements and availability, industry trends and other factors that our
board of directors may deem relevant. Any such decision also will be subject to compliance with contractual restrictions and covenants
in the agreements governing our current indebtedness. In addition, we may incur additional indebtedness, the terms of which may further
restrict or prevent us from paying dividends on our common stock. As a result, you may have to sell some or all of your common stock after
price appreciation in order to generate cash flow from your investment, which you may not be able to do. Our inability or decision not
to pay dividends could also adversely affect the market price of our common stock.
We
may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise
adversely affect holders of our common stock, which could depress the price of our common stock.
Our
second amended and restated certificate of incorporation authorizes us to issue one or more series of preferred stock. Our board of directors
has the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number
of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred
stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance
of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price,
and materially and adversely affect the market price and the voting and other rights of the holders of our common stock.
The
issuance by us of additional shares of common stock or convertible securities may dilute your ownership of us and could adversely affect
our stock price.
We
may issue additional capital stock in the future that will result in dilution to all other stockholders. We also expect to continue to
grant equity awards to employees, directors and consultants under our equity incentive plans. From time to time in the future, we may
also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including
acquisitions. The issuance by us of additional shares of our common stock or securities convertible into our common stock would dilute
your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market
prices of our common stock.
Future
sales, or the perception of future sales, by us or our existing stockholders in the public market could cause the market price for our
common stock to decline.
The
sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm
the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make
it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Concentrated sales
of our common stock by these employees and other shareholders following the expiration of the lock-up restrictions or upon the triggering
of the early release thresholds, if triggered, could harm the price of our common stock.
Anti-takeover
provisions in our governing documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by
our stockholders to replace or remove our current management, and depress the market price of our common stock.
Our
second amended and restated certificate of incorporation, second amended and restated bylaws and Delaware law contain provisions that
could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors.
Among others, our second amended and restated certificate of incorporation and amended and restated bylaws include the following provisions:
•limitations
on convening special stockholder meetings, which could make it difficult for our stockholders to adopt desired governance changes;
•advance
notice procedures, which apply for stockholders to nominate candidates for election as directors or to bring matters before an annual
meeting of stockholders;
•no
authorization of cumulative voting, which limits the ability of minority stockholders to elect director candidates;
•provides
for a classified board of directors; and
•the
authorization of undesignated or “blank check” preferred stock, the terms of which may be established and shares of which
may be issued without further action by our stockholders.
These
provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware
corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law (the “DGCL”),
which prevents interested stockholders, such as certain stockholders holding more than 15% of our outstanding common stock from engaging
in certain business combinations unless (i) prior to the time such stockholder became an interested stockholder, the board approved the
transaction that resulted in such stockholder becoming an interested stockholder, (ii) upon consummation of the transaction that resulted
in such stockholder becoming an interested stockholder, the interested stockholder owned 85% of the common stock or (iii) following board
approval, the business combination receives the approval of the holders of at least two-thirds of our outstanding common stock not held
by such interested stockholder.
Any
provision of our second amended and restated certificate of incorporation, second amended and restated bylaws or Delaware law that has
the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium
for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
If
our operating and financial performance in any given period does not meet the guidance that we provide to the public, the market price
of our common stock may decline.
We
may, but are not obligated to, provide public guidance on our expected operating and financial results for future periods. Any such guidance
will be comprised of forward-looking statements subject to the risks and uncertainties described in this prospectus and in our other public
filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in
times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance
we provide or the expectations of investment analysts, or if we reduce our guidance for future periods, the market price of our common
stock may decline. Even if we do issue public guidance, there can be no assurance that we will continue to do so in the future.
If
securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary about us or our industry
or downgrade our common stock, the price of our common stock could decline.
Our
stock price and trading volume are heavily influenced by the way analysts and investors interpret our financial information and other
disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about
our business, or publish negative reports about our business, regardless of accuracy, our common stock price and trading volume could
decline. The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish
about us or our business. We do not have any control over these analysts. If the number of analysts that cover us declines, demand for
our common stock could decrease and our common stock price and trading volume may decline. Even if our common stock is actively covered
by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future
results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ
significantly from our own. Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures
could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons
discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common
stock, our stock price would likely decline.
As
a public reporting company, we are subject to rules and regulations established from time to time by the SEC regarding our internal control
over financial reporting. If we continue to fail to establish and maintain effective internal control over financial reporting and disclosure
controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.
We
are a public reporting company subject to the rules and regulations established from time to time by the SEC. These rules and regulations
require, among other things, that we establish and periodically evaluate procedures with respect to our internal control over financial
reporting. Reporting obligations as a public company place a considerable strain on our financial and management systems, processes and
controls, as well as on our personnel.
In
addition, as a public company, we are required to document and test our internal control over financial reporting pursuant to Section
404 of the Sarbanes-Oxley Act so that our management can evaluate the effectiveness of our internal control over financial reporting.
Section 404(a) of the Sarbanes-Oxley Act (“Section 404(a)”) requires that management assess and report annually on the effectiveness
of our internal control over financial reporting and identify any material weaknesses in our internal control over financial reporting.
Additionally, Section 404(b) requires our independent registered public accounting firm to issue an annual report that addresses the effectiveness
of our internal control over financial reporting. Our compliance with Section 404(a) has and will continue to require that we incur substantial
expenses and expend significant management efforts.
If
we are unable to establish effective internal control over financial reporting, and our independent registered public accounting firm
cannot render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting
at such time as it is required to do so, we could be subject to regulatory scrutiny, a loss of public and investor confidence, and to
litigation from investors and stockholders, which could have a material adverse effect on our business and our stock price. In addition,
if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively
or accurately report our financial performance on a timely basis, which could cause us to lose investor confidence in the accuracy and
completeness of our financial reports, causing the price of our common stock to decline.
We
identified material weaknesses in our internal control over financial reporting, and our business and stock price may be adversely affected
if our internal control over financial reporting is not effective.
We
have identified material weaknesses in our internal control over financial reporting related to an insufficiency of personnel with an
appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate
with the Company’s financial reporting requirements and the complexity of the Company’s operations and transactions. Remediation
efforts undertaken by the Company in 2021 identified an additional material weakness related to insufficient selection and development
of Information Technology General Controls (ITGCs).
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented
or detected on a timely basis.
While
we are in the process of implementing a remediation plan to remediate these material weaknesses, there can be no assurance that the material
weaknesses will be promptly remediated or that we will not identify additional material weaknesses in the future. The occurrence of, or
failure to remediate, this material weakness and any future material weaknesses in our internal control over financial reporting may adversely
affect the accuracy and reliability of our financial statements. A more complete description of this material weakness is included in
Item 9A, "Controls and Procedures" in this Annual Report on Form 10-K.
The
Company’s losses and negative cash flows from operations since inception, its current cash and working capital position, and the
upcoming expiration of the floorplan financing arrangement raise substantial doubt about the Company’s ability to continue as a
going concern.
Since
inception, the Company has generated recurring losses which has resulted in an accumulated deficit of $612.8 million as of December 31,
2022. During the year ended December 31, 2022, the Company had negative operating cash flows of $110.4 million. As of December 31,
2022, the Company had unrestricted cash and cash equivalents of $96.2 million and total working capital of $83.1 million. Our current
floorplan financing arrangement expires on December 9, 2023. The accompanying consolidated financial statements have been prepared under
the assumption that we will continue as a going concern for the next twelve months. However, there is substantial doubt about the Company’s
ability to continue as a going concern.
Our
ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing or generate profitable
operations. Historically, we have funded operations through issuances of common and preferred stock and through a reverse recapitalization
via the IAC Merger in October 2020, as well as through inventory floorplan financing and net cash received as part of out merger with
CarLotz Inc in December 2022. We have also historically funded vehicle inventory purchases through our vehicle floorplan facilities. There
can be no assurance that additional financing will be available or will be available on commercially reasonable terms. The inclusion of
disclosures expressing substantial doubt about our ability to continue as a going concern could materially adversely affect our stock
price and our ability to raise new capital or enter into strategic alliances.
Acquisitions
such as the Fair acquisition, CarLotz merger, joint ventures and other strategic alliances may have an adverse effect on our business;
we may fail to realize the anticipated benefits of such transactions.
In
order to position ourselves to take advantage of growth opportunities, from time to time we may make strategic acquisitions and enter
into joint ventures and other strategic alliances that involve significant risks and uncertainties. Risks and uncertainties relating to
these transaction and any other acquisitions, joint ventures and other strategic alliances we may undertake include:
•the
difficulty in combining, integrating and managing newly acquired businesses or any businesses of a joint venture or strategic alliance
in an efficient and effective manner;
•the
challenges in achieving the objectives, cost savings, synergies and other benefits expected from such transactions;
•the
risk of diverting resources and the attention of senior management from the operations of our business;
•additional
demands on management related to integration efforts or the increase in the size and scope of our company following an acquisition or
to the complexities of a joint venture or strategic alliance, including challenges of coordinating geographically dispersed organizations
and addressing differences in corporate cultures or management philosophies;
•difficulties
in the assimilation and retention of key employees and in maintaining relationships with present and potential customers, distributors
and suppliers;
•the
lack of unilateral control over a joint venture or strategic alliance and the risk that joint venture or strategic partners have business
goals and interests that are not aligned with ours, or the failure of a joint venture partner to satisfy its obligations or its bankruptcy
or malfeasance;
•costs
and expenses associated with any undisclosed or potential liabilities of an acquired business;
•delays,
difficulties or unexpected costs in the integration, assimilation, implementation or modification of platforms, systems, functions (including
corporate, administrative, information technology, marketing and distribution functions), technologies, infrastructure, and product and
service offerings of the acquired business, joint venture or strategic alliance, or in the harmonization of standards, controls (including
internal accounting controls), procedures and policies;
•the
risk that funding requirements of the acquired business, joint venture or combined company may be significantly greater than anticipated;
•the
risks of entering markets in which we have less experience; and
•the
risks of disputes concerning indemnities and other obligations that could result in substantial costs.
We
may not achieve the anticipated growth, cost savings or other benefits from the Fair acquisition, CarLotz merger or any other transaction
we may undertake without adversely affecting current revenues and investments in future growth. Moreover, the anticipated growth, cost
savings, synergies and other benefits of the Fair acquisition, CarLotz merger, or any other transaction we may undertake may not be realized
fully, or at all, or may take longer to realize than expected. Additionally, we may inherit legal, regulatory, and other risks of the
acquired business, whether known or unknown to us, which may be material to the combined company. Moreover, uncertainty about the effect
of a pending transaction on employees, suppliers and customers may have an adverse effect on us and/or the acquired business, which uncertainties
may impair our or its ability to attract, retain and motivate key personnel, and could cause our or its customers, suppliers and distributors
to seek to change existing business relationships with either of us. In addition, in connection with acquisitions, joint ventures or strategic
alliances, we may incur debt, issue equity securities, assume contingent liabilities or have amortization expenses and write-downs of
acquired assets, which could cause our earnings per share to decline.
In
addition, companies such as Fair that are private companies at the time of acquisition are not subject to reporting requirements and may
not have accounting personnel specifically employed to review internal controls over financial reporting and other procedures or to ensure
compliance with the requirements of the Sarbanes-Oxley Act of 2002. Bringing the legacy systems for these businesses into compliance with
those requirements and integrating them into our compliance and accounting systems may cause us to incur substantial additional expense,
make some activities more difficult, time-consuming or costly and increase demand on our systems and resources.
Mergers,
acquisitions, joint ventures and strategic alliances are inherently risky and subject to many factors outside of our control, and we cannot
be certain that our previous or future acquisitions, joint ventures and strategic alliances will be successful and will not materially
adversely affect our business, operating results or financial condition. We may not be able to successfully integrate the businesses,
products, technologies or personnel that we might acquire in the future, and any strategic investments we make may not meet our financial
or other investment objectives. Any failure to do so could seriously harm our business, financial condition and results of operations.
Our
Restructuring Plan and the associated workforce reduction may not result in anticipated savings, could result in total costs and expenses
that are greater than expected and could disrupt our business.
In
August 2022, we announced a reduction in workforce by approximately 60% in connection with the Restructuring Plan to prioritize and focus
on improving unit economics and reducing selling, general and administrative costs. We may not realize, in full or in part, the anticipated
benefits, savings and improvements in our operating structure from our restructuring efforts due to unforeseen difficulties, delays or
unexpected costs. If we are unable to realize the expected operational efficiencies and cost savings from the restructuring, our operating
results and financial condition, and cash flows would be adversely affected. We also cannot guarantee that we will not have to undertake
additional workforce reductions or restructuring activities in the future.
Furthermore,
our strategic Restructuring Plan may be disruptive to our operations. For example, our workforce reductions could yield unanticipated
consequences, such as attrition beyond planned staff reductions, increased difficulties in our day-to-day operations and reduced employee
morale. If employees who were not affected by the reduction in force seek alternate employment, this could result in us needing to seek
contract support at unplanned additional expense or harm our productivity. Our workforce reductions could also harm our ability to attract
and retain qualified management and personnel who are critical to our business. Our business, financial condition and results of operations
could be materially and adversely affected by any failure to attract or retain qualified personnel.
Item
1B. Unresolved Staff Comments
None.
Item 2. Properties
Shift's
corporate headquarters is located in San Francisco, California, and consists of approximately 9,255 square feet of space under a lease
that expires on December 31, 2023. These facilities provide corporate functions and support, including meeting space and mail services,
to our primarily remote workforce.
Shift
operates three omnichannel markets including vehicle storage and sales facilities located in Los Angeles, California, Oakland, California,
and Portland, Oregon. Following the Restructuring Plan described in detail in Note 16 - Impairment and Restructuring to the accompanying
consolidated financial statements, certain legacy Shift facilities in California, Washington, and Texas are no longer in use. Following
the merger with CarLotz, Inc. (see Note 3 - Business Combinations to the accompanying consolidated financial statements), the Company
has facilities that are not in use in Alabama, Colorado, Illinois, Louisiana, North Carolina, Texas, and Virginia. The Company is actively
engaged in efforts to dispose of the properties not in use. The Company's leases expire between January 1, 2023 and December 30,
2036.
We
believe our existing facilities are sufficient for our current needs and that, should it be needed, suitable additional or alternative
space will be available to accommodate our operations.
ITEM
3. LEGAL PROCEEDINGS
The
Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Other than the matter discussed
below, 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.
Stifel
matter
On
May 7, 2021, we were named in a lawsuit filed in the U.S. District Court for the Southern District of New York (Stifel, Nicolaus &
Company, Inc. v. Shift Technologies, Inc. 21-cv-04135) by a former financial advisor, Stifel, Nicolaus & Company, Inc. (“Stifel”),
claiming that we are required to pay the former financial advisor certain compensation as a result of the IAC Merger. In addition, the
complaint seeks punitive damages as a result of alleged unjust enrichment for the amount of the benefits allegedly conferred on Shift
by Stifel. On August 24, 2022, Stifel's suit was dismissed with prejudice. On September 16, 2022, Stifel filed a Notice of Appeal with
the U.S. Court of Appeals for the Second Circuit and formally filed its appeal with the Second Circuit on January 20, 2023. Shift has
until April 20, 2023 to file its responsive pleading. Following the dismissal of Stifel's initial suit, the probable incurred losses related
to the claim are immaterial as of December 31, 2022. Based on such information as is available to us, the range of additional reasonably
possible losses related to the claim does not exceed $4.0 million, excluding any punitive damages which the Company cannot currently
estimate. The Company believes the claim is without merit and intends to defend itself vigorously; however, there can be no assurances
that the Company will be successful in its defense.
CarLotz
stockholder matters
On
November 4, 2022, a lawsuit entitled Derek Dorrien v. CarLotz, Inc. et al., Case No. 1:22-cv-09463, was filed in the United States District
Court for the Southern District of New York against CarLotz and the members of the CarLotz board of directors (the “Dorrien Action”).
On November 4, 2022, a lawsuit entitled Sholom D. Keller v. CarLotz, Inc. et al., Case No. 2022-1006-NAC, was filed in the Court of Chancery
of the State of Delaware against CarLotz and the members of the CarLotz board of directors (the “Keller Action” and together
with the Dorrien Action, the “Actions”). The Dorrien Action alleges that the defendants violated Sections 14(a) (and Rule
14a-9 promulgated thereunder) and 20(a) of the Exchange Act by, among other things, omitting certain allegedly material information with
respect to the transactions contemplated by the Merger Agreement (the “Transactions”) in the registration statement on Form
S-4 (the “Registration Statement”) filed by us with the Securities and Exchange Commission on September 26, 2022. The Keller
Action alleges that the members of the CarLotz board of directors and Lev Peker, in his capacity as an officer of CarLotz, breached their
fiduciary duties in connection with the Transactions. The Actions seek, among other things, injunctive relief, money damages and the costs
of the Actions, including reasonable attorneys’ and experts’ fees. Shift is not named as a defendant in the Actions. We believe
that the plaintiffs’ allegations in the Actions are without merit; however, litigation is inherently uncertain and there can be
no assurance that CarLotz’s or our defense of the action will be successful.
In
addition, on October 3, 2022, a purported stockholder of CarLotz sent a demand to CarLotz and us regarding the Registration Statement
(the “CarLotz Stockholder Demand”). The CarLotz Stockholder Demand alleges the Registration Statement omits material information
with respect to the Transactions and demands that CarLotz, the CarLotz board of directors, and Shift provide corrective disclosures. Shift
disagrees with and intends to vigorously defend against any claim, if asserted, arising from the CarLotz Stockholder Demand.
Delaware
Section 205 Petition
On
March 6, 2023, Shift filed a petition in the Delaware Court of Chancery under Section 205 of the Delaware General Corporation Law (the
“DGCL”) to resolve potential uncertainty with respect to the Company’s share capital. Such uncertainty was introduced
by a recent decision in Garfield v. Boxed, Inc., 2022 WL 17959766 (Del. Ch. Dec. 27, 2022) that potentially affects the Company and many
other similarly situated companies that were formed and became publicly traded as a special purpose acquisition company (“SPAC”).
Out of an abundance of caution, the Company elected to pursue the remedial actions described below. Concurrently with the filing of the
Petition, the Company filed a motion to expedite the hearing on the Petition, which was subsequently granted on March 6, 2023.
In
October 2020, the Company, which was then a SPAC named Insurance Acquisition Corp. (“IAC”), held a special meeting of stockholders
(the “IAC Special Meeting”) to approve certain matters relating to the merger between IAC and a privately held company then
called Shift Technologies, Inc. One of these matters was a proposal to amend and restate IAC’s Amended and Restated Certificate
of Incorporation (the “SPAC Charter”) in order to, among other things, increase the number of authorized shares of Class A
common stock from 50,000,000 to 500,000,000 (such proposal, the “Share Increase Proposal” and, together with such other amendments
to the SPAC Charter, the “Charter Proposals”). At the IAC Special Meeting, the Charter Proposals were approved by a majority
of the outstanding shares of Class A common stock and a majority of the outstanding shares of Class B common stock of IAC as of the record
date for the IAC Special Meeting, voting together as a single class. After the IAC Special Meeting, IAC and Shift Technologies, Inc. closed
the merger pursuant to which the Company became the parent of Shift Technologies, Inc. (now named Shift Platform, Inc.), and the Company’s
certificate of incorporation, as amended to give effect to the Charter Proposals and to change the Company’s name to Shift Technologies,
Inc., became effective.
The
recent ruling by the Delaware Court of Chancery in the Boxed case introduced uncertainty as to whether Section 242(b)(2) of the DGCL would
have required the Share Increase Proposal to be approved by the vote of the majority of IAC’s then-outstanding shares of Class A
common stock, voting as a separate class. The Company had been operating with the understanding that the Charter Proposals were validly
approved at the IAC Special Meeting. In light of this recent ruling, however, to resolve potential uncertainty with respect to the Company’s
share capital, the Company filed a petition in the Delaware Court of Chancery under Section 205 of the DGCL to seek validation of the
Charter Proposals. Section 205 of the DGCL permits the Court of Chancery, in its discretion, to ratify and validate potentially defective
corporate acts.
On
March 6, 2023, the Court of Chancery granted the motion to expedite and set a hearing date for the Petition to be heard. On March 17,
2023, the hearing took place and the Court of Chancery approved the Company’s request for relief. The Court of Chancery then entered
an order under Section 205 of the DGCL on March 17, 2023, declaring (i) the increase in aggregate number of authorized shares of Class
A common stock, par value $0.0001, of the Company from 50,000,000 to 500,000,000 under the Company’s Second Amended and Restated
Certificate of Incorporation (the “Certificate of Incorporation”) and the Certificate of Incorporation, including the filing
and effectiveness thereof, are validated and declared effective retroactive to the date of its filing with the Secretary of State of the
State of Delaware on October 13, 2020 and (2) all shares of capital stock of the Company issued in reliance on the effectiveness of the
Certificate of Incorporation are validated and declared effective as of the date and time of the original issuance of such shares.
ITEM
4. MINE SAFETY DISCLOSURES
None.
Part
II
Item 5. Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The
Company's common stock is traded on the Nasdaq under the symbol “SFT.”
Holders
As
of March 30, 2023, there were 429 holders of record of our Class A common stock. These numbers do not include beneficial owners holding
our securities through nominee names.
Dividend Policy
We
have not paid any cash dividends on our common stock to date. The payment of cash dividends in the future will depend upon our revenues
and earnings, if any, capital requirements and general financial condition. The payment of any cash dividends will be within the discretion
of our board of directors at such time. Our flooring line of credit with Ally Bank contains certain restrictive covenants that may limit
the Company’s ability to pay distributions.
Recent Sales
of Unregistered Equity Securities
On
May 11, 2022, the Company completed the Fair acquisition and issued an aggregate of 206,697 shares of Class A common stock. Such
shares were issued pursuant to an exemption from registration in reliance upon Section 4(a)(2) of the Securities Act. Pursuant to the
Amended and Restated Equity and Asset Purchase Agreement dated May 11, 2022, the Sellers represented to the Company that they are
“accredited investors” as that term is defined in Regulation D of the Securities Act. Appropriate legends stating that such
shares have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption
therefrom were affixed to the certificates or book entry statements evidencing such shares. See Note 3 - Business Combinations to the
accompanying consolidated financial statements for further information.
On
May 27, 2021, the Company completed a private offering of its 4.75%
Convertible Senior Notes due 2026 (the “Notes”). The aggregate principal amount of the Notes sold in the offering was $150.0
million. Please see Note 10 - Borrowings to the accompanying consolidated financial statements for additional information.
Issuer
Purchases of Equity Securities
None.
Item 6. [Reserved]
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion 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 sections entitled
“Risk Factors” and “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 consumer-centric omnichannel retailer transforming the used car industry by leveraging its end-to-end ecommerce platform and retail
locations to provide a technology-driven, hassle-free customer experience.
Launched
in 2014, Shift started as a pure ecommerce seller and buyer of used cars, aimed at transforming the customer experience within the industry.
Since inception, Shift has invested significantly into its technology platform to create an exceptional customer experience and to support
and leverage the internal operations of the Company.
On
October 13, 2020, Insurance Acquisition Corp. (“IAC”), an entity listed on the Nasdaq Capital Market under the trade symbol
“INSU”, acquired Shift Platform, Inc., formerly known as Shift Technologies, Inc. (“Legacy Shift”), by the merger
of IAC Merger Sub, Inc., a direct wholly owned subsidiary of IAC, with and into Legacy Shift, with Legacy Shift continuing as the surviving
entity and a wholly owned subsidiary of IAC (the “ IAC Merger”). The public company resulting from the merger was renamed
Shift Technologies, Inc.
In
August 2022, Shift announced both a strategic and operational restructuring and a merger with CarLotz (the "CarLotz Merger"), a consignment-to-retail
used vehicle marketplace that operated a technology-enabled buying, sourcing, and selling model with an omnichannel experience. With the
implementation of the restructuring and the close of the merger, Shift evolved into an omnichannel experience and established a plan to
position the Company for long-term profitable growth by prioritizing unit economics, reducing operating expenses and maximizing liquidity.
See
Part I, Item 1 - "Business" for a detailed description and discussion of the Company's business.
Recent
Events
Project
Focus Restructuring Plan
On
August 9, 2022, the Company announced the implementation of Project Focus, a restructuring plan designed to position the Company for long-term
profitable growth by prioritizing unit economics, reducing our operating expenses and maximizing liquidity (the “Restructuring Plan”).
The primary elements of the Restructuring Plan are as follows:
•Optimizing
unit economics and GPU, by optimizing sales through Shift’s most profitable online channel, and rebalancing inventory mix to favor
Value vehicles, which Shift defines as older than 8 years or over 80,000 miles;
•Consolidating
Shift’s physical operations to three West Coast markets in Los Angeles, Oakland, and Portland to efficiently support our new omnichannel
fulfillment model, and closing seven existing locations;
•Restructuring
our workforce around our reduced physical footprint and more-efficient fulfillment model, eliminating approximately 650 positions or 60%
of our workforce; and,
•Undertaking
additional efforts to reduce spending on overhead.
In
connection with the implementation of the Restructuring Plan, we incurred expenses of approximately $29.6 million, consisting primarily
of inventory liquidation, disposals of long-lived assets, and personnel costs including one-time termination benefits. The restructuring
activities associated with the Restructuring Plan were substantially completed during the third quarter of 2022. Further personnel costs
were incurred in the fourth quarter 2022 related to one-time termination benefits unrelated to the Restructuring Plan.
The
foregoing estimates are based upon current assumptions and expectations but are subject to known and unknown risks and uncertainties.
Accordingly, we may not be able to fully realize the cost savings and benefits initially anticipated from the Restructuring Plan, and
the expected costs may be greater than expected. See Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk
Factors— Risks Related to Our Financial Condition and Results of Operations.” for more information.
CarLotz
Merger
The
Company closed its acquisition of CarLotz, Inc. in December 2022. At the date of this filing, the Company has closed all former CarLotz
locations except those serving our current major markets in Los Angeles, Oakland, and Portland. The workforce of the combined company
has also been reduced in accordance with our smaller geographic footprint and to eliminate redundancies arising the from the CarLotz Merger.
CEO
Transition
On
September 1, 2022, the Company announced that Jeffrey Clementz was appointed as the Company's Chief Executive Officer, succeeding George
Arison, one of our co-founders, as the Company's Chief Executive Officer. Mr. Arison will continue to serve in his capacity as a member
of the Board. Mr. Clementz previously served as our President since September 2021. The Company has entered into an amended employment
agreement with Mr. Clementz in connection with his appointment as Chief Executive Officer.
Nasdaq
Deficiency Letter and Reverse Stock Split
On
October 4, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock
Market LLC (“Nasdaq”) notifying us that, for the last 30 consecutive business days, the bid price for our Class A common stock
had closed below the $1.00 per share minimum bid price requirement for continued inclusion on the Nasdaq Global Market pursuant to Nasdaq
Listing Rule 5450(a)(1) (the "Bid Price Requirement"). Under Nasdaq Listing Rule 5810(c)(3)(A) (the "Compliance Period Rule"), we have
a 180-calendar day grace period, or until April 3, 2023 (the “Compliance Date”), to regain compliance with the Bid Price Requirement.
During this period, our Class A common stock will continue to trade on the Nasdaq Global Market. If at any time before the Compliance
Date the bid price of Class A common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days as required
under the Compliance Period Rule, the Staff will provide written notification to the Company that it has regained compliance with the
Bid Price Requirement (unless the Staff exercises its discretion to extend this 10 business day period pursuant to Nasdaq Listing Rule
5810(c)(3)(H)).
At
the Company’s Special Meeting of Stockholders held on December 7, 2022, the Company’s stockholders approved a proposal to
authorize a reverse stock split of the Company’s common stock, at a ratio within the range of 1-for-5 to 1-for-10. The Board approved
a 1-for-10 reverse split ratio, and on March 7, 2023, the Company filed a Certificate of Amendment to its Second Amended and Restated
Certificate of Incorporation (the “Charter Amendment”) to effect the reverse split effective March 8, 2023. On March 22,
2023, the Company was notified by Nasdaq that the Company has regained compliance with the Bid Price Requirement.
Business
Description
Shift
is an omnichannel retailer for buying and selling used cars, operating an end-to-end ecommerce platform and three stores located in California
and Oregon. Each store provides vehicle inventory inspection, reconditioning and storage to prepare cars for sale. For the year ended
December 31, 2022, the Company had $670.8 million in revenue, an increase of 5% compared to $636.9 million of revenue for the year ended
December 31, 2021.
The
Company's plan to achieve long-term profitable growth prioritizes unit economics, operating expense reductions, and maximizing liquidity.
Shift plans to increase market penetration in our urban, densely populated existing markets by using direct-to-consumer digital marketing
and a responsive ecommerce sales approach
Shift's
focus on improving unit economics is driven by direct vehicle acquisition channels, optimized inventory mix and ancillary product offerings,
combined with streamlined inventory onboarding, controlled fulfillment costs, and centralized software. Shift’s differentiated consumer
sourcing 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. For the year ended December 31, 2022, Shift sourced 95%
of its inventory from consumer-sellers and partners driving improved 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 provides Shift with access to a deep pool of scarce, highly desirable inventory. Over
time, we intend to expand our machine learning-enabled recommendation engine to better help customers find the cars best suited to them.
Shift
offers a full suite of options to consumers to finance and protect their vehicle through our mobile point-of-sale solution or in our locations.
These products include vehicle service contracts, guaranteed asset protection, and tire coverage.
Since
inception, Shift has invested significantly in its technology to provide a highly-rated customer experience, to support the operations
of the business, and to allow the Company to scale over time. Our ecommerce platform has significant functionality that includes discover
and search functionality for potential car buyers, the ability to connect customers to various lending partners for financing and service
products, online prequalification form that filters inventory that meets their budget and financing requirements, ability to prequalify
for financing, and the ability to get an instant online quote for car sellers. We will continue to develop our technology to improve the
overall operations of the business and especially the customer experience.
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 to consumers at one of our markets, directly, through our
ecommerce platform in a seamless end-to-end process, or through a combination of online and in-person. 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
and vehicle protection products, also referred to as finance and insurance (“F&I”), 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 year ended December 31,
2022 and 2021 was $670.8 million and $636.9 million, respectively.
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 accumulate data, we expect to improve the performance of our model to optimize our vehicle selection and disposal.
Vehicle
Reconditioning
All
of the cars that Shift sells undergo a rigorous 150+ point mechanical inspection and reconditioning process in one of our markets (or
at a third-party partner when additional capacity is needed) to help ensure that they are 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 operational flexibility in our reconditioning
process improves our ability to grow profitably and is a primary factor in our decision to conduct reconditioning in-house.
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 F&I products we sell, our gross profit on these items is equal to the revenue we generate.
Our current offering consists of financing from third-party lenders, guaranteed asset protection (“GAP”), vehicle protection
plans and vehicle service contracts. We plan to offer additional third-party products to provide a wider product offering to customers
and expect these products to contribute to reaching our revenue and profitability targets.
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 substantial opportunity to capture additional market share within our existing service areas. We have 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.
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 improved pricing. Simultaneously, customers become more likely to purchase a car on our website, driving higher demand and sales
volume.
Improvements
in Reconditioning Processes
We
learned early on from our experience in the used car sales business that in order 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”).
Growth
in Other Revenue from Existing Revenue Streams
We
have prioritized development of our “other revenue” streams, which comprise the financing and vehicle protection products
as well as other ancillary products. We have invested in the technology and sales capabilities needed 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 from further expansion of our attach rates for our financing and vehicle protection product suite.
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. We intend to continue to grow this
business segment to service every addressable 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.
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 recognize that in the future, our revenues may be affected
by these seasonal trends (including any disruptions to normal seasonal trends arising from the COVID-19 pandemic), as well as cyclical
trends affecting the overall economy, and specifically the automotive retail industry.
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 performance, increasing our brand awareness through unique site visitors
and continuing to offer a full spectrum of used vehicles to service all types of customers.
Retail
Units Sold
We
define retail 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 retail units sold is the primary driver of our revenues and, indirectly, gross profit, since retail
unit sales enable multiple complementary revenue streams, including all financing and protection products. We view retail 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 meets our retail standards.
Retail
Average Sale Price
We
define retail average sale price (“ASP”) as the average price paid by a customer for an retail vehicle, calculated as retail
revenue divided by retail units. Retail 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. We believe this metric provides
transparency and is comparable to our peers.
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 retail, other, and wholesale, each of which divided by the total number of retail
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 primarily driven by retail 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 Retail gross profit per unit, Wholesale gross profit per unit and Other gross
profit per unit.
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 any given
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 retail units sold in a period. We view average days to sale as a useful metric in understanding the health of our
inventory.
Retail
Vehicles Available for Sale
We
define retail vehicles available for sale as the number of retail vehicles in inventory on the last day of a given reporting period. Until
we reach an optimal pooled inventory level, we view retail vehicles available for sale as a key measure of our growth. Growth in retail
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 retail vehicles available for sale is an indicator of our ability to scale our vehicle
purchasing, inspection and reconditioning operations.
Results
of Operations
The
following table presents our revenue, gross profit, and unit sales information by channel for the periods indicated:
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Year
Ended December 31, |
| |
|
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|
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|
2022 |
|
2021 |
|
Change |
| |
|
|
|
|
|
|
($
in thousands, except per unit metrics) |
| Revenue: |
|
|
|
|
|
|
|
|
|
|
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| Retail
vehicle revenue, net |
|
|
|
|
|
|
$ |
555,523 |
|
|
$ |
538,387 |
|
|
3.2 |
% |
| Other
revenue, net |
|
|
|
|
|
|
27,007 |
|
|
22,633 |
|
|
19.3 |
% |
| Wholesale
vehicle revenue |
|
|
|
|
|
|
88,223 |
|
|
75,849 |
|
|
16.3 |
% |
| Total
revenue |
|
|
|
|
|
|
$ |
670,753 |
|
|
$ |
636,869 |
|
|
5.3 |
% |
|
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|
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|
|
|
|
|
|
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| Cost
of sales: |
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| Retail
vehicle cost of sales |
|
|
|
|
|
|
$ |
546,940 |
|
|
$ |
513,124 |
|
|
6.6 |
% |
| Wholesale
vehicle cost of sales |
|
|
|
|
|
|
98,480 |
|
|
74,957 |
|
|
31.4 |
% |
| Total
cost of sales |
|
|
|
|
|
|
$ |
645,420 |
|
|
$ |
588,081 |
|
|
9.8 |
% |
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|
|
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|
|
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| Gross
profit: |
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|
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|
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| Retail
vehicle gross profit |
|
|
|
|
|
|
$ |
8,583 |
|
|
$ |
25,263 |
|
|
(66.0) |
% |
| Other
gross profit |
|
|
|
|
|
|
27,007 |
|
|
22,633 |
|
|
19.3 |
% |
| Wholesale
vehicle gross profit (loss) |
|
|
|
|
|
|
(10,257) |
|
|
892 |
|
|
(1,249.9) |
% |
| Total
gross profit |
|
|
|
|
|
|
$ |
25,333 |
|
|
$ |
48,788 |
|
|
(48.1) |
% |
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|
|
|
|
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| Unit
sales information: |
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|
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| Retail
vehicle unit sales |
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|
|
|
|
|
20,961 |
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|
23,251 |
|
|
(9.8) |
% |
| Wholesale
vehicle unit sales |
|
|
|
|
|
|
5,344 |
|
|
7,067 |
|
|
(24.4) |
% |
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| Average
selling prices per unit (“ASP”): |
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| Retail
vehicles |
|
|
|
|
|
|
$ |
26,503 |
|
|
$ |
23,155 |
|
|
14.5 |
% |
| Wholesale
vehicles |
|
|
|
|
|
|
$ |
16,509 |
|
|
$ |
10,733 |
|
|
53.8 |
% |
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|
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|
|
|
|
|
|
|
|
| Gross
profit per unit: |
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|
|
|
|
|
|
|
|
|
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| Retail
gross profit per unit |
|
|
|
|
|
|
$ |
409 |
|
|
$ |
1,087 |
|
|
(62.4) |
% |
| Other
gross profit per unit |
|
|
|
|
|
|
1,288 |
|
|
973 |
|
|
32.4 |
% |
| Wholesale
gross profit (loss) per unit |
|
|
|
|
|
|
(489) |
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|
38 |
|
|
(1,386.8) |
% |
| Total
gross profit per unit |
|
|
|
|
|
|
$ |
1,208 |
|
|
$ |
2,098 |
|
|
(42.4) |
% |
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| Non-financial
metrics |
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| Average
monthly unique visitors |
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|
735,824 |
|
|
659,358 |
|
|
11.6 |
% |
| Average
days to sale |
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|
69 |
|
|
54 |
|
|
27.8 |
% |
| Retail
vehicles available for sale |
|
|
|
|
|
|
1,476 |
|
|
4,337 |
|
|
(66.0) |
% |
We
present operating results down to gross profit from three distinct revenue channels:
Retail
Vehicles, Net:
The retail channel within our Retail segment represents sales of used vehicles directly to our customers through our website.
Other,
Net:
The other
channel within our Retail segment represents fees earned on sales of value-added products associated with the sale of retail vehicles.
Wholesale
Vehicles:
The Wholesale
channel is the only component of our Wholesale segment and represents sales of used vehicles through wholesale auctions.
Year
Ended December 31, 2022
Retail
Vehicle Revenue, Net
Retail
vehicle revenue increased by $17.1 million, or 3.2%, to $555.5 million during the year ended December 31, 2022, from $538.4 million in
the comparable period in 2021. The increase in retail vehicle revenue was partly due to an increase in retail ASP, which was $26,503 for
the year ended December 31, 2022, compared to $23,155 for the year ended December 31, 2021. This increase in retail ASP was primarily
a reflection of increased demand for used vehicles coupled with lower-than-average inventory levels across the auto market as a whole
as compared to the prior period.
This
increase was partly offset by a decrease in retail unit sales, as we sold 20,961 retail vehicles in the year ended December 31, 2022,
compared to 23,251 retail vehicles in the year ended December 31, 2021. The decrease in unit sales was driven by the execution of the
Restructuring Plan in the second half of 2022. Unit sales decreased due to the closure of inventory storage and reconditioning centers
in California, Washington, and Texas and the associated reduction in inventory available for sale.
Following
the Restructuring Plan, retail revenue and unit sales are expected to trend downwards in 2023 as the Company's smaller geographic footprint
results in reduced unit volume, focusing on profitability over top-line growth.
Other
Revenue, Net
Other
revenue increased by $4.4 million, or 19.3%, to $27.0 million during the year ended December 31, 2022, from $22.6 million in the comparable
period in 2021. This increase was primarily due to strategic investments to enhance and expand our ancillary product offerings to better
monetize our unit sales.
Wholesale
Vehicle Revenue
Wholesale
vehicle revenue increased by $12.4 million, or 16.3%, to $88.2 million during the year ended December 31, 2022, from $75.8 million in
the comparable period in 2021. This increase in wholesale vehicle revenue was primarily due to a 53.8% increase in ASP resulting from
the fact that the Company liquidated a relatively high proportion of higher priced inventory as part of the Restructuring Plan that would
ordinarily have been sold through the Retail channel. The increase in ASP was partly offset by a decrease in wholesale unit volume as
we sold 5,344 wholesale vehicles during the year ended December 31, 2022, compared to 7,067 wholesale vehicles in the year ended December
31, 2021.
Cost
of Sales
Cost
of sales increased by $57.3 million, or 9.8%, to $645.4 million during the year ended December 31, 2022, from $588.1 million in the comparable
period in 2021. The increase was primarily due to increased buying and selling prices in the used auto market as a whole, caused by constrained
supplies of new and used vehicles. The increase was partly offset by a decrease in unit sales as we sold 26,305 total vehicles in the
year ended December 31, 2022, compared to 30,318 total vehicles in the year ended December 31, 2021.
Retail
Vehicle Gross Profit
Retail
vehicle gross profit decreased by $16.7 million, or 66.0%, to $8.6 million during the year ended December 31, 2022, from $25.3 million
in the comparable period in 2021. The decrease was primarily driven by a decrease in retail gross profit per unit, which shrank to $409
per unit for the year ended December 31, 2022, from $1,087 per unit in the comparable period in 2021. The decrease in retail vehicle gross
profit was partly due to a decrease in retail units sold, as described in “Retail
Vehicle Revenue, Net”
above. The decrease in retail gross profit per unit was largely driven by atypical vehicle appreciation witnessed in the comparable period
of 2021, as well as promotional discounts offered in 2022 to liquidate inventory as part of the Restructuring Plan. Retail vehicle gross
profit is expected to improve through a more balanced sales mix of older and newer vehicles as well as through the return of normal depreciation
and seasonality cycles.
Other
Gross Profit
Other
gross profit increased by $4.4 million, or 19.3%, to $27.0 million during the year ended December 31, 2022, from $22.6 million in the
comparable period in 2021. The increase in other gross profit was partly due to the increase in other gross profit per unit to $1,288
during the year ended December 31, 2022, from $973 per unit in the comparable period in 2021. 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 Loss
Wholesale
vehicle gross loss increased by $11.1 million, or 1,249.9%, to $10.3 million during the year ended December 31, 2022, from a profit of
$0.9 million in the comparable period in 2021. The increase was primarily due to the increase in wholesale gross loss per unit, which
grew to $489 per unit for the year ended December 31, 2022, from a profit of $38 in the comparable period in 2021. The increase was primarily
due to the liquidation of vehicles through the Wholesale channel as we adjust to a smaller geographic footprint pursuant to the Restructuring
Plan.
Components
of SG&A
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|
Year
Ended December 31, |
| |
2022 |
|
2021 |
|
Change |
| |
($
in thousands) |
|
Compensation
and benefits |
$ |
94,273 |
|
|
$ |
103,871 |
|
|
(9.2) |
% |
| as
a % of revenue |
14.1 |
% |
|
16.3 |
% |
|
|
| Marketing
expenses |
32,547 |
|
|
49,807 |
|
|
(34.7) |
% |
| as
a % of revenue |
4.9 |
% |
|
7.8 |
% |
|
|
|
Other costs(1) |
87,188 |
|
|
66,377 |
|
|
31.4 |
% |
| as
a % of revenue |
13.0 |
% |
|
10.4 |
% |
|
|
| Total
selling, general and administrative expenses |
$ |
214,008 |
|
|
$ |
220,055 |
|
|
(2.7) |
% |
| as
a % of revenue |
31.9 |
% |
|
34.6 |
% |
|
|
____________
(1)Other
costs include all other selling, general and administrative expenses such as facility operating costs, vehicle shipping costs for internal
purposes, corporate occupancy, professional services, registration and licensing, and IT expenses, and M&A transaction costs.
Selling,
general and administrative expenses decreased by $6.0 million, or 2.7%, to $214.0 million during the year ended December 31, 2022, from
$220.1 million in the comparable period in 2021. The decrease was partly due to the decrease in compensation costs of $9.6 million, driven
by the decrease in average headcount to 970 from 1,037. The decrease was also partly due to a decrease in marketing expense of $17.3 million,
which resulted from abnormally high marketing spend in the comparable period caused by overlapping marketing campaigns, as well as curtailed
marketing spend in the second half of 2022. Lastly, other costs increased by $20.8 million due primarily to transaction costs incurred
for the merger with CarLotz, Inc.
Selling,
general and administrative expenses decreased as a percentage of revenue from 34.6% to 31.9% as the Company began to realize cost savings
from the Restructuring Plan and various other efforts to improve overhead efficiency.
Liquidity
and Capital Resources
Sources
of liquidity
Our
main source of liquidity is cash generated from financing activities. Cash generated from financing activities through December 31,
2022 primarily includes proceeds from the IAC Merger and PIPE financing completed in October 2020, issuance of convertible notes and senior
unsecured notes, and proceeds from the Flooring Line of Credit facility with Ally (the "Ally FLOC"). Refer to Note 10 - Borrowings and
Note 15 - Related Party Transactions of the “Notes
to Consolidated Financial Statements”
for additional information. In addition, we obtained $95.7 million in cash from the CarLotz Merger (see Note 3 - Business Combinations
of the “Notes
to Consolidated Financial Statements”
for additional information).
On
May 27, 2021, the Company completed a private offering of its 4.75% Convertible Senior Notes due 2026 (the “Notes”).
The aggregate principal amount of the Notes sold in the offering was $150.0 million. The Notes accrue interest payable semi-annually in
arrears at a rate of 4.75% per year. The Notes will mature on May 15, 2026, unless earlier converted, redeemed or repurchased by
the Company. See Note 10 - Borrowings in the “Notes
to Consolidated Financial Statements”
for additional details regarding the Notes. The Company used approximately $28.4 million of the net proceeds from the sale of the
Notes to pay the cost of the Capped Call Transactions (see Note 12 - Stockholders' Equity (Deficit) of the “Notes
to Consolidated Financial Statements”),
and is using the remaining proceeds for working capital and general corporate purposes.
On
May 11, 2022, in conjunction with the acquisition of Fair (See Note 3 - Business Combinations of the “Notes
to Consolidated Financial Statements”),
the Company entered into an agreement with SB LL Holdco, Inc. ("SB LL Holdco") to a sale of $20.0 million aggregate principal amount
of 6.00% Senior Unsecured Notes due May 11, 2025 ("Senior Unsecured Notes").
Since
inception, the Company has generated recurring losses which has resulted in an accumulated deficit of $612.8 million as of December 31,
2022. During the year ended December 31, 2022, the Company had negative operating cash flows of $110.4 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.
Liquidity
and Management's Plan
For
the year ended December 31, 2022 and 2021, the Company generated negative cash flows from operations of approximately $110.4 million and
$211.0 million, respectively, and generated net losses of approximately $172.0 million and $166.3 million, respectively. As of December 31,
2022, the Company had unrestricted cash and cash equivalents of $96.2 million and total working capital of $83.1 million. Since inception,
the Company has had negative cash flows and losses from operations which it has funded primarily through issuances of common and preferred
stock and through a reverse recapitalization via the IAC Merger in October 2020. The Company has historically funded vehicle inventory
purchases through its vehicle floorplan facilities (see Note 10 - Borrowings to the accompanying consolidated financial statements). The
Company's current floorplan facility expires on December 9, 2023. The Company also continually assesses other opportunities to raise debt
or equity capital.
The
Company's plan is to raise capital to provide the liquidity necessary to satisfy its obligations over the next twelve months, and to secure
a new or amended floorplan financing arrangement to provide continuity when the current floorplan expires. The Company's ability to raise
capital may be constrained by the price of and demand for the Company's Class A common stock. There can be no assurance that the Company
will be able to raise sufficient additional capital or obtain financing that will provide it with sufficient liquidity to satisfy its
obligations over the next twelve months.
The
Company continues to implement the Restructuring Plan which is designed to improve the Company’s liquidity by improving unit economics
and reducing selling, general, and administrative expenses. The Restructuring Plan seeks to achieve these goals by eliminating less profitable
fulfillment channels, consolidating operations into fewer physical locations, and reducing headcount accordingly. Please see Note 16 -
Impairment and Restructuring to the accompanying consolidated financial statements for additional information.
In
accordance with Accounting Standards Update No. 2014-15, Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial
doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial
statements are issued or available to be issued. Management determined as a result of this evaluation, the Company’s losses and
negative cash flows from operations since inception, combined with its current cash, working capital position, and expiration of the current
floorplan financing arrangement on December 9, 2023, raise substantial doubt about the Company’s ability to continue as a going
concern.
The
consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern which contemplates
the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. Accordingly, the accompanying
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Debt
obligations
See
Note 10 - Borrowings of the “Notes
to Consolidated Financial Statements”
for information regarding the Company’s debt obligations.
Cash
Flows — Year Ended December 31, 2022 and 2021
The
following table summarizes our cash flows for the periods indicated:
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|
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|
|
Year
Ended December 31, |
| |
2022 |
|
2021 |
| |
($
in thousands) |
| Cash
Flow Data: |
|
|
|
| Net
cash, cash equivalents, and restricted cash used in operating activities |
$ |
(110,416) |
|
|
$ |
(211,046) |
|
| Net
cash, cash equivalents, and restricted cash provided by (used in) investing activities |
65,995 |
|
|
(14,143) |
|
| Net
cash, cash equivalents, and restricted cash provided by (used in) financing activities |
(42,074) |
|
|
183,989 |
|
Operating
Activities
For
the year ended December 31, 2022, net cash used in operating activities was $110.4 million, a decrease of $100.6 million from cash used
in operating activities of $211.0 million for the year ended December 31, 2021. The change is primarily due to an increase in cash provided
by net sales of inventory of $162.1 million, offset by an increase of $50.1 million in net cash used to settle accounts payable and accrued
liabilities.
Investing
Activities
For
the year ended December 31, 2022, net provided by investing activities of $66.0 million was primarily driven by the $95.7 million of cash
acquired as part of the acquisition of CarLotz, Inc., offset by $15.0 million used to purchase Fair Dealer Services, LLC (See Note 3 -
Business Combinations of the “Notes
to Consolidated Financial Statements”)
as well as capitalization of website and internal-use software costs and purchases of capital equipment.
Financing
Activities
For
the year ended December 31, 2022, net cash used in financing activities was $42.1 million, primarily due to net repayments on the Flooring
Line of Credit of $58.4 million, offset by proceeds from the Senior Unsecured Notes of 19.6 million (See Note 10 - Borrowings of the “Notes
to Consolidated Financial Statements”).
Contractual
Obligations
As
of December 31, 2022 and 2021, the Company reported a liability for vehicles acquired under an OEM program of zero and $3.6 million,
respectively. 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.
The
Company has various operating leases of real estate and equipment. See Note 6 - Leases to the accompanying consolidated financial statements
for further discussion of the nature and timing of cash obligations due under these leases.
Off-Balance
Sheet Arrangements
We
are a party to an off-balance sheet arrangement, as the Company guaranteed the lease obligation of two closed locations assigned to a
third-party (see Note 6 - Leases to the accompanying consolidated financial statements for additional information). We are not a party
to any other 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 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 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.
We
recognize revenue at a point in time as described below.
Retail
Vehicle Revenue
We
sell used vehicles to retail customers through our ecommerce platform. The price for used vehicles is the stand-alone selling price as
set forth in the customer contract. Customers frequently trade-in their existing vehicle to apply toward the price of a used vehicle,
which is included in the transaction price as non-cash consideration at the stated trade-in value within the contract. We satisfy our
performance obligation and recognize revenue for sales of retail vehicles at a point in time when the vehicles are delivered to or picked
up by the customer. The revenue recognized by Shift is the amount equal to the stand-alone selling price, including any service fees,
less any discounts and an estimate for returns. 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. Any payments received prior to the delivery or pick-up of used
vehicles are recorded as deferred revenue within accrued liabilities on the consolidated balance sheets until delivery or pick-up occurs.
Our
return policy allows customers to initiate a return during the first seven days or 200 miles after delivery (whichever comes first). Retail
vehicle revenue is recognized net of a reserve for returns, which is estimated using historical experience and trends. The returns reserve
was $0.6 million at December 31, 2022 and $1.0 million at December 31, 2021, and is materially offset by matching reductions
in cost of sales.
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, with whom we have agreements 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 or financed, respectively. We concluded that we are an agent
for these transactions because we do not control the products before they are transferred to the customer and our risk related to these
products is limited to the commissions that we receive. Accordingly, we recognize commission revenue at the time of sale.
In
the event that a customer cancels certain finance and insurance products, the Company may be obligated to return all or part of its commission.
Other revenue is recognized net of a reserve for cancellations, which is estimated using historical experience and trends. The reserve
for estimated cancellations at December 31, 2022 and 2021 was $2.7 million and $2.3 million, respectively, and is presented in accrued
expenses and other current liabilities on the consolidated balance sheets.
Wholesale
Vehicle Revenue
We
also 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.
Costs
to obtain or fulfill a contract
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 consolidated statements of operations.
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 and vehicle reconditioning
costs, including parts, applied labor, unapplied labor, inbound transportation costs and other incremental costs, are allocated to inventory
via specific identification and standard costing, which approximate average costs. Net realizable value is the estimated selling price
less costs to complete, dispose and transport the vehicles. Estimated selling price is derived from historical data and trends, such as
sales price and average days to sell similar vehicles, along with independent market resources. 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.
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
that we determine 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 December 31, 2022 and 2021, 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 expense for stock options 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.
Determination
of the Fair Value of Financial Instruments
Escrow
Shares
The
former Legacy Shift stockholders were entitled to receive up to an additional 600,021 shares of the Company’s common stock (the
“Escrow Shares”). The Escrow Shares were issued to a third-party escrow agent in connection with the closing of the IAC Merger,
with each former Legacy Shift stockholder listed as beneficiary in proportion to their percentage ownership of Legacy Shift common shares
immediately prior to the IAC Merger. The Escrow Shares will be released to the beneficiaries if the price of our common stock meets certain
thresholds in the 30 months following the closing of the IAC Merger (see Note 3 - Merger in the accompanying consolidated financial statements
for additional information). The Escrow shares will be returned to the Company if these thresholds are not reached. On October 13, 2021,
50% of the Escrow Shares were returned to the Company as our common stock did not meet the required threshold for release of the first
tranche.
The
Escrow Shares meet the accounting definition of a derivative financial instrument. Prior to October 13, 2021, as the number of Escrow
Shares that would ultimately be released was partially dependent on variables (namely, the occurrence of a change in control) that were
not valuation inputs to a “fixed for fixed” option or forward contract, the Escrow Shares were not considered to be indexed
to the Company’s common stock and were therefore classified as a liability. The Company’s obligation to release the Escrow
Shares upon achievement of the milestones was recorded to financial instruments liability
on the consolidated
balance sheet at fair value as of the date of the IAC Merger, with subsequent changes in fair value recorded in change in fair value of
financial instruments on the consolidated statements of operations.
Following
the return of the first tranche of the Escrow Shares to the Company on October 13, 2021, the Escrow Shares met the "fixed for fixed" option
or forward contract criteria for equity classification. As such, changes in fair value of the Escrow Shares prior to October 13, 2021
were recorded in change in fair value of financial instruments on the consolidated statements of operations and comprehensive loss. The
fair value of the shares on October 13, 2021 was reclassified to additional paid-in capital from financial instruments liability on the
consolidated balance sheet.
The
fair value of the Escrow Shares was determined using a Monte Carlo valuation model, which requires significant estimates including the
expected volatility of our common stock.
Convertible
Notes
On
May 27, 2021, the Company completed a private offering of its 4.75% Convertible Senior Notes due 2026 (the “Notes”).
The aggregate principal amount of the Notes sold in the offering was $150.0 million. The Notes accrue interest, payable semi-annually
in arrears on May 15 and November 15 of each year, beginning on November 15, 2021, at a rate of 4.75% per year. The Notes will mature
on May 15, 2026, unless earlier converted, redeemed or repurchased by the Company. Please see Note 7 - Borrowings to the accompanying
consolidated financial statements for additional information.
The
Notes contain conversion and redemption features that were evaluated for separate accounting as bifurcated embedded derivatives under
applicable GAAP. The conversion feature was determined to meet the scope exception for embedded features indexed to the Company's common
stock, and therefore was not accounted for separately from the host debt instrument. The redemption feature was determined to meet the
scope exception for embedded features that are clearly and closely related to the host instrument, and therefore was not accounted for
separately from the host debt instrument. The Notes are presented on the consolidated balance sheets at par value, net of unamortized
discounts and issuance costs.
Capped
Call Transactions
On
May 27, 2021, in connection with the issuance of the Notes (see Note 7 - Borrowings), the Company consummated privately negotiated
capped call transactions (the “Capped Call Transactions”) with certain of the initial purchasers, their respective affiliates
and other counterparties (the "Capped Call Counterparties"). The Capped Call Transactions initially cover, subject to anti-dilution adjustments
substantially similar to those applicable to the Notes, the number of the Company’s Class A common shares underlying the Notes.
The Capped Call Transactions are expected generally to reduce the potential dilution to holders of the Company’s Class A common
stock upon conversion of the Notes and/or offset the potential cash payments that the Company could be required to make in excess of the
principal amount of any converted Notes upon conversion thereof, with such reduction and/or offset subject to a cap. The Capped Call Transactions
are settled from time to time upon the conversion of the Notes, with a final expiration date of May 15, 2026. The Capped Call Transactions
are settled in the same proportion of cash and stock as the converted Notes. The proportion of cash and stock used to settle the Notes
is at the discretion of the Company.
The
Capped Call Transactions are separate transactions entered into by the Company with the Capped Call Counterparties, are not part of the
terms of the Notes and will not change any holder’s rights under the Notes. Holders of the Notes will not have any rights with respect
to the Capped Call Transactions.
The
Company used approximately $28.4 million of the net proceeds from the offering of the Notes to pay the cost of the Capped Call Transactions.
The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Company's stock.
The premiums paid for the Capped Call Transactions have been included as a net reduction to additional paid-in capital on the consolidated
balance sheets.
Business
Combinations
We
account for business combinations using the acquisition method of accounting, which requires all assets acquired and liabilities assumed
to be recorded at their respective fair values at the date of acquisition. Any excess consideration over the fair value of assets acquired
and liabilities assumed is recognized as goodwill. The determination of the acquisition date fair value of the assets acquired and liabilities
assumed requires significant estimates and assumptions, such as, if applicable, forecasted revenue growth rates and operating cash flows,
royalty rates, customer attrition rates, obsolescence rates of developed technology, and discount rates. These estimates are inherently
uncertain and subject to refinement. Depending on the nature of the acquired assets, we use either the income approach or the cost to
recreate approach to measure the fair value of these intangible assets. Under the cost to recreate approach, the company estimates the
cost to re-create an equivalent asset based on estimated labor hours, labor cost, other costs as applicable, and appropriate profit margins.
Under the income approach, the Company estimates future cash flows and discounts these cash flows at a rate of return that reflects the
Company’s relative risk. When estimating the significant assumptions to be used in the valuation we include consideration of current
industry information, market and economic trends, historical results of the acquired business and other relevant factors. These significant
assumptions are forward-looking and could be affected by future economic and market conditions. We engage the assistance of valuation
specialists in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
Impairment
of Long-Lived Assets
Evaluating
long-lived assets for impairment or abandonment requires the use of estimates. To assess the recoverability of definite-lived assets,
we estimate the remaining undiscounted cash flows pertaining to each asset group. For any asset groups that are not recoverable based
on estimated future undiscounted cash flows, we estimate the fair value of the asset group and compare it to the carrying value of the
assets. Any excess of carrying value over fair value is expensed as an impairment charge. Because of the magnitude of the carrying value
of the Company's long-lived assets, modest changes in our estimates could have a material impact on the reported result and financial
condition of the Company. The facility closures and the drop in our stock market capitalization were triggering events in the current
period. A detailed discussion of estimates pertaining to the current period impairment assessment is included in
Note 16 -
Impairment and Restructuring to the accompanying consolidated financial statements.
Goodwill
Goodwill
and indefinite-lived intangible assets are not amortized but rather tested for impairment annually in the fourth fiscal quarter, or more
frequently if events or changes in circumstances indicate that impairment may exist. Goodwill impairment is recognized when the quantitative
assessment results in the carrying value of the reporting unit exceeding its fair value, in which case an impairment charge is recorded
to goodwill to the extent the carrying value exceeds the fair value, limited to the amount of goodwill.
During
the year ended December 31, 2022, the Company recognized a goodwill impairment loss of $0.5 million, which is included in loss on impairment
on the consolidated statements of operations. There was no impairment of goodwill for the year ended December 31, 2021. During the fourth
fiscal quarter of 2022, management determined that indicators of impairment existed and performed a goodwill impairment test. The facility
closures and the drop in our stock price were indicators of impairment in the current period. Management engaged third party valuation
consultants to determine the fair value of the Retail segment (which also meets the definition of a reporting unit for goodwill impairment
purposes). The fair value was determined using a market approach based on comparison to peer company valuation multiples.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable to Smaller Reporting Companies.
ITEM
8. FINANCIAL STATEMENTS
|
|
|
|
|
|
| Index
to Consolidated Financial Statements |
|
|
Report
of Independent Registered Public Accounting Firm
(PCAOB ID No. 34) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the stockholders and the Board of Directors of Shift Technologies, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Shift Technologies, Inc. and subsidiaries (the "Company") as of December
31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows,
for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022,
in conformity with accounting principles generally accepted in the United States of America.
Going
Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, since inception, the Company has suffered recurring losses and negative cash flows from operations, combined
with its current cash and working capital position, and expiration of the current floorplan financing arrangement on December 9, 2023,
that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change
in Accounting Principle
As
discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases effective January 1, 2022,
due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis
for Opinion
These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/
Deloitte & Touche
LLP
San
Francisco, California
March
31, 2023
We
have served as the Company's auditor since 2018.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2022 |
|
As
of December 31, 2021 |
| ASSETS |
|
|
|
| Current
assets: |
|
|
|
| Cash
and cash equivalents |
$ |
96,159 |
|
|
$ |
182,616 |
|
| Restricted
cash, current |
10,632 |
|
|
— |
|
| Marketable
securities at fair value |
1,264 |
|
|
— |
|
|
Accounts
receivable, net of allowance for doubtful accounts of $93
and $304 |
4,558 |
|
|
20,084 |
|
| Inventory |
40,925 |
|
|
122,743 |
|
| Prepaid
expenses and other current assets |
7,657 |
|
|
7,392 |
|
| Operating
and finance lease assets, property and equipment, accounts receivable, and other assets held for sale |
17,226 |
|
|
— |
|
| Total
current assets |
178,421 |
|
|
332,835 |
|
| Restricted
cash, non-current |
1,055 |
|
|
11,725 |
|
| Marketable
securities at fair value, non-current |
707 |
|
|
— |
|
| Property
and equipment, net |
6,797 |
|
|
7,940 |
|
| Operating
lease assets |
44,568 |
|
|
— |
|
| Finance
lease assets, net |
152 |
|
|
— |
|
| Capitalized
website and internal use software costs, net |
10,657 |
|
|
9,262 |
|
| Goodwill |
2,070 |
|
|
— |
|
| Deferred
borrowing costs |
268 |
|
|
564 |
|
| Other
non-current assets |
3,323 |
|
|
3,414 |
|
| Total
assets |
$ |
248,018 |
|
|
$ |
365,740 |
|
|
|
|
|
| LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
| Current
liabilities: |
|
|
|
| Accounts
payable |
$ |
12,085 |
|
|
$ |
15,175 |
|
| Accrued
expenses and other current liabilities |
33,872 |
|
|
43,944 |
|
| Operating
lease liabilities, current |
8,865 |
|
|
— |
|
| Finance
lease liabilities, current |
271 |
|
|
— |
|
| Operating
and finance lease liabilities and other liabilities associated with assets held for sale |
15,432 |
|
|
— |
|
| Flooring
line of credit |
24,831 |
|
|
83,252 |
|
| Total
current liabilities |
95,356 |
|
|
142,371 |
|
| Long-term
debt, net |
163,363 |
|
|
144,335 |
|
| Operating
lease liabilities, non-current |
44,985 |
|
|
— |
| Finance
lease liabilities, non-current |
3,989 |
|
|
— |
| Other
non-current liabilities |
111 |
|
|
3,762 |
|
| Total
liabilities |
307,804 |
|
|
290,468 |
|
|
|
|
|
|
Commitments
and contingencies (Note 11) |
|
|
|
|
|
|
|
| Stockholders’
equity (deficit): |
|
|
|
|
Preferred
stock – par value $0.0001
per share; 1,000,000
shares authorized at December 31, 2022 and December 31, 2021, respectively |
— |
|
|
— |
|
|
Common
stock – par value $0.0001
per share; 500,000,000
shares authorized at December 31, 2022 and December 31, 2021, respectively; 17,212,130
and 8,136,931
shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively |
2 |
|
|
1 |
|
| Additional
paid-in capital |
552,968 |
|
|
515,982 |
|
| Accumulated
other comprehensive loss |
(3) |
|
|
— |
| Accumulated
deficit |
(612,753) |
|
|
(440,711) |
|
| Total
stockholders’ equity (deficit) |
(59,786) |
|
|
75,272 |
|
| Total
liabilities and stockholders’ equity (deficit) |
$ |
248,018 |
|
|
$ |
365,740 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31, |
| |
|
|
|
|
2022 |
|
2021 |
| Revenue |
|
|
|
|
|
|
|
| Retail
revenue, net |
|
|
|
|
$ |
555,523 |
|
|
$ |
538,387 |
|
| Other
revenue, net |
|
|
|
|
27,007 |
|
|
22,633 |
|
| Wholesale
vehicle revenue |
|
|
|
|
88,223 |
|
|
75,849 |
|
| Total
revenue |
|
|
|
|
670,753 |
|
|
636,869 |
|
| Cost
of sales |
|
|
|
|
645,420 |
|
|
588,081 |
|
| Gross
profit |
|
|
|
|
25,333 |
|
|
48,788 |
|
| Operating
expenses: |
|
|
|
|
|
|
|
| Selling,
general and administrative expenses |
|
|
|
|
214,008 |
|
|
220,055 |
|
| Depreciation
and amortization |
|
|
|
|
10,456 |
|
|
5,586 |
|
| Restructuring
expenses |
|
|
|
|
21,001 |
|
|
— |
|
| Loss
on impairment |
|
|
|
|
17,319 |
|
|
— |
|
| Total
operating expenses |
|
|
|
|
262,784 |
|
|
225,641 |
|
| Loss
from operations |
|
|
|
|
(237,451) |
|
|
(176,853) |
|
| Change
in fair value of financial instruments |
|
|
|
|
— |
|
|
18,893 |
|
| Gain
on bargain purchase |
|
|
|
|
76,685 |
|
|
— |
|
| Interest
and other expense, net |
|
|
|
|
(10,950) |
|
|
(8,082) |
|
| Loss
before income taxes |
|
|
|
|
(171,716) |
|
|
(166,042) |
|
| Provision
for income taxes |
|
|
|
|
326 |
|
|
226 |
|
| Net
loss |
|
|
|
|
$ |
(172,042) |
|
|
$ |
(166,268) |
|
| Net
loss per share, basic and diluted |
|
|
|
|
$ |
(19.92) |
|
|
$ |
(21.29) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
|
|
|
|
8,638,073 |
|
|
7,811,414 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Loss
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31, |
|
|
|
|
|
|
2022 |
|
2021 |
| Net
loss |
|
|
|
|
|
$ |
(172,042) |
|
|
$ |
(166,268) |
|
| Other
comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
| Unrealized
loss on marketable securities |
|
|
|
|
|
(3) |
|
|
— |
|
| Other
comprehensive loss, net of tax |
|
|
|
|
|
(3) |
|
|
— |
|
| Total
comprehensive loss |
|
|
|
|
|
$ |
(172,045) |
|
|
$ |
(166,268) |
|
The
accompanying notes are an integral part of these consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders' Equity (Deficit)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock |
|
Additional
Paid
in
Capital |
|
Accumulated
Deficit |
|
Accumulated
Other Comprehensive Loss |
|
Total
Stockholders’ Equity (Deficit) |
|
|
Shares |
|
Amount |
|
|
| Balance
at December 31, 2020 |
|
8,390,418 |
|
|
1 |
|
|
511,624 |
|
|
(274,443) |
|
|
— |
|
|
237,182 |
|
| Issuance
of common stock upon exercise of vested options |
|
36,299 |
|
|
— |
|
|
506 |
|
|
— |
|
|
— |
|
|
506 |
|
| Repurchase
of shares related to early exercised options |
|
(2,292) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| Vesting
of early exercised options |
|
— |
|
|
— |
|
|
436 |
|
|
— |
|
|
— |
|
|
436 |
|
| Stock-based
compensation |
|
— |
|
|
— |
|
|
25,967 |
|
|
— |
|
|
— |
|
|
25,967 |
|
| Warrant
exchange |
|
12,516 |
|
|
— |
|
|
(497) |
|
|
— |
|
|
— |
|
|
(497) |
|
| Purchase
of capped calls |
|
— |
|
|
— |
|
|
(28,391) |
|
|
— |
|
|
— |
|
|
(28,391) |
|
| Cancellation
and reclassification of Escrow Shares |
|
(300,010) |
|
|
— |
|
|
6,337 |
|
|
— |
|
|
— |
|
|
6,337 |
|
| Net
loss and comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
(166,268) |
|
|
— |
|
|
(166,268) |
|
| Balance
at December 31, 2021 |
|
8,136,931 |
|
|
1 |
|
|
515,982 |
|
|
(440,711) |
|
|
— |
|
|
75,272 |
|
| Issuance
of common stock upon exercise of vested options |
|
1,293 |
|
|
— |
|
|
3 |
|
|
— |
|
|
— |
|
|
3 |
|
| Repurchase
of shares related to early exercised options |
|
(2,285) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| Vesting
of early exercised options |
|
— |
|
|
— |
|
|
92 |
|
|
— |
|
|
— |
|
|
92 |
|
| Stock-based
compensation |
|
— |
|
|
— |
|
|
14,299 |
|
|
— |
|
|
— |
|
|
14,299 |
|
| Issuance
of common stock under stock-based compensation plans, net of shares exchanged for withholding tax |
|
313,162 |
|
|
— |
|
|
(2,861) |
|
|
— |
|
|
— |
|
|
(2,861) |
|
| Issuance
of common stock as consideration in business combinations |
|
8,763,029 |
|
|
1 |
|
|
25,453 |
|
|
— |
|
|
— |
|
|
25,454 |
|
| Other
comprehensive loss, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3) |
|
|
(3) |
|
| Net
loss |
|
— |
|
|
— |
|
|
— |
|
|
(172,042) |
|
|
— |
|
|
(172,042) |
|
| Balance
at December 31, 2022 |
|
17,212,130 |
|
|
2 |
|
|
552,968 |
|
|
(612,753) |
|
|
(3) |
|
|
(59,786) |
|
The
accompanying notes are an integral part of these consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31, |
| |
2022 |
|
2021 |
| CASH
FLOWS FROM OPERATING ACTIVITIES |
|
|
|
| Net
loss |
$ |
(172,042) |
|
|
$ |
(166,268) |
|
| Adjustments
to reconcile net loss to net cash used in operating activities: |
|
|
|
| Depreciation
and amortization |
11,787 |
|
|
6,253 |
|
| Stock-based
compensation expense |
13,029 |
|
|
25,130 |
|
| Unrealized
losses on equity securities |
24 |
|
|
— |
|
| Gain
on bargain purchase |
(76,685) |
|
|
— |
|
| Change
in fair value of financial instruments |
— |
|
|
(18,893) |
|
| Amortization
of operating lease right-of-use assets |
10,496 |
|
|
— |
|
| Contra-revenue
associated with milestones |
637 |
|
|
637 |
|
| Amortization
of debt discounts |
2,011 |
|
|
2,741 |
|
| Loss
on impairment and non-cash restructuring expenses |
30,692 |
|
|
— |
|
| Changes
in operating assets and liabilities: |
|
|
|
| Accounts
receivable |
18,158 |
|
|
(11,658) |
|
| Inventory |
88,409 |
|
|
(73,657) |
|
| Prepaid
expenses and other current assets |
(203) |
|
|
(1,914) |
|
| Other
non-current assets |
767 |
|
|
(1,186) |
|
| Accounts
payable |
(4,352) |
|
|
4,359 |
|
| Accrued
expenses and other current liabilities |
(19,020) |
|
|
22,375 |
|
| Operating
lease liabilities |
(10,770) |
|
|
— |
|
| Other
non-current liabilities |
(3,354) |
|
|
1,035 |
|
| Net
cash, cash equivalents, and restricted cash used in operating activities |
(110,416) |
|
|
(211,046) |
|
|
|
|
|
| CASH
FLOWS FROM INVESTING ACTIVITIES |
|
|
|
| Purchases
of property and equipment |
(4,665) |
|
|
(7,524) |
|
| Proceeds
from sale of property and equipment |
317 |
|
|
— |
|
| Purchases
of marketable securities |
(67) |
|
|
— |
|
| Proceeds
from sales of marketable securities |
115 |
|
|
— |
|
| Capitalized
website internal-use software costs |
(10,368) |
|
|
(6,619) |
|
| Cash
received from acquisition of CarLotz, Inc. |
95,663 |
|
|
— |
|
| Cash
paid for acquisition of Fair Dealer Services, LLC |
(15,000) |
|
|
— |
|
| Net
cash, cash equivalents, and restricted cash provided by (used in) investing activities |
65,995 |
|
|
(14,143) |
|
|
|
|
|
| CASH
FLOWS FROM FINANCING ACTIVITIES |
|
|
|
| Proceeds
from flooring line of credit facility |
382,090 |
|
|
329,981 |
|
| Repayment
of flooring line of credit facility |
(440,511) |
|
|
(261,217) |
|
| Exchange
of warrants for cash |
— |
|
|
(497) |
|
| Proceeds
from Senior Unsecured Notes, net of discounts |
19,591 |
|
|
— |
|
| Payment
of debt issuance costs |
(175) |
|
|
(88) |
|
| Proceeds
from issuance of convertible notes |
— |
|
|
143,768 |
|
| Premiums
paid for Capped Call Transactions |
— |
|
|
(28,391) |
|
| Principal
payments on finance leases |
(127) |
|
|
— |
|
| Proceeds
from stock option exercises, including from early exercised options |
— |
|
|
506 |
|
| Payment
of tax withheld for common stock issued under stock-based compensation plans |
(2,861) |
|
|
— |
|
| Repurchase
of shares related to early exercised options |
(81) |
|
|
(73) |
|
| Net
cash, cash equivalents, and restricted cash provided by (used in) financing activities |
(42,074) |
|
|
183,989 |
|
| Net
decrease in cash, cash equivalents and restricted cash |
(86,495) |
|
|
(41,200) |
|
| Cash,
cash equivalents and restricted cash, beginning of period |
194,341 |
|
|
235,541 |
|
| Cash,
cash equivalents and restricted cash, end of period |
$ |
107,846 |
|
|
$ |
194,341 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31, |
|
2022 |
|
2021 |
| SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
| Cash
paid for interest |
$ |
10,338 |
|
|
$ |
4,230 |
|
| Cash
paid for income taxes |
214 |
|
|
102 |
|
|
|
|
|
| SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
| Capital
expenditures in accounts payable |
$ |
126 |
|
|
$ |
141 |
|
| Vesting
of exercised options |
92 |
|
|
436 |
|
| Other
receivables resulting from stock option exercises |
— |
|
|
35 |
|
| Stock-based
compensation capitalized to internal-use software |
1,270 |
|
|
841 |
|
| Issuance
of shares as consideration in business acquisitions |
2,481 |
|
|
— |
|
| Imputation
of debt discounts reducing consideration transferred in business acquisitions |
2,103 |
|
|
— |
|
| Establishment
of operating lease right of use assets and lease liabilities |
|
|
|
| Operating
lease right of use assets |
67,603 |
|
|
— |
|
| Operating
lease liabilities |
72,202 |
|
|
— |
|
| Finance
lease right of use assets |
4,488 |
|
|
— |
|
| Finance
lease liabilities |
9,423 |
|
|
— |
|
| Other
Assets |
1,716 |
|
|
— |
|
| Other
Liabilities |
2,492 |
|
|
— |
|
The
accompanying notes are an integral part of these consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
1.
DESCRIPTION OF THE BUSINESS
Shift
Technologies, Inc., which, together with its subsidiaries we refer to as Shift, we, us, our, SFT, or the Company, conducts its business
through its wholly owned subsidiaries. Shift Platform, Inc., formerly known as Shift Technologies, Inc. (“Legacy Shift”) was
incorporated in the State of Delaware on December 9, 2013.
Shift
Technologies, Inc. is a consumer-centric omnichannel retailer transforming the used car industry by leveraging its end-to-end ecommerce
platform and retail locations to provide a technology-driven, hassle-free customer experience.
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”).
COVID-19
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 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 will 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 was effective
from the enactment date through December 31, 2020. As of December 31, 2022, the Company had repaid all of the $1.3 million
originally deferred.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
Our
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”). Intercompany accounts and transactions have been eliminated.
At
the Company’s Special Meeting of Stockholders held on December 7, 2022, the Company’s stockholders approved a proposal to
authorize a reverse stock split of the Company’s common stock, at a ratio within the range of 1-for-5 to 1-for-10. The Board approved
a 1-for-10 reverse split ratio, and on March 7, 2023, the Company filed a Certificate of Amendment to its Second Amended and Restated
Certificate of Incorporation (the “Charter Amendment”) to effect the reverse split effective March 8, 2023. All share and
per-share amounts have been retrospectively adjusted to reflect the impact of the reverse stock split.
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, financial instruments, convertible debt, stock-based compensation and income taxes.
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.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of 3 months or less to be cash equivalents.
As of December 31, 2022 and 2021, cash and cash equivalents consisted of bank deposits, money market placements and demand deposits
with third-party payment platforms.
Restricted
Cash
Restricted
cash includes amounts required by the Ally FLOC (See Note 10 - Borrowings), letters of credit required in conjunction with lease agreements
and collateral related to state licensing requirements. As of December 31, 2022 and 2021, the current and non-current
restricted cash balances totaled $11.7
million and $11.7
million, respectively.
Marketable
Securities
The
Company and its reinsurance subsidiaries invest excess cash in marketable securities in the ordinary course of conducting their operations
and maintain a portfolio of marketable securities primarily comprised of fixed income debt securities. The Company has investments in
marketable securities that are classified as available-for-sale securities and are reported at fair value. Unrealized gains and losses
related to changes in the fair value of equity securities are recognized in interest and other expense, net in the Company’s consolidated
statements of operations. Unrealized gains and losses related to changes in the fair value of debt securities, if material, are recognized
in accumulated other comprehensive income in the Company’s consolidated balance sheets. Changes in the fair value of available-for-sale
debt securities impact the Company’s net loss only when such securities are sold or when other-than-temporary impairment is recognized.
Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis and
are recognized on the trade date.
Management
determines the appropriate classification of its investments at the time of purchase and re-evaluates the designations at each balance
sheet date. The Company may sell certain of the Company’s marketable securities prior to their stated maturities for strategic reasons,
including, but not limited to, anticipation of credit deterioration and duration management. The Company reviews its debt securities on
a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. The Company considers
factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term
prospects of the issuer and the Company’s intent to sell, or whether it is more likely than not the Company will be required to
sell the investment before recovery of the investment’s amortized cost basis. If the Company believes that an other-than-temporary
decline exists in one of these securities, the Company will write down these investments to fair value through earnings.
Accounts
Receivable, Net
Accounts
receivable are primarily due from auction facilities and partner financial institutions that provide financing to our customers, and are
recorded net of any allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon historical experience,
current economic conditions and other factors and is evaluated periodically. As of December 31, 2022 and 2021,
the allowance for doubtful accounts was $0.1 million
and $0.3 million,
respectively. Write-offs were immaterial during the years ended December 31, 2022 and 2021.
Concentrations
of Credit Risk and Other Uncertainties
Financial
instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable.
Substantially all of the Company’s cash and cash equivalents were deposited in accounts at two financial institutions, and account
balances may at times exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk
due to the financial strength of the depository institution in which the cash is held.
Credit
risk with respect to accounts receivable is generally not significant due to diversity of the Company’s customers. The Company routinely
assesses the creditworthiness of its customers. The Company generally has not experienced any material losses related to receivables from
individual customers, or groups of customers during the years ended December 31, 2022 and 2021. The Company does not require collateral.
Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable
in the Company’s accounts receivable.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
As
of December 31, 2022, receivables from each of three retail lending institutions accounted for 55%,
21%,
and 19%,
respectively, of the Company's accounts receivable balance. As of December 31, 2021, receivables from one retail lending institution
accounted for 24%
of the Company's accounts receivable balance. For the years ended December 31, 2022 and 2021, no customers accounted for more than
10% of the Company’s revenue.
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 and vehicle reconditioning
costs, including parts, applied labor, unapplied labor, inbound transportation costs and other incremental costs, are allocated to inventory
via specific identification
At
December 31, 2022 and 2021, inventory was stated at the lower of cost or net realizable value. Net realizable value is the estimated
selling price less costs to complete, dispose and transport the vehicles. Estimated selling price is derived from historical data and
trends, such as sales price and average days to sell similar vehicles, along with independent market resources. Each reporting period
the Company recognizes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value through cost
of sales in the accompanying consolidated statements of operations.
Vehicles
held on consignment are not recorded in the Company’s inventory balance, as title to those vehicles, and, therefore control of the
vehicle, remain with the consignors until a customer purchases the vehicle and the vehicle is delivered.
Property
and Equipment, Net
Property
and equipment consists of equipment, furniture, fixtures and leasehold improvements and is recorded at cost less of accumulated depreciation.
Major replacements and improvements are capitalized, while general repairs and maintenance are expensed as incurred.
Depreciation
is computed using the straight-line method over the estimated useful life of the related assets:
|
|
|
|
|
|
| Equipment |
3
to 5
years |
| Furniture
and fixtures |
3
years |
| Leasehold
improvements |
Lesser
of useful life or lease term |
Software
Development Costs, Net
The
Company capitalizes costs associated with customized internal-use software systems that have reached the application development stage.
Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related
expenses for employees who are directly associated with the applications. Capitalization of such costs begins when the preliminary project
stage is complete and ceases at the point in which the project is substantially complete and ready for its intended purpose. Amortization
is computed using the straight-line method, generally over three
years.
Impairment
of Long-Lived Assets
The
Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are impaired, the impairment to be
recognized is measured by the amount by which the carrying value exceeds the fair value of such assets. Fair value is
determined through various valuation techniques, including cost-based, market and income approaches as considered necessary. The Company
recognized impairment losses on long-lived assets of $16.9
million and zero
for the years ended December 31, 2022 and 2021, respectively.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Assets
and Liabilities Held for Sale
The
Company classifies assets to be sold as assets held for sale when (i) Company management has approved and commits to a plan to sell the
asset; (ii) the asset is available for immediate sale in its present condition and is ready for sale; (iii) an active program to locate
a buyer and other actions required to sell the asset have been initiated; (iv) the sale of the asset is probable; (v) the asset is being
actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn. Assets classified as held for sale are recorded at the lower of the
carrying amount or fair value less the cost to sell.
Business
Combinations
The
Company uses the acquisition method of accounting under ASC 805, Business Combinations. Each acquired company’s operating results
are included in the Company’s Consolidated Financial Statements starting on the acquisition date. The purchase price is equivalent
to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired and liabilities assumed as of the
acquisition date are recorded at the acquisition date fair value. Goodwill is recognized for the excess of purchase price over the net
fair value of assets acquired and liabilities assumed. In contrast, a gain on bargain purchase is recognized in earnings in the period
of acquisition for the excess of the estimated fair value of net assets acquired and liabilities assumed over the purchase price.
Amounts
allocated to assets and liabilities are based upon fair values. Such valuations require management to make significant estimates and assumptions,
especially with respect to the identifiable intangible assets. Management makes estimates of fair value based upon assumptions believed
to be reasonable and that of a market participant. These estimates are based on available historical information as well as future expectations,
and the estimates are inherently uncertain. The separately identifiable intangible assets generally include customer relationships, acquired
technology, backlog, trade names, and non-compete agreements.
Goodwill
Goodwill
and indefinite-lived intangible assets are not amortized but rather tested for impairment annually in the fourth fiscal quarter, or more
frequently if events or changes in circumstances indicate that impairment may exist. Goodwill impairment is recognized when the quantitative
assessment results in the carrying value of the reporting unit exceeding its fair value, in which case an impairment charge is recorded
to goodwill to the extent the carrying value exceeds the fair value, limited to the amount of goodwill. The Company recognized impairments
of goodwill totaling $0.5
million and zero
for the year ended December 31, 2022 and 2021, respectively.
Deferred
Borrowing Costs
Deferred
borrowing costs associated with long-term debt facilities are recorded as a reduction to long term debt and amortized into interest expense
over the expected term of the related facility. Deferred borrowing costs associated with revolving facilities and lines of credit are
recorded as a long-term assets on the consolidated balance sheet and amortized over the expected term of the related facility. Any unamortized
deferred borrowing costs upon extinguishment of debt facilities are written off to interest expense on the consolidated statements of
operations. See Note 10 - Borrowings and Note 15 - Related Party Transactions for further discussion regarding the deferred
borrowing costs.
Reinsurance — Contract
Reserves
The
Company acquired certain reinsurance entities as part of the CarLotz Merger. The Company sells certain finance and insurance contracts
that are underwritten by third parties. The Company, through its reinsurance subsidiaries, reinsures those contracts, thereby assuming
the risk of loss on the underlying insurance contracts. The Company establishes insurance reserves in accordance with ASC 944, Financial
Services — Insurance. These amounts are recorded as accrued expenses and other current liabilities on the consolidated
balance sheets.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, which prescribes a five-step model that includes: (1) identify the contract; (2)
identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations;
and (5) recognize revenue when (or as) performance obligations are satisfied.
The
Company recognizes revenue upon transfer of control of goods or services to customers, in an amount that reflects the consideration to
which the Company expects to be entitled in exchange for those goods or services. Control passes to the customer at the time of delivery
or pick-up. The Company 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. The Company has provided
cash or non-cash payments to a related party customer, including in the form of equity (see Note 15 - Related Party Transactions). In
such cases the Company accounts for such payments under the guidance for consideration payable to a customer and considers whether such
amount should be reflected as contra-revenue.
The
Company recognizes revenue at a point in time as described below.
Retail
Revenue
The
Company sells used vehicles to its retail customers through its platform. The price for used vehicles is the stand-alone selling price
as set forth in the customer contract. Customers frequently trade-in their existing vehicle to apply toward the price of a used vehicle,
which is included in the transaction price as non-cash consideration at the stated trade-in value within the contract. The Company satisfies
its performance obligation and recognizes revenue for used vehicle sales at a point in time when the vehicles are delivered to or picked
up by the customer. The revenue recognized by the Company is the amount equal to the stand-alone selling price, including any service
fees, less any discounts and an estimate for returns. Revenue excludes any sales taxes, title and registration fees, and other government
fees that are collected from customers.
The
Company receives 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. Any payments received prior to the delivery or pick-up of used
vehicles are recorded as deferred revenue within accrued expenses and other current liabilities on the consolidated balance sheets until
delivery or pick-up occurs, typically within seven
days.
The
Company’s return policy allows customers to initiate a return during the first seven
days or 200
miles after delivery (whichever comes first). Retail vehicle revenue is recognized net of a reserve for returns, which is estimated using
historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with an asset
recorded in prepaid expenses and other current assets and a refund liability recorded in accrued expenses and other current liabilities.
The net impact of the returns reserve is immaterial.
Other
Revenue
The
Company provides buyers on its platform with options for financing, insurance, and extended warranties, as well as other value-added products
such as vehicle service contracts, guaranteed asset protection and wheel and tire coverage. All such services are provided by unrelated
third-party vendors and the Company has agreements with each of these vendors giving the Company the right to offer such services on its
platform.
When
a buyer selects a service from these providers, the Company earns a commission based on the actual price paid or financed. The Company
concluded that it is an agent for these transactions because it does not control the products before they are transferred to the customer.
Accordingly, the Company recognizes commission revenue at the time of sale.
In
the event that a customer prematurely cancels certain finance and insurance products, the Company may be obligated to return all or part
of its commission. Other revenue is recognized net of a reserve for cancellations, which is estimated using historical experience and
trends. The reserve for estimated cancellations at December 31, 2022 and 2021 was $2.7
million and $2.3
million, respectively, and is presented in accrued expenses and other current liabilities on the consolidated balance sheets.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Wholesale
Vehicle Revenue
The
Company sells 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 the Company’s quality standards to list and sell through its website. The
Company satisfies its performance obligation and recognizes revenue for wholesale vehicle sales 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.
Costs
to obtain and fulfill a contract
The
Company 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 on the consolidated statements of operations.
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, labor, inbound transportation costs and other incremental costs. These
costs include inbound shipping costs of purchased vehicles, mechanical inspection, vehicle preparation supplies and repair costs necessary
for reconditioning the vehicle for resale. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower
of cost or net realizable value.
Shipping
and Handling
The
Company’s logistics costs related to transporting its used vehicle inventory primarily includes third-party transportation fees.
The portion of these costs related to inbound transportation from the point of acquisition to the relevant reconditioning facility is
included in cost of sales when the related used vehicle is sold. Logistics costs not included in cost of sales are accounted for as costs
to fulfill contracts with customers and are included in selling, general and administrative expenses in the consolidated statements of
operations and were $8.7
million and $8.1
million during the years ended December 31, 2022 and 2021, respectively, excluding compensation and benefits.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses primarily include compensation and benefits, advertising, facilities costs, technology expenses and
other administrative expenses. Selling, general and administrative expenses exclude costs to recondition vehicles and inbound transportation,
which are included in costs of sales, as well as payroll and stock-based compensation costs capitalized to website and internal-use software
development costs. For the years ended December 31, 2022 and 2021, advertising expense was $32.3
million and $49.8
million, respectively. Advertising costs are expensed as incurred.
Stock-Based
Compensation Expense
Stock-based
compensation expense related to awards to employees are measured at the grant date based on the fair value of the award. The fair value
of the award is expensed on a straight-line basis over the requisite service period, which is generally the vesting period. The Company
elects to account for forfeitures as they occur by reversing compensation cost when awards are forfeited. Exercises of option awards are
settled by issuing new shares.
See
Note 14 - Stock-Based Compensation Plans for additional information on stock-based compensation.
Interest
and Other Income
Interest
and other income is comprised of bank interest and other miscellaneous items.
Interest
Expense
Interest
expense includes interest incurred from the Convertible Notes, Senior Unsecured Notes, and the flooring line of credit facilities, as
well as the amortization of deferred borrowing costs, debt discounts and other miscellaneous items.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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
1 —
Quoted prices in active markets for identical assets or liabilities.
Level
2 —
Observable 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.
Level
3 —
Unobservable 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. The Company recognizes transfers
between the levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between
levels during the years ended December 31, 2022 and 2021. As of December 31, 2022, the Company had $2.0
million of assets and $48
thousand of liabilities measured at fair value.
Escrow
Shares
In
connection with the closing of the Company's merger with Insurance Acquisition Corp. on October 13, 2020, (the "IAC Merger"), 600,021
shares of the Company’s Class A common stock (the “Escrow Shares”) were deposited into an escrow account, with each
former Legacy Shift stockholder listed as beneficiary in proportion to their percentage ownership of Legacy Shift common shares immediately
prior to the IAC Merger. The Escrow Shares will be released to the beneficiaries if the following conditions are achieved following October 13,
2020, the date of the closing of the IAC Merger:
i.if
at any time during the 12
months following the closing, the closing share price of the Company’s Class A common stock is greater than $120.00
over any 20
trading days within any 30
trading day period, 50%
of the Escrow Shares will be released; and
ii.
if at any time during the 30
months following the closing, the closing share price of the Company’s Class A common stock is greater than $150.00
over any 20
trading days within any 30
trading day period, 50%
of the Escrow Shares will be released.
iii.If,
during the 30
months following the closing, there is a change of control (as defined in the IAC Merger Agreement) that will result in the holders of
the Company’s Class A common stock receiving a per share price equal to or in excess of $100.00
per share (as equitably adjusted for stock splits, stock dividends, special cash dividends, reorganizations, combinations, recapitalizations
and similar transactions affecting the Class A common stock after the date of the IAC Merger), then all remaining Escrow Shares shall
be released to the Legacy Shift stockholders effective as of immediately prior to the consummation of such change of control.
The
Escrow Shares are legally outstanding and the beneficiaries retain all voting, dividend and distribution rights applicable to the Company’s
Class A common stock while the shares are in escrow. If the conditions for the release of the Escrow Shares are not met, the shares and
any dividends or distributions arising therefrom shall be returned to the Company. The Escrow Shares are not considered outstanding for
accounting purposes, and as such are excluded from the calculation of basic net loss per share (see Note 18 - Net Loss Per Share).
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
Escrow Shares meet the accounting definition of a derivative financial instrument. Prior to the cancellation of the first tranche on October 13,
2021, the number of Escrow Shares that would have ultimately been released was partially dependent on variables (namely, the occurrence
of a change in control) that are not valuation inputs to a “fixed for fixed” option or forward contract, and therefore the
Escrow Shares were not considered to be indexed to the Company’s Class A common stock and were therefore classified as a liability.
The Company’s obligation to release the Escrow Shares upon achievement of the milestones was initially recorded to financial instruments
liability
on the consolidated
balance sheets at fair value as of the date of the IAC Merger. Subsequent changes in the fair value of the liability were recorded to
change in fair value of financial instruments on the consolidated statements of operations.
The
Escrow Shares were remeasured on a recurring basis using Level 3 inputs. The fair value of the Escrow Shares was determined using a Monte
Carlo valuation model, which requires significant estimates including the expected volatility of our Class A common stock. The expected
annual volatility of our Class A common stock was estimated to be 65.53%
as of December 31, 2021, based on the historical volatility of comparable publicly traded companies.
The
table below illustrates the changes in the fair value of the Company’s Level 3 financial instruments liability:
|
|
|
|
|
|
|
|
|
| (in
thousands) |
|
2021 |
| Balance
as of January 1, |
|
$ |
25,230 |
|
| Remeasurement
of Escrow Shares liability |
|
(18,893) |
|
| Reclassification
of Escrow Shares liability to additional paid-in capital |
|
(6,337) |
|
|
Balance as of
December 31, |
|
$ |
— |
|
As
of the first anniversary of the IAC Merger on October 13, 2021, the first tranche of 300,011
Escrow Shares had failed to satisfy the $120.00
stock performance hurdle. As a result, the shares were returned to the Company for cancellation.
Following
the return of the first tranche of the Escrow Shares to the Company on October 13, 2021, the Escrow Shares met the "fixed for fixed" option
or forward contract criteria for equity classification. As such, changes in fair value of the Escrow Shares through October 13, 2021 were
recorded in change in fair value of financial instruments on the consolidated statements of operations. The fair value of the shares on
October 13, 2021 of $6.3
million, measured using the Monte Carlo valuation model, was reclassified to additional paid-in capital on the consolidated balance sheets.
During
the year ended December 31, 2021, the Company recognized a gain related to the change in fair value of the Escrow Shares of $18.9 million,
which is included in change in fair value of financial instruments on the consolidated statements of operations.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method. The Company recognizes 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 its deferred income tax assets, the Company considers all available positive and negative evidence,
including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis.
In the event the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded
amount, it 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 December 31, 2022 and 2021, respectively, the Company
recorded a full valuation allowance on its 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.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Net
Loss Per Share Attributable to Common Stockholders
Basic
and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating
securities. Under the two-class method, net loss is attributed to common stockholders and participating securities based on their participation
rights. The Company considers all series of its redeemable convertible preferred stock to be participating securities. Under the two-class
method, the net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holders of the Company’s
convertible preferred stock do not have a contractual obligation to share in the Company’s losses. Under the two-class method, basic
net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the
weighted-average number of shares of common stock outstanding during the period. For periods in which the Company reports net losses,
diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common
stockholders because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Liquidity
and Management's Plan
For
the year ended December 31, 2022 and 2021, the Company generated negative cash flows from operations of approximately $110.4
million and $211.0
million, respectively, and generated net losses of approximately $172.0
million and $166.3
million, respectively. As of December 31, 2022, the Company had unrestricted cash and cash equivalents of $96.2
million and total working capital of $83.1
million. Since inception, the Company has had negative cash flows and losses from operations which it has funded primarily through issuances
of common and preferred stock and through a reverse recapitalization via the IAC Merger in October 2020. The Company has historically
funded vehicle inventory purchases through its vehicle floorplan facilities (see Note 10 - Borrowings to the accompanying consolidated
financial statements). The Company's current floorplan facility expires on December 9, 2023. The Company also continually assesses
other opportunities to raise debt or equity capital.
The
Company's plan is to raise capital to provide the liquidity necessary to satisfy its obligations over the next twelve months, and to secure
a new or amended floorplan financing arrangement to provide continuity when the current floorplan expires. The Company's ability to raise
capital may be constrained by the price of and demand for the Company's Class A common stock. There can be no assurance that the Company
will be able to raise sufficient additional capital or obtain financing that will provide it with sufficient liquidity to satisfy its
obligations over the next twelve months.
The
Company continues to implement the Restructuring Plan which is designed to improve the Company’s liquidity by improving unit economics
and reducing selling, general, and administrative expenses. The Restructuring Plan seeks to achieve these goals by eliminating less profitable
fulfillment channels, consolidating operations into fewer physical locations, and reducing headcount accordingly. Please see Note 16 -
Impairment and Restructuring to the accompanying consolidated financial statements for additional information.
In
accordance with Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a
Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that
raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated
financial statements are issued or available to be issued. Management determined as a result of this evaluation, the Company’s losses
and negative cash flows from operations since inception, combined with its current cash, working capital position, and expiration of the
current floorplan financing arrangement on December 9, 2023, raise substantial doubt about the Company’s ability to continue
as a going concern.
The
consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern which contemplates
the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. Accordingly, the accompanying
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Recently
Issued Accounting Standards
In
June 2016, the Financial Accounting Standards Board ("FASB") issued guidance codified in Accounting Standards Update ("ASU") 2016-13,
Financial
instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU
2016-13"), 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. The Company does not expect
the adoption this standard to materially impact the Company's consolidated financial statements.
Recently
Adopted Accounting Standards
In
February 2016, the FASB issued, ASU 2016-02, Leases (Topic 842), which amends the accounting guidance on leases. The new standard requires
a lessee to recognize right-of-use assets and lease obligations on the balance sheet for most lease agreements. Leases are classified
as either operating or finance, with classification affecting the pattern of expense recognition in the statement of operations. The FASB
also subsequently issued amendments to the standard to provide additional practical expedients and an additional transition method option.
The
Company adopted Topic 842 as of January 1, 2022 using the modified retrospective approach with a cumulative-effect adjustment to opening
retained earnings (accumulated deficit) with no restatement of comparative periods. Upon adoption, the Company recognized $28.6
million of operating lease liabilities and $27.9
million of operating lease right-of-use assets. The adoption of Topic 842 did not result in a cumulative effect adjustment to accumulated
deficit.
Topic
842 provides various optional practical expedients for transition. The Company elected to utilize the package of practical expedients
for transition which permitted the Company to not reassess its prior conclusions regarding whether a contract is or contains a lease,
lease classification and initial direct costs.
Topic
842 also provides optional practical expedients for an entity’s ongoing lease accounting. The Company elected the short-term lease
recognition exemption for all leases that qualify and the practical expedient to not separate lease and non-lease components of leases.
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 also clarifies and amends
existing guidance to improve consistent application. The Company adopted ASU 2019-12 on January 1, 2022. There was no impact to the Company's
consolidated financial statements.
In
October 2021, the FASB issued guidance codified in ASU 2021-08,
Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.
Under new guidance, an acquirer is required to recognize and measure contract assets and contract liabilities acquired in a business combination
in accordance with Topic 606, Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December
15, 2022, with early adoption permitted. The Company early adopted the guidance during the second quarter of 2022 with no material impact
to the Company’s consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
3.
BUSINESS COMBINATIONS
Fair
Dealer Services, LLC
On
May 11, 2022, the Company completed the acquisition of certain automotive dealer marketplace assets and all of the issued and outstanding
limited liability company interests of Fair Dealer Services, LLC (“Fair”), (collectively, the “Marketplace Assets”),
from Fair Financial Corp., Fair IP, LLC (“Fair IP”), and (for limited purposes) Cayman Project 2 Limited (“SB LL Holdco”),
pursuant to the terms of the Amended and Restated Purchase Agreement dated May 11, 2022. The Company purchased the Marketplace Assets
in order to acquire software and other assets to enable the listing of inventory owned by third-party dealerships for sale on the Company’s
ecommerce platform. The Company determined that the Marketplace Assets meet the definition of a business and the purchase is properly
accounted for as a business combination.
During
the year ended December 31, 2022, the Company incurred $3.3
million of transaction related costs, which are included in selling, general and administrative expenses on the consolidated statements
of operations.
The
consideration for the Marketplace Assets consisted of cash in the amount of $15.0
million (the “Cash Consideration”) and 206,698
shares of the Company’s Class A common stock (such shares being equal to 2.5%
of the issued and outstanding shares of the Company’s Class A common stock as of immediately prior to the closing of the transactions
contemplated by the Amended and Restated Purchase Agreement) (the “Stock Consideration”). The shares were issued and valued
as of May 11, 2022 at a per share market closing price of $10.20.
The
Company financed the acquisition of the Marketplace Assets through the issuance of the Senior Unsecured Notes to SB LL Holdco (See Note
10 - Borrowings). The stated interest rate on the Senior Unsecured Notes was determined to be below the market rate of interest, effectively
providing a discount on the purchase price of the Marketplace Assets. Therefore, the Company recognized an imputed discount of $2.1
million on the Senior Unsecured Notes based on an estimated market rate of interest of 10.5%,
and a corresponding reduction to the consideration transferred for the purchase of the Marketplace Assets.
The
following table presents an estimate of consideration transferred:
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
| Cash
consideration |
|
$ |
15,000 |
|
| Fair
value of shares of Shift Common Stock issued |
|
2,481 |
|
| Allocation
of proceeds from Senior Unsecured Notes |
|
(2,103) |
|
| Merger
Consideration |
|
$ |
15,378 |
|
The
intangible assets acquired were recorded at their fair values as of the acquisition date. Management estimated the fair value of intangible
assets in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation
consultants. The initial allocation of the consideration transferred is based on a preliminary valuation and is subject to adjustments.
Balances subject to adjustment primarily include the valuations of acquired assets and tax-related matters. During
the measurement period, the Company may record adjustments to the provisional amounts recognized.
|
|
|
|
|
|
|
Estimated
Fair Value |
| Capitalized
website and internal use software costs |
$ |
12,500 |
|
| Other
intangible assets - Trade name |
100 |
|
| Other
intangible assets - Dealer network |
100 |
|
| Prepaid
expenses and other current assets |
154 |
|
| Goodwill |
2,524 |
|
| Total
fair value of purchase price |
$ |
15,378 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Identifiable
Intangible Assets
The
Company acquired intangible assets that consisted primarily of developed software, which had an estimated fair value of $12.5
million, and which is included in capitalized website and internal use software costs, net on the consolidated balance sheets. The Company
also acquired other intangible assets with a total estimated fair value of $0.2 million.
The Cost to Recreate Method was used to value the acquired developed software asset. Management applied judgment in estimating the fair
value of this intangible asset, which involved the use of significant assumptions such as the cost and time to build the acquired technology,
developer’s profit and rate of return. The other intangible assets are included in other non-current assets on the consolidated
balance sheets. The Company will amortize the intangible assets on a straight-line basis over their estimated useful lives of three
years for the capitalized internal use software and trade name, and one
year for the dealer network.
Goodwill
The
goodwill represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable
to the benefits expected from combining the Company’s expertise with Fair’s technology, resource base, and ability to effectively
integrate the Marketplace Assets with the Company's existing ecommerce platform. This goodwill is not deductible for income tax purposes.
Pro
forma information (unaudited)
The
unaudited pro forma results presented below include the effects of the Fair acquisition as if it had been consummated as of January 1,
2021, with adjustments to give effect to pro forma events that are directly attributable to the acquisition which includes adjustments
related to the amortization of acquired intangible assets. The unaudited pro forma results do not reflect any operating efficiency or
potential cost savings which may result from the integration of Fair. Accordingly, these unaudited pro forma results are presented for
informational purposes only and are not necessarily indicative of what the actual results of operation of the combined company would have
been if the acquisition had occurred as of January 1, 2021. Revenue and earnings of Fair included in the consolidated statement of operations
for the year ended December 31, 2022 were immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
|
|
|
|
2022 |
|
2021 |
| Revenue |
|
|
|
|
$ |
670,753 |
|
|
$ |
636,869 |
|
| Loss
from operations |
|
|
|
|
(244,602) |
|
|
(196,774) |
|
| Net
loss |
|
|
|
|
$ |
(179,644) |
|
|
$ |
(187,906) |
|
| Net
loss per share, basic and diluted |
|
|
|
|
$ |
(20.62) |
|
|
$ |
(23.44) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
|
|
|
|
8,712,246 |
|
|
8,018,112 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
CarLotz,
Inc.
On
December 9, 2022, the Company completed the acquisition of all of the issued and outstanding equity interests of CarLotz, Inc. (“CarLotz”),
a Delaware corporation, pursuant to the terms of the Agreement and Plan of Merger (the "CarLotz Merger") dated as of August 9, 2022 (the
“Merger Agreement”). The CarLotz Merger increased the liquidity available to the combined entity by adding the cash resources
of legacy CarLotz to the combined entity and obviating the need for legacy CarLotz to invest in technologies already developed by Shift.
The Company determined that the CarLotz Merger is properly accounted for as a business combination.
During
the year ended December 31, 2022, the Company incurred $16.2
million of transaction related costs, which are included in selling, general and administrative expenses on the consolidated statements
of operations.
The
following table presents an estimate of Merger Consideration transferred to effect the CarLotz Merger at Closing:
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
| Fair
value of shares of Shift Common Stock issued to CarLotz stockholders |
|
$ |
22,411 |
|
| Replacement
of CarLotz equity awards |
|
562 |
|
| Merger
Consideration |
|
$ |
22,973 |
|
The
fair value of shares of Shift Common Stock issued as Merger Consideration was based on approximately 8.6
million shares of Shift Common Stock, including 0.1
million shares issued pursuant to accelerated vesting of certain CarLotz RSU Awards in connection with the CarLotz Merger, and the closing
price of Shift common stock of $2.62
per share on December 9, 2022.
Consideration
transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the
acquisition date. Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable
accounting guidance for business combinations and utilized the services of third-party valuation consultants. The initial allocation of
the consideration transferred is based on a preliminary valuation and is subject to adjustments. Balances subject to adjustment primarily
include the valuations of acquired assets (tangible and intangible), liabilities assumed, as well as tax-related matters. During the measurement
period, the Company may record adjustments to the provisional amounts recognized. The
allocation of the consideration transferred will be finalized within the measurement period (up to one year from the acquisition date).
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
|
|
|
|
|
Estimated
Fair Value |
| Cash,
cash equivalents, and marketable securities |
$ |
97,710 |
|
| Accounts
receivable |
3,321 |
|
| Inventory |
7,062 |
|
| Other
current assets |
1,756 |
|
| Property
and equipment |
7,009 |
|
| Operating
lease right of use assets |
25,119 |
|
| Finance
lease right of use assets |
4,176 |
|
| Developed
technology |
3,190 |
|
| Trademarks |
970 |
|
| Other
non-current assets |
364 |
|
| Total
assets |
150,677 |
|
| Accounts
payable and accrued liabilities |
(11,899) |
|
| Operating
lease liabilities, current |
(4,127) |
|
| Finance
lease liabilities, current |
(273) |
|
| Other
current liabilities |
(694) |
|
| Operating
lease liabilities |
(24,713) |
|
| Finance
lease liabilities |
(8,940) |
|
| Other
non-current liabilities |
(373) |
|
| Total
liabilities |
(51,019) |
|
| Net
assets acquired |
99,658 |
|
| Gain
on Bargain purchase |
$ |
(76,685) |
|
| Consideration
transferred |
$ |
22,973 |
|
The
aggregate revenue and net loss of CarLotz included in the Company's consolidated financial statements from the date of the acquisition
was $4.8
million and $6.0
million, respectively for the year ended December 31, 2022.
Identifiable
Intangible Assets
The
fair value of the trademarks and developed technology intangible assets has been determined using the relief-from-royalty method, which
involves the estimation of an amount of hypothetical royalty savings enjoyed by the entity that owns the intangible asset because that
entity is relieved from having to license that intangible asset from another owner. In using this method, third-party arm’s-length
royalty or license agreements were analyzed. The licensing transactions were selected as reflecting similar risks and characteristics
that make them comparable to the subject assets. The net revenue expected to be generated by the intangible asset during its expected
remaining life was then multiplied by the selected royalty rate. The selected estimated royalty rates for the trademarks and developed
technology were 0.3%
and 1.5%,
respectively. The estimated after tax royalty streams were then discounted to present value using a discount rate of 19.4%,
to estimate the fair value of the subject intangible assets.
The
trademarks are included in other non-current assets on the consolidated balance sheets. The developed technology is included in capitalized
website and internal use software costs, net on the consolidated balance sheets. The Company will amortize the intangible assets on a
straight-line basis over their estimated useful lives of three months, as the Company plans to decommission the acquired intangible assets
in favor of equivalent legacy Shift assets as soon as reasonably practicable.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Bargain
Purchase
Any
excess of fair value of acquired net assets over the purchase price (negative goodwill) has been recognized as a gain in the period the
acquisition was completed. We have reassessed whether all acquired assets and assumed liabilities have been identified and recognized
and performed remeasurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued.
The remaining excess has been recognized as a gain in the consolidated statement of operations. Factors believed to contribute to the
bargain purchase include a) the management turnover, restructuring, and other indicators of distress experienced by CarLotz prior to the
CarLotz Merger, b) successful cash conservation efforts by CarLotz during the period from the execution of the CarLotz Merger Agreement
to the closing of the merger, and c) a significant decline in the market price of the Company's Class A common stock during the period
from the execution of the Merger Agreement to the closing of the merger, which reduced the fair market value of the stock paid as consideration
for the merger.
Pro
forma information (unaudited)
The
unaudited pro forma results presented below include the effects of the CarLotz Merger as if it had been consummated as of January 1, 2021,
with adjustments to give effect to pro forma events that are directly attributable to the acquisition. For the year ended December 31,
2022, the pro forma adjustments include a reduction in share based compensation costs to reflect expected amortization of assumed equity
awards and a reduction in amortization expense to reflect the revaluation of certain technology assets. For the year ended December 31,
2021, the pro forma adjustments include a reduction in share based compensation expense to reflect expected amortization of assumed equity
awards, non-recurring transaction costs, and a gain on bargain purchase.
The
unaudited pro forma results do not reflect any operating efficiency or potential cost savings which may result from the integration of
CarLotz. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative
of what the actual results of operation of the combined company would have been if the acquisition had occurred as of January 1, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
|
|
|
|
2022 |
|
2021 |
| Revenue |
|
|
|
|
$ |
814,184 |
|
|
$ |
895,403 |
|
| Loss
from operations |
|
|
|
|
(288,489) |
|
|
(281,428) |
|
| Net
loss |
|
|
|
|
$ |
(284,003) |
|
|
$ |
(80,479) |
|
| Net
loss per share, basic and diluted |
|
|
|
|
$ |
(16.56) |
|
|
$ |
(4.77) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
|
|
|
|
17,147,688 |
|
|
16,879,267 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
4.
MARKETABLE SECURITIES
The
Company acquired equity and debt security investments as a result of the CarLotz Merger. The equity and debt securities are classified
as Level 1 and Level 2 in the fair value hierarchy, respectively. There were no material sales or purchases of equity or debt securities
between the December 9, 2022 acquisition date and December 31, 2022.
The
following table summarizes amortized cost, gross unrealized gains and losses and fair values of the Company’s investments in fixed
maturity debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
Amortized
Cost/ Cost Basis |
|
Gross
Unrealized Gains |
|
Gross
Unrealized Losses |
|
Estimated
Fair Value |
| Corporate
bonds |
$ |
527 |
|
|
$ |
— |
|
|
$ |
(3) |
|
|
$ |
524 |
|
| Municipal
bonds |
674 |
|
|
— |
|
|
— |
|
|
674 |
|
| Foreign
governments |
314 |
|
|
— |
|
|
— |
|
|
314 |
|
| Total
Fixed Maturity Debt Securities |
$ |
1,515 |
|
|
$ |
— |
|
|
$ |
(3) |
|
|
$ |
1,512 |
|
The
amortized cost and fair value of the Company’s fixed maturity debt securities as of December 31, 2022 by contractual maturity
are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost |
|
Fair
Value |
| Due
in one year or less |
$ |
822 |
|
|
$ |
805 |
|
| Due
after one year through five years |
648 |
|
|
662 |
|
| Due
after five years through ten years |
45 |
|
|
45 |
|
| Total |
$ |
1,515 |
|
|
$ |
1,512 |
|
Unrealized
losses are believed to be temporary. Fair value of investments in fixed maturity debt securities change and are based primarily on market
rates. As of December 31, 2022, the Company’s fixed maturity portfolio had 28
securities with gross unrealized losses totaling $3
thousand that had been in loss positions for less than 12 months and no
securities in loss positions for more than 12 months.
The
following tables summarize cost and fair values of the Company’s investments in equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2022 |
|
Cost |
|
Estimated
Fair Value |
| Equity
securities |
$ |
483 |
|
|
$ |
459 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2022 |
|
As
of December 31, 2021 |
| Equipment |
$ |
4,545 |
|
|
$ |
8,753 |
|
| Furniture
and fixtures |
1,278 |
|
|
252 |
|
| Leasehold
improvements |
4,334 |
|
|
1,258 |
|
| Total
property and equipment |
10,157 |
|
|
10,263 |
|
| Less:
accumulated depreciation |
(3,360) |
|
|
(2,323) |
|
| Property
and equipment, net |
$ |
6,797 |
|
|
$ |
7,940 |
|
Depreciation
expense related to property and equipment was $2.8
million and $1.8
million for the year ended December 31, 2022 and 2021, respectively. Depreciation expense related to reconditioning facilities for the
year ended December 31, 2022 and 2021 was $1.2
million and $0.7
million, respectively. Depreciation expense related to reconditioning facilities is included in cost of sales with the remainder included
in depreciation and amortization in the consolidated statements of operations.
We
classified $2.6
million and $0.1
million of gross property and equipment and accumulated depreciation, respectively, as held-for-sale. In addition, the Company recognized
an impairment charge that was partly allocated to property and equipment. See Note 16 - Impairment and Restructuring for additional information.
6.
LEASES
The
Company is a tenant under various operating and finance leases with third parties, including leases of office facilities, vehicle inspection,
reconditioning locations, storage locations, and vehicle leases. The Company assesses whether each lease is an operating or finance lease
at the lease commencement date.
The
Company’s real estate leases often require it to make payments for maintenance in addition to rent as well as payments for real
estate taxes, and insurance. Maintenance, real estate taxes, and insurance payments are generally variable costs which are based on actual
expenses incurred by the lessor. Therefore, these amounts are generally not included in the consideration of the contract when determining
the right-of-use asset and lease liability but are reflected as variable lease expenses in the period incurred.
Leases
with an initial term of 12 months or less are not recorded on the Company’s consolidated balance sheets and expense for these leases
are recognized on a straight-line basis over the lease term.
As
the rate implicit in the lease is generally not readily determinable for the Company’s operating leases, the discount rates used
to determine the present value of the Company’s lease liabilities are based on the Company’s incremental borrowing rate at
the lease commencement date and commensurate with the remaining lease term. The incremental borrowing rate for a lease is the rate of
interest the Company would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments
in a similar economic environment. The Company uses its incremental borrowing rate based on the information available at commencement
date in determining the present value of lease payments.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
balance sheet classification of leases for the year ended December 31, 2022 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Classification |
|
December
31, 2022 |
| Assets |
|
|
|
|
| Operating
leases |
|
Operating
lease assets |
|
$ |
44,568 |
|
|
|
Operating
and finance lease assets, property and equipment, accounts receivable, and other assets held for sale |
|
9,572 |
|
| Finance
leases |
|
Finance
lease assets, net |
|
152 |
|
|
|
Operating
and finance lease assets, property and equipment, accounts receivable, and other assets held for sale |
|
4,155 |
|
| Total
lease assets |
|
|
|
$ |
58,447 |
|
|
|
|
|
|
| Liabilities |
|
|
|
|
| Operating
leases |
|
Operating
lease liabilities, current |
|
$ |
8,865 |
|
|
|
Operating
and finance lease liabilities and other liabilities associated with assets held for sale |
|
10,138 |
|
|
|
Operating
lease liabilities, non-current |
|
44,985 |
|
| Total
operating lease liabilities |
|
|
|
$ |
63,988 |
|
|
|
|
|
|
| Finance
leases |
|
Finance
lease liabilities, current |
|
$ |
271 |
|
|
|
Operating
and finance lease liabilities and other liabilities associated with assets held for sale |
|
5,036 |
|
|
|
Finance
lease liabilities, non-current |
|
3,989 |
|
| Total
finance lease liabilities |
|
|
|
$ |
9,296 |
|
|
|
|
|
|
| Total
lease liabilities |
|
|
|
$ |
73,284 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
Company’s lease costs and activity for the year ended December 31, 2022 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2022 |
| Lease
cost |
|
|
|
| Operating
lease cost |
|
|
$ |
14,811 |
|
| Finance
lease amortization |
|
|
181 |
|
| Finance
lease interest |
|
|
72 |
|
| Short-term
lease cost |
|
|
1,485 |
|
| Variable
lease cost |
|
|
2,387 |
|
| Sublease
income |
|
|
(215) |
|
| Total
lease cost |
|
|
$ |
18,721 |
|
|
|
|
|
| Cash
paid for amounts included in the measurement of operating lease liabilities |
|
|
|
| Operating
cash flows from operating leases |
|
|
$ |
9,594 |
|
| Finance
leases - Operating cash flows |
|
|
$ |
72 |
|
| Finance
leases - Financing cash flows |
|
|
$ |
127 |
|
| Lease
assets obtained in exchange for lease liabilities |
|
|
|
| Operating
leases |
|
|
$ |
67,603 |
|
| Finance
leases |
|
|
$ |
4,488 |
|
|
|
|
|
| Weighted
average remaining lease term - operating leases (in years) |
|
|
5.48 |
| Weighted
average discount rate - operating leases |
|
|
8.97 |
% |
| Weighted
average remaining lease term - finance leases (in years) |
|
|
12.28 |
| Weighted
average discount rate - finance leases |
|
|
11.13 |
% |
Leases
have remaining terms of 1
year to 13
years, inclusive of options that are reasonably certain to be exercised. Sublease income is derived from three subleases as of December 31,
2022
Operating
and finance lease liabilities by maturity date from December 31, 2022 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year
ended December 31, |
|
Operating
Leases |
|
Finance
Leases |
| 2023 |
|
$ |
13,434 |
|
|
$ |
1,374 |
|
| 2024 |
|
12,649 |
|
|
1,297 |
|
| 2025 |
|
13,726 |
|
|
1,318 |
|
| 2026 |
|
11,092 |
|
|
1,346 |
|
| 2027 |
|
10,315 |
|
|
1,422 |
|
| Thereafter |
|
16,862 |
|
|
10,928 |
|
| Total
minimum lease payments |
|
$ |
78,078 |
|
|
$ |
17,687 |
|
| Less:
Imputed interest |
|
14,090 |
|
|
8,391 |
|
| Total
lease liabilities |
|
$ |
63,988 |
|
|
$ |
9,296 |
|
Rent
expense for operating leases during the year ended December 31, 2021 was $9.3
million.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
As
of December 31, 2022, the Company guaranteed the lease obligation of two of its closed locations assigned to a third-party that operates
a used vehicle dealership. The Company continues as guarantor of such lease obligations with maximum total payments of $4,799
and will continue as the guarantor of one of the leases through March 2031 and the other lease through September 2031. The Company would
be required to perform under the guarantee if the third-party is in default. As of December 31, 2022, the Company does not anticipate
any material defaults under the forgoing leases, and therefore, no liability has been accrued.
7.
CAPITALIZED WEBSITE AND INTERNAL-USE SOFTWARE COSTS, NET
Capitalized
website and internal use software costs, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| |
As
of December 31, 2022 |
|
As
of December 31, 2021 |
| Capitalized
website domain costs – nonamortizable |
$ |
385 |
|
|
$ |
385 |
|
| Capitalized
website and internal-use software development costs – amortizable |
12,294 |
|
|
24,433 |
|
| Less:
accumulated amortization |
(2,022) |
|
|
(15,556) |
|
| Capitalized
website and internal-use software development costs, net |
$ |
10,657 |
|
|
$ |
9,262 |
|
Amortization
of capitalized software development costs is included in depreciation and amortization in the consolidated statements of operations. Amortization
of capitalized software development costs amounted to $8.8
million and $4.4
million for the year ended December 31, 2022 and 2021, respectively.
As
of December 31, 2022, the remaining weighted-average amortization period for internal-use capitalized software intangible assets
was approximately 0.91
years.
The
expected annual amortization expense to be recognized in future years as of December 31, 2022 consists of the following (in thousands):
|
|
|
|
|
|
|
As
of December 31, 2022 |
| 2023 |
$ |
4,393 |
|
| 2024 |
1,985 |
|
| 2025 |
921 |
|
| Development
in progress |
2,974 |
|
| Total
amortizable costs |
10,272 |
|
| Nonamortizable
costs |
385 |
|
| Total
capitalized website and internal-use software development costs |
$ |
10,657 |
|
The
Company recognized an impairment charge that was partly allocated to internal-use capitalized software. See Note 16 - Impairment and Restructuring
for additional information. The Company's annual impairment test of the indefinite-lived web domain assets did not result in an impairment.
8.
GOODWILL
On
May 11, 2022 the Company acquired the Marketplace Assets for consideration totaling $15.4 million
(See Note 3 - Business Combinations). The purchase price was allocated to tangible assets of $0.2 million
and intangible assets of $12.7 million
based on their fair values on the acquisition date. Goodwill represents the excess purchase price over the fair value of the net assets
acquired. The excess of the purchase price over the amounts allocated to assets acquired was recorded to Goodwill, in the amount of $2.5
million, which is included in the retail segment.
Goodwill
is not amortized but is tested at least annually or more frequently when events or circumstances change that would, more likely than not,
reduce the fair value of a reporting unit below its carrying amount. The Company first assesses qualitative factors to determine if it
is not more likely than not that the fair value of its reporting unit is less than its carrying amount.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
following table presents the changes in the carrying amount of goodwill for the year ended December 31, 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amount |
|
Accumulated
Impairment |
|
Balance at December 31,
2021 |
$ |
— |
|
|
$ |
— |
|
|
Acquisition
of Fair Dealer Services, LLC (see Note 3) |
2,524 |
|
|
|
| Impairment
losses |
— |
|
|
(454) |
|
|
Balance at December 31,
2022 |
$ |
2,524 |
|
|
$ |
(454) |
|
|
|
|
|
| Total
goodwill |
|
|
$ |
2,070 |
|
During
the year ended December 31, 2022, the Company recognized a goodwill impairment loss of $0.5 million,
which is included in loss on impairment on the consolidated statements of operations. There was no
impairment of goodwill for the year ended December 31, 2021. During the fourth fiscal quarter of 2022, management determined that indicators
of impairment existed and performed a goodwill impairment test. Management engaged third party valuation consultants to determine the
fair value of the Retail segment (which also meets the definition of a reporting unit for goodwill impairment purposes). The fair value
was determined using a market approach based on comparison to peer company valuation multiples.
9.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| |
As
of December 31, 2022 |
|
As
of December 31, 2021 |
| Liability
for vehicles acquired under OEM program |
$ |
— |
|
|
$ |
3,550 |
|
| Accrued
payroll related costs |
14,048 |
|
|
15,890 |
|
| Provision
for DMV refunds |
1,080 |
|
|
1,170 |
|
| Accrued
sales taxes |
3,957 |
|
|
13,787 |
|
| Common
stock subject to repurchase liability, current |
44 |
|
|
142 |
|
| Interest
payable |
960 |
|
|
910 |
|
| Provision
for sales returns and cancellations |
4,304 |
|
|
3,302 |
|
| Other
accrued expenses |
9,479 |
|
|
5,193 |
|
| Total
accrued expenses and other current liabilities |
$ |
33,872 |
|
|
$ |
43,944 |
|
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
one of its inspection, reconditioning and storage centers 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. The final price paid to the OEM upon sale of the vehicle includes an additional
amount equal to 50%
of the excess of the sales price over the original acquisition price.
We
classified $0.1
million of accrued expenses associated with a long-lived asset disposal group as held-for-sale. See Note 16 - Impairment and Restructuring
for further information.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10.
BORROWINGS
Senior
Unsecured Notes
On
May 11, 2022, in connection with the Fair acquisition (See Note 3 - Business Combinations),
the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) by and between the Company, each of the
Company’s subsidiaries party thereto as guarantors (each, a “Guarantor” and, collectively, the “Guarantors”),
and SB LL Holdco, Inc., a Delaware corporation (“SB LL Holdco”). Pursuant to the Note Purchase Agreement and the terms and
conditions set forth therein, the Company agreed to issue and sell, and SB LL Holdco agreed to purchase, 6.00%
Senior Unsecured Notes due May 11, 2025 with a principal amount of $20.0 million
(the “Senior Unsecured Notes”) in a private placement in reliance on an exemption from registration under the Securities Act
of 1933, as amended (the “Securities Act”).
The
Senior Unsecured Notes bear interest at a rate of 6.00%
per annum and will mature on May 11, 2025. The Company may, at its option, prepay the Senior Unsecured Notes in their entirety (i)
if prior to November 11, 2024, at 100% of the principal amount plus accrued and unpaid interest thereon to (but excluding) such date and
a premium specified therein, or (ii) if on or after November 11, 2024, at 100% of the principal amount plus accrued and unpaid interest
thereon to (but excluding) such date. The Senior Unsecured Notes are senior unsecured indebtedness of the Company.
As
of December 31, 2022, discounts and deferred borrowing costs related to the Senior Unsecured Notes totaled $2.0
million and $0.1
million, respectively, and are included as a reduction to long-term debt, net on the consolidated balance sheets. For the year ended December
31, 2022, the Company had $0.8
million, respectively, of contractual interest expense and $0.5
million, respectively, of discount and deferred borrowing cost amortization, with both recorded to interest and other expense, net on
the consolidated statements of operations.
The
estimated fair value of the Senior Unsecured Notes (Level 2) as of December 31, 2022 was $16.6
million.
Convertible
Notes
On
May 27, 2021, the Company completed a private offering of its 4.75%
Convertible Senior Notes due 2026 (the “Notes”). The aggregate principal amount of the Notes sold in the offering was $150.0
million. The Notes are the Company’s senior unsecured obligations and will rank equally in right of payment with the Company’s
future senior unsecured indebtedness, senior in right of payment to the Company’s future indebtedness that is expressly subordinated
to the Notes and effectively subordinated to the Company’s future secured indebtedness, to the extent of the value of the collateral
securing that indebtedness.
The
Notes accrue interest payable semi-annually in arrears at a rate of 4.75%
per year. The Notes will mature on May 15, 2026, unless earlier converted, redeemed or repurchased by the Company.
The
Notes are convertible into shares of the Company’s Class A common stock at an initial conversion rate of 11.8654
shares of the Company’s Class A common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion
price of approximately $84.28
per share of the Company’s Class A common stock). The initial conversion price represents a premium of approximately 27.47%
over the last reported sale price of the Company’s Class A common stock on May 24, 2021, which was $66.10
per share. The conversion rate will be subject to adjustment upon the occurrence of certain events prior to the maturity date. The Company
will increase the conversion rate on a sliding scale to up to a maximum of 15.1284
per $1,000 principal amount for a holder who elects to convert its notes in connection with certain corporate events or the Company’s
delivery of a notice of redemption, as the case may be, in certain circumstances.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Noteholders
may convert their notes at their option only in the following circumstances:
1.during
any calendar quarter commencing after the calendar quarter ending on June 30, 2021, if the last reported sale price per share of our Class
A common stock exceeds 130%
of the conversion price for each of at least 20
trading days during the 30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
2.during
the 5
consecutive business days immediately after any 10
consecutive trading day period (such 10
consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes
for each trading day of the measurement period was less than 98%
of the product of the last reported sale price per share of our Class A common stock on such trading day and the conversion rate on such
trading day;
3.upon
the occurrence of certain corporate events or distributions on our Class A common stock;
4.if
we call such notes for redemption; and
5.at
any time from, and including, November 15, 2025 until the close of business on the second scheduled trading day immediately before the
maturity date.
Conversions
of the Notes will be settled in cash, shares of the Company's Class A common stock or a combination thereof, at the Company's election.
The
Notes will be redeemable, in whole or in part (subject to a partial redemption limitation), at the Company’s option at any time,
and from time to time, on or after May 20, 2024 and on or before the 40th
scheduled trading day immediately before the Maturity Date, at a cash redemption price equal to the principal amount of the Notes to be
redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if (i) the last reported sale price
per share of the Company’s Class A common stock exceeds 130%
of the conversion price on (1) each of at least 20 trading days, whether or not consecutive, during the 30
consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption
notice; and (2) the trading day immediately before the date the Company sends such notice; and (ii) a registration statement covering
the resale of the shares of the Company’s Class A common stock, if any, issuable upon conversion of the Notes in connection with
such optional redemption is effective and available for use and is expected, as of the date the redemption notice is sent, to remain effective
and available during the period from, and including the date the redemption notice is sent to, and including, the business day immediately
before the related redemption date, unless the Company elects cash settlement in respect of the conversions in connection with such optional
redemption.
In
addition, calling any Note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the
conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called
for redemption and on or prior to the business day immediately before the related redemption date. If the Company elects to redeem less
than all of the outstanding Notes, at least $50.0 million
aggregate principal amount of Notes must be outstanding and not subject to redemption as of the date the Company sends the related redemption
notice.
Unamortized
deferred borrowing costs at December 31, 2022 were $4.5
million, and are included as a reduction to long-term debt, net on the consolidated balance sheets. For the year ended December 31, 2022,
the Company recorded $7.1
million of contractual interest expense and $1.2
million of deferred borrowing cost amortization, respectively. For the year ended December 31, 2021, the Company recorded $4.2
million of contractual interest expense and $0.7
million, respectively, of deferred borrowing cost amortization. Contractual interest expense and deferred borrowing cost amortization
was recorded to interest and other expense, net on the consolidated statements of operations. The effective interest rate of the Notes
is 5.73%.
The
estimated fair value of the Notes (Level 2) at December 31, 2022 was $21.2
million.
The
Company used a portion of the net proceeds from the sale of the notes to pay the cost of the capped call transactions (see Note 12 - Stockholders'
Equity (Deficit)), and is using the remaining proceeds for working capital and general corporate purposes.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Ally
Flooring Line of Credit
On
December 9, 2021, the Company entered into a $100.0
million flooring line of credit facility with Ally Bank to finance its used vehicle inventory (the “Ally FLOC”), which is
secured by substantially all of the Company’s assets. Borrowings under the Ally FLOC bear interest at the Prime Rate (as defined
in the agreement) plus 1.50%.
As of December 31, 2022, the interest rate on borrowings outstanding under the Ally FLOC was 9.00%.
As of December 31, 2022, the Company had an outstanding balance under the facility of $24.8
million and $75.2
million of unused capacity. As of December 31, 2021, the Company had an outstanding balance under the facility of $83.3
million and $16.7
million in unused capacity.
Under
the Ally FLOC, repayment of amounts drawn for the purchase of a vehicle should generally be made as soon as practicable after selling
or otherwise disposing of the vehicles. Outstanding balances related to vehicles held in inventory for more than 180
days require monthly principal payments equal to 10%
of the original principal amount of that vehicle until the remaining outstanding balance is 50%
(or less) of the original principal balance. Prepayments may be made without incurring a premium or penalty. Additionally, the Company
is permitted to make prepayments to the lender to be held as principal payments and subsequently reborrow such amounts.
The
Ally FLOC requires the Company to maintain unrestricted cash and cash equivalents of not less than 20%
of the total credit line, and to maintain an additional restricted cash balance equal to 10%
of the total credit line. Additionally, the Ally FLOC requires the company to maintain at least 10%
equity in the Company’s total inventory balance. As of December 31, 2022, the Company was in compliance with all covenants
related to the Ally FLOC.
Additionally,
the Company is required to pay an availability fee each calendar quarter if the average outstanding balance for such quarter is less than
50%
of the average total credit line for such quarter. The Company was required to pay an upfront commitment fee upon execution of the Ally
FLOC.
US
Bank Flooring Line of Credit
On
October 11, 2018, the Company entered into a flooring line of credit facility (“FLOC”) 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 were able to be prepaid in part
or in full at any time without charge, penalty or premium. Advances under the facility accrued interest at LIBOR plus 2.00%.
The obligations under the facility were secured by substantially all of the Company’s inventory, both currently owned or acquired
thereafter. Repayment of obligations under the facility were guaranteed by Lithia. Refer to Note 15 - Related Party Transactions for further
details regarding the guarantee of the flooring line of credit, the commercial agreement and the warrants.
Subsequent
amendments extended the expiration date to October 11, 2021 and increased the amount available under the FLOC to $50.0
million. The amendments also required the Company to pay a fee of 0.40%
per annum on unused availability under the FLOC, and reduced the Liquidity Covenant to one
times the three-month cash burn amount.
The
FLOC was subject to customary subjective acceleration clauses, effective upon a material adverse change in the Company’s business
or financial condition, or a material impairment in the Company’s ability to repay the borrowing.
The
FLOC expired on October 11, 2021 and was repaid in full.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
11.
COMMITMENTS AND CONTINGENCIES
Litigation
The
Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Other than the matters discussed
below, 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.
Stifel
matter
On
May 7, 2021, we were named in a lawsuit filed in the U.S. District Court for the Southern District of New York (Stifel, Nicolaus &
Company, Inc. v. Shift Technologies, Inc. 21-cv-04135) by a former financial advisor, Stifel, Nicolaus & Company, Inc. (“Stifel”),
claiming that we are required to pay the former financial advisor certain compensation as a result of the IAC Merger. In addition, the
complaint seeks punitive damages as a result of alleged unjust enrichment for the amount of the benefits allegedly conferred on Shift
by Stifel. On August 24, 2022, Stifel's suit was dismissed with prejudice. On September 16, 2022, Stifel filed a Notice of Appeal with
the U.S. Court of Appeals for the Second Circuit and formally filed its appeal with the Second Circuit on January 20, 2023. Shift has
until April 20, 2023 to file its responsive pleading. Following the dismissal of Stifel's initial suit, the probable incurred losses related
to the claim are immaterial as of December 31, 2022. Based on such information as is available to us, the range of additional reasonably
possible losses related to the claim does not exceed $4.0 million,
excluding any punitive damages which the Company cannot currently estimate. The Company believes the claim is without merit and intends
to defend itself vigorously; however, there can be no assurances that the Company will be successful in its defense.
CarLotz
stockholder matters
On
November 4, 2022, a lawsuit entitled Derek Dorrien v. CarLotz, Inc. et al., Case No. 1:22-cv-09463, was filed in the United States District
Court for the Southern District of New York against CarLotz and the members of the CarLotz board of directors (the “Dorrien Action”).
On November 4, 2022, a lawsuit entitled Sholom D. Keller v. CarLotz, Inc. et al., Case No. 2022-1006-NAC, was filed in the Court of Chancery
of the State of Delaware against CarLotz and the members of the CarLotz board of directors (the “Keller Action” and together
with the Dorrien Action, the “Actions”). The Dorrien Action alleges that the defendants violated Sections 14(a) (and Rule
14a-9 promulgated thereunder) and 20(a) of the Exchange Act by, among other things, omitting certain allegedly material information with
respect to the transactions contemplated by the Merger Agreement (the “Transactions”) in the registration statement on Form
S-4 (the “Registration Statement”) filed by us with the Securities and Exchange Commission on September 26, 2022. The Keller
Action alleges that the members of the CarLotz board of directors and Lev Peker, in his capacity as an officer of CarLotz, breached their
fiduciary duties in connection with the Transactions. The Actions seek, among other things, injunctive relief, money damages and the costs
of the Actions, including reasonable attorneys’ and experts’ fees. Shift is not named as a defendant in the Actions. We believe
that the plaintiffs’ allegations in the Actions are without merit; however, litigation is inherently uncertain and there can be
no assurance that CarLotz’s or our defense of the action will be successful.
In
addition, on October 3, 2022, a purported stockholder of CarLotz sent a demand to CarLotz and us regarding the Registration Statement
(the “CarLotz Stockholder Demand”). The CarLotz Stockholder Demand alleges the Registration Statement omits material information
with respect to the Transactions and demands that CarLotz, the CarLotz board of directors, and Shift provide corrective disclosures. Shift
disagrees with and intends to vigorously defend against any claim, if asserted, arising from the CarLotz Stockholder Demand.
Delaware
Section 205 Petition
On
March 6, 2023, Shift filed a petition in the Delaware Court of Chancery under Section 205 of the Delaware General Corporation Law (the
“DGCL”) to resolve potential uncertainty with respect to the Company’s share capital. Such uncertainty was introduced
by a recent decision in Garfield v. Boxed, Inc., 2022 WL 17959766 (Del. Ch. Dec. 27, 2022) that potentially affects the Company and many
other similarly situated companies that were formed and became publicly traded as a special purpose acquisition company (“SPAC”).
Out of an abundance of caution, the Company elected to pursue the remedial actions described below. Concurrently with the filing of the
Petition, the Company filed a motion to expedite the hearing on the Petition, which was subsequently granted on March 6, 2023.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In
October 2020, the Company, which was then a SPAC named Insurance Acquisition Corp. (“IAC”), held a special meeting of stockholders
(the “IAC Special Meeting”) to approve certain matters relating to the merger between IAC and a privately held company then
called Shift Technologies, Inc. One of these matters was a proposal to amend and restate IAC’s Amended and Restated Certificate
of Incorporation (the “SPAC Charter”) in order to, among other things, increase the number of authorized shares of Class A
common stock from 50,000,000
to 500,000,000
(such proposal, the “Share Increase Proposal” and, together with such other amendments to the SPAC Charter, the “Charter
Proposals”). At the IAC Special Meeting, the Charter Proposals were approved by a majority of the outstanding shares of Class A
common stock and a majority of the outstanding shares of Class B common stock of IAC as of the record date for the IAC Special Meeting,
voting together as a single class. After the IAC Special Meeting, IAC and Shift Technologies, Inc. closed the merger pursuant to which
the Company became the parent of Shift Technologies, Inc. (now named Shift Platform, Inc.), and the Company’s certificate of incorporation,
as amended to give effect to the Charter Proposals and to change the Company’s name to Shift Technologies, Inc., became effective.
The
recent ruling by the Delaware Court of Chancery in the Boxed case introduced uncertainty as to whether Section 242(b)(2) of the DGCL would
have required the Share Increase Proposal to be approved by the vote of the majority of IAC’s then-outstanding shares of Class A
common stock, voting as a separate class. The Company had been operating with the understanding that the Charter Proposals were validly
approved at the IAC Special Meeting. In light of this recent ruling, however, to resolve potential uncertainty with respect to the Company’s
share capital, the Company filed a petition in the Delaware Court of Chancery under Section 205 of the DGCL to seek validation of the
Charter Proposals. Section 205 of the DGCL permits the Court of Chancery, in its discretion, to ratify and validate potentially defective
corporate acts.
On
March 6, 2023, the Court of Chancery granted the motion to expedite and set a hearing date for the Petition to be heard. On March 17,
2023, the hearing took place and the Court of Chancery approved the Company’s request for relief. The Court of Chancery then entered
an order under Section 205 of the DGCL on March 17, 2023, declaring (i) the increase in aggregate number of authorized shares of Class
A common stock, par value $0.0001,
of the Company from 50,000,000
to 500,000,000
under the Company’s Second Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) and
the Certificate of Incorporation, including the filing and effectiveness thereof, are validated and declared effective retroactive to
the date of its filing with the Secretary of State of the State of Delaware on October 13, 2020 and (2) all shares of capital stock of
the Company issued in reliance on the effectiveness of the Certificate of Incorporation are validated and declared effective as of the
date and time of the original issuance of such shares.
12.
STOCKHOLDERS' EQUITY (DEFICIT)
Capped
Call Transactions
On
May 27, 2021, in connection with the issuance of the Notes (see Note 10 - Borrowings), the Company consummated privately negotiated capped
call transactions (the “Capped Call Transactions”) with certain of the initial purchasers, their respective affiliates and
other counterparties (the "Capped Call Counterparties"). The Capped Call Transactions initially cover, subject to anti-dilution adjustments
substantially similar to those applicable to the Notes, the number of the Company’s Class A common shares underlying the Notes.
The Capped Call Transactions are expected generally to reduce the potential dilution to holders of the Company’s Class A common
stock upon conversion of the Notes and/or offset the potential cash payments that the Company could be required to make in excess of the
principal amount of any converted Notes upon conversion thereof, with such reduction and/or offset subject to a cap. The Capped Call Transactions
are settled from time to time upon the conversion of the Notes, with a final expiration date of May 15, 2026. The Capped Call Transactions
are settled in the same proportion of cash and stock as the converted Notes. The proportion of cash and stock used to settle the Notes
is at the discretion of the Company.
The
cap price of the Capped Call Transactions was initially approximately $148.725
per share, which represents a premium of approximately 125%
above the last reported sale price per share of Class A common stock on Nasdaq on May 24, 2021, and is subject to certain adjustments
under the terms of the Capped Call Transactions.
The
Capped Call Transactions are separate transactions entered into by the Company with the Capped Call Counterparties, are not part of the
terms of the Notes and will not change any holder’s rights under the Notes. Holders of the Notes will not have any rights with respect
to the Capped Call Transactions.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
Company used approximately $28.4 million
of the net proceeds from the offering of the Notes to pay the cost of the Capped Call Transactions. The Capped Call Transactions do not
meet the criteria for separate accounting as a derivative as they are indexed to the Company's stock. The premiums paid for the Capped
Call Transactions have been included as a net reduction to additional paid-in capital on the consolidated balance sheets.
The
settlement amount of the Capped Call Transactions at December 31, 2022 was zero.
The settlement amount shall be greater than zero
if the volume weighted average price ("VWAP") of the Company's Class A common stock is above $84.30
at any time over the 40
consecutive trading days immediately prior to settlement.
At-the-Market
Offering
On
May 6, 2022, the Company entered into a Controlled Equity OfferingSM
Sales Agreement (the “Sales Agreement”), with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which the
Company may offer and sell, at its option, shares of the Company’s Class A common stock, par value $0.0001
per share, having an aggregate offering price of up to $150.0
million (the “Placement Shares”), through the Agent, as its sales agent, from time to time at prevailing market prices in
an “at-the-market offering” within the meaning of Rule 415 of the Securities Act, including sales made to the public directly
on or through the Nasdaq Capital Market and any other trading market for shares of our Class A common stock (the “Offering”).
Due to the Company's change at December 31, 2022 to a non-accelerated filer, the amount that can be raised through an offering is
limited by Nasdaq requirements.
Under
the Sales Agreement, the Company may from time to time deliver placement notices to the Agent designating the number of Placement Shares
and the minimum price per share thereof to be offered. However, subject to the terms and conditions of the Sales Agreement, the Agent
is not required to sell any specific number or dollar amount of Placement Shares but will act as Agent using their commercially reasonable
efforts consistent with their normal trading and sales practices and applicable state and federal laws, rules and regulations and the
rules of the Nasdaq Stock Market. The Company or the Agent may suspend the offering of Placement Shares by notifying the other party.
The Offering will terminate after the sale of all of the Placement Shares subject to the Sales Agreement, or sooner in accordance with
the Sales Agreement, upon proper notice by us and/or the Agents or by mutual agreement. The Company will pay the Agent a commission of
up to 3.0%
of the gross sales price of the shares of the Placement Shares sold under the Sales Agreement.
As
of December 31, 2022, the Company had not sold any shares pursuant to the Sales Agreement. Following the date of this 10-K filing,
the amount available to be raised under the ATM will be severely limited by regulations pertaining to shelf registrations by non-accelerated
filers.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
CarLotz
Warrants
As
part of the CarLotz Merger, the Company assumed 718,342
public and 428,385
private warrants to purchase the Company's common stock at an exercise price of $163.06
related to CarLotz's prior merger with Acamar Partners.
Additionally,
former CarLotz equity holders at the closing of CarLotz's previous merger are entitled to receive up to an additional 489,841
earnout shares. The earnout period expires on January 21, 2026 (the "Forfeiture Date") and the earnout shares will be issued if any of
the following conditions are achieved:
i.If
at any time prior to the Forfeiture Date, the closing trading price of the common stock is greater than $177.24
over any 20 trading days within any 30 trading day period (the “First Threshold”), the Company will issue 50% of the earnout
shares.
ii.If
at any time prior to the Forfeiture Date, the closing trading price of the common stock is greater than $212.69
over any 20 trading days within any 30 trading day period (the “Second Threshold”), the Company will issue 50% of the earnout
shares.
iii.If
either the First Threshold or the Second Threshold is not met on or before the Forfeiture Date, any unissued earnout shares are forfeited.
All unissued earnout shares will be issued if there is a change of control of the Company that will result in the holders of the common
stock receiving a per share price equal to or in excess of $141.80
(as equitably adjusted for stock splits, stock dividends, special cash dividends, reorganizations, combinations, recapitalizations and
similar transactions affecting the common stock) prior to the Forfeiture Date.
The
liabilities associated with the warrants and earnout shares were immaterial as of December 31, 2022. There was not a material change
in the fair value of the liabilities between the Merger Date and December 31, 2022.
13.
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”) reviews the Company’s operating results in assessing performance and allocating
resources. The CODM is the Chief Executive Officer. 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
year ended months ended December 31, 2022 and 2021, the Company did not have sales to customers outside the United States. As of
December 31, 2022 and December 31, 2021, the Company did not have any assets located outside of the United States.
Information
about the Company’s reportable segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
|
|
|
|
2022 |
|
2021 |
| Revenue
from external customers |
|
|
|
|
|
|
|
| Retail |
|
|
|
|
$ |
582,530 |
|
|
$ |
561,020 |
|
| Wholesale |
|
|
|
|
88,223 |
|
|
75,849 |
|
| Consolidated |
|
|
|
|
$ |
670,753 |
|
|
$ |
636,869 |
|
| Segment
gross profit (loss) |
|
|
|
|
|
|
|
| Retail |
|
|
|
|
$ |
35,590 |
|
|
$ |
47,896 |
|
| Wholesale |
|
|
|
|
(10,257) |
|
|
892 |
|
| Consolidated |
|
|
|
|
$ |
25,333 |
|
|
$ |
48,788 |
|
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
reconciliation between reportable segment gross profit to loss before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Year
Ended December 31, |
| |
|
|
|
|
2022 |
|
2021 |
| Segment
gross profit |
|
|
|
|
$ |
25,333 |
|
|
$ |
48,788 |
|
| Selling,
general and administrative expenses |
|
|
|
|
(214,008) |
|
|
(220,055) |
|
| Depreciation
and amortization |
|
|
|
|
(10,456) |
|
|
(5,586) |
|
| Loss
on impairment |
|
|
|
|
(17,319) |
|
|
— |
|
| Restructuring
expenses |
|
|
|
|
(21,001) |
|
|
— |
|
| Change
in fair value of financial instruments |
|
|
|
|
— |
|
|
18,893 |
|
| Gain
on bargain purchase |
|
|
|
|
76,685 |
|
|
— |
|
| Interest
and other expense, net |
|
|
|
|
(10,950) |
|
|
(8,082) |
|
| Loss
before income taxes |
|
|
|
|
$ |
(171,716) |
|
|
$ |
(166,042) |
|
14.
STOCK-BASED COMPENSATION PLANS
The
Company’s 2014 Stock Option Plan (the “2014 Plan”) provides for the grant of restricted stock awards and incentive and
non-qualified options and to purchase Class A common stock to officers, employees, directors, and consultants. Options granted to employees
and non-employees generally vest ratably over four to five
years, with a maximum contractual term of ten
years. Outstanding awards under the 2014 Plan continue to be subject to the terms and conditions of the 2014 Plan. The
number of shares authorized for issuance under the 2014 Plan was reduced to the number of shares subject to awards outstanding under the
2014 Plan immediately after the IAC Merger. As a result, no further awards will be made under the 2014 Plan. Shares reserved for awards
that are subsequently expired or forfeited will no longer be returned to the pool of shares authorized for issuance under the 2014 Plan.
At
the Company's special meeting of stockholders held on October 13, 2020, the stockholders approved the 2020 Omnibus Equity Compensation
Plan (the "2020 Plan"). The 2020 Plan provides for the grant of incentive and non-qualified stock option, restricted stock units ("RSUs"),
restricted share awards, stock appreciation awards, and cash-based awards to employees, directors, and consultants of the Company. Awards
under the 2020 Plan expire no more than ten
years from the date of grant. The 2020 Plan became effective immediately upon the closing of the IAC Merger.
In
June 2022, the Company's Compensation Committee adopted the 2022 Employment Inducement Plan and granted at total of 46,165
inducement RSU awards to form Fair employees joining the Company following the acquisition of the Marketplace Assets (see Note 3 - Business
Combinations). The grants of restricted stock units were promised to each of the employees in their employment agreements or offer letters
with the Company as a material inducement to employment in accordance with Nasdaq Listing Rule 5635(c)(4). All awards will vest subject
to continued employment and vest on May 20, 2023.
In
December 2022, the Company assumed various stock plans in connection with the CarLotz Merger (the "CarLotz Plans"). Outstanding awards
under the CarLotz Plans continue to be subject to the terms and conditions of the CarLotz Plans. The number of shares authorized for issuance
under the CarLotz Plans was reduced to the number of shares subject to awards outstanding under the CarLotz Plans immediately after the
CarLotz Merger.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Activity
related to employee and non-employee stock options for all plans is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual Life
(Years) |
|
Aggregate
Intrinsic Value (000’s) |
|
As of December 31,
2021 |
159,779 |
|
|
$ |
15.90 |
|
|
7.47 |
|
$ |
3,574 |
|
| Granted |
379,616 |
|
|
30.90 |
|
|
|
|
|
| Exercised |
(1,297) |
|
|
2.47 |
|
|
|
|
|
| Forfeited |
(10,072) |
|
|
28.93 |
|
|
|
|
|
| Cancelled
(expired) |
(8,703) |
|
|
50.79 |
|
|
|
|
|
|
As of December 31,
2022 |
519,323 |
|
$ |
26.02 |
|
|
4.95 |
|
$ |
1 |
|
|
Exercisable
as of December 31, 2022 |
510,452 |
|
$ |
26.00 |
|
|
4.88 |
|
$ |
1 |
|
The
weighted-average grant date fair value of options granted during the year ended December 31, 2022 was $0.20.
The total intrinsic value of options exercised during the years ended December 31, 2022 and 2021 was $3
thousand and $2.1
million, respectively.
Activity
related to employee and non-employee RSU awards is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares |
|
Weighted
Average
Grant
Date Fair Value |
|
Weighted
Average
Remaining
Contractual Life
(Years) |
|
Aggregate
Intrinsic Value (000’s) |
|
Unvested as
of December 31, 2021 |
973,397 |
|
|
$ |
61.40 |
|
|
2.21 |
|
$ |
33,193 |
|
| Granted |
745,867 |
|
|
12.19 |
|
|
|
|
|
| Vested |
(482,845) |
|
|
42.80 |
|
|
|
|
|
| Forfeited |
(750,365) |
|
|
53.80 |
|
|
|
|
|
|
Unvested as
of December 31, 2022 |
486,054 |
|
$ |
29.30 |
|
|
1.01 |
|
$ |
724 |
|
| Vested
and unreleased |
3,287 |
|
|
|
|
|
|
|
Outstanding
as of December 31, 2022 |
489,341 |
|
|
|
|
|
|
The
total vesting date fair value of RSUs vested was $4.8
million for the year ended December 31, 2022. All RSUs that were vested and unreleased as of December 31, 2022 were released in February
2023.
Stock-Based
Compensation Expense
For
the year ended December 31, 2022 and 2021, the Company recorded stock-based compensation expense to selling, general and administrative
expenses on the consolidated statements of operations of $13.0
million and $25.1
million, respectively. In addition, the Company capitalized stock-based compensation costs for the year ended December 31, 2022 and 2021
of $1.3
million and $0.8
million, respectively, to capitalized website and internal use software costs, net.
As
of December 31, 2022, there was $12.2
million of unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average period of 1.67
years.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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. Such an exercise is 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 to additional paid in capital as the award vests.
As
of December 31, 2022 and 2021, the Company has recorded a liability of $0.1
million and $0.2
million relating to 1,177
and 5,963
options that were exercised but not vested, respectively.
15.
RELATED PARTY TRANSACTIONS
Sales
to Related Parties
The
Company operated a one-sided marketplace (“OSM”) program whereby the Company acquired cars from various sources in Oxnard,
California and sold them directly and solely to Lithia. The Company invoiced Lithia based on the purchase price of the car plus an agreed
upon margin. During the year ended December 31, 2022 and 2021, the Company recognized approximately $4.7 million
and $16.8
million, respectively, of sales from the OSM agreement with Lithia. The OSM program was terminated in the second quarter of 2022 with
the last sale to Lithia taking place in March 2022.
During
the period from the execution of the Merger Agreement with CarLotz on August 9, 2022 until the merger closing on December 9, 2022, the
Company sold vehicles totaling $3.0
million to CarLotz, included in retail revenue, net on the consolidated statements of operations.
Accounts
Receivable from Related Party
As
of December 31, 2021, the Company had $2.1
million in outstanding accounts receivable from Lithia, which is comprised $2.0
million in vehicle sales and $77
thousand, respectively, in commissions based on the number of loan contracts booked with US bank. There were no receivables due from Lithia
at December 31, 2022.
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 8,666,154
shares of Legacy Shift common stock at an exercise price of $0.10
per share (the “Warrant Shares”). The Warrant Shares were scheduled to vest and become exercisable in six
separate tranches of 1,444,359
shares each. Vesting and exercisability was 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. All Warrant Shares became vested prior to the Vesting Termination Date and were exercised prior to the
IAC Merger.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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. The estimated fair value of the in substance upfront payment
to AWS was $2.8 million
with an offsetting entry recorded to additional paid-in capital, representing a capital transaction with a related party.
Milestone
5 was met in October 2019 and the Company recorded the 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 $0.4 million
and was recorded to other non-current assets on the consolidated balance sheets. The combined asset recorded of $3.2 million
is subject to amortization over a five-year
period expected period of benefit. During year ended December 31, 2022 and 2021 the Company amortized $0.6
million and $0.6
million, respectively of the asset as a reduction to finance and insurance sales, which is recorded within other revenue, net on the consolidated
statements of operations. As of December 31, 2022 and 2021, the remaining asset, net of amortization, was $0.6 million
and $1.2 million,
respectively.
Lease
Agreements
On
November 1, 2018 and July 10, 2019, pursuant to Milestone 3 and 4, 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 Concord and Portland facilities
of Lithia, respectively. Both agreements expired on October 12, 2021. During the year ended December 31, 2021, total costs related to
these agreements were $0.1
million. The lease costs were expensed to selling, general and administrative expenses on the consolidated statements of operations.
Flooring
Line of Credit Guarantee
In
February 2019, the Company entered into a guarantee agreement with Lithia. The interest rate was 1.50%
per annum based on a daily outstanding flooring line of credit and was payable monthly to Lithia. For the year ended December 31, 2021,
the Company recorded $78
thousand of interest and $2.1
million of deferred borrowing cost amortization to interest and other expense, net on the consolidated statements of operations. The guarantee
expired coterminously with the FLOC on October 11, 2021.
Accounts
Payable Due to Related Party
As
of December 31, 2022 and 2021 payables and accruals to Lithia consisted of other miscellaneous expenses of $0.2
million and $0.2
million, respectively.
16.
IMPAIRMENT AND RESTRUCTURING
Impairment
of Long-Lived Assets
During
the fourth fiscal quarter of 2022, management identified indicators of impairment, including declines in our market capitalization, rising
interest rates, and other unfavorable macroeconomic and industry factors, and performed a test for recoverability for each of the Company's
pre-CarLotz Merger asset groups. Assets acquired as part of the CarLotz Merger were recorded at fair value on the acquisition date (see
Note 3 - Business Combinations). Asset groups consisted of one asset group containing all operating assets and liabilities of the Company
(the "Operating Asset Group"), and separate assets groups each containing a single closed facility that is subleased or held for sublease
(the "Sublease Asset Groups"). The Operating Asset Group and certain Sublease Asset Groups were determined not to be recoverable, and
as such management determined the fair value of these asset groups. The Operating Asset Group was valued with the assistance of third
party valuation specialists using a market approach based on comparison to peer company valuation multiples. The Sublease Asset Groups
were valued using the income approach based on discounted estimated cash flows from subleasing the properties.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
Operating Asset Group and one of the Sublease Asset Groups were determined to have carrying values in excess of their fair values. As
such, the Company measured a loss on impairment equal to the difference between the carrying value and the fair value of each impaired
asset group. The loss on impairment was allocated to the assets within each respective asset group, except that no individual asset was
reduced below its individual fair value. Within the Operating Asset Group, the fair value of individual assets was determined with the
assistance of third party valuation specialists. Right of use assets were valued using the market approach, based on comparison to similar
leased properties. Capitalized internal use software was valued using the relief-from-royalty approach, which involves the estimation
of an amount of hypothetical royalty savings enjoyed by the entity that owns an intangible asset because that entity is relieved from
having to license that intangible asset from another owner. Property and equipment was valued using the cost approach based on secondary
market values of similar assets. Within the impaired Sublease Asset Group, the fair value of the impaired right of use asset was determined
using the income approach based on discounted estimated cash flows from subleasing the properties.
The
Company recognized a loss on impairment of long-lived assets of $16.9
million for the year ended December 31, 2022. There was no
loss on impairment of long lived assets for the year ended December 31, 2021. All impaired asset groups were contained in the Retail segment.
Facility
Closures
In
the second quarter of 2022, prior to the adoption of the Restructuring Plan, the Company discontinued plans to open additional facilities
and ceased using certain real estate leaseholds acquired in anticipation thereof. For the year ended December 31, 2022, the Company recognized
additional rent expense and other charges related to the closures of $1.8
million, included in selling, general and administrative expenses in the consolidated statements of operations.
Restructuring
Plan
On
July 22, 2022, the Company's Board approved the implementation of the Restructuring Plan designed to position the Company for long-term
profitable growth by prioritizing unit economics, reducing operating expenses and maximizing liquidity. At the same time, the Company
announced the CEO transition described below. As part of the Restructuring Plan, the Company consolidated Shift’s physical operations
to three West Coast locations in Los Angeles, Oakland, and Portland, closing seven existing facilities. The Company also restructured
its workforce around the reduced physical footprint, eliminating approximately 650
positions or 60%
of its workforce. The restructuring was substantially complete as of September 30, 2022.
The
Company recorded the following restructuring charges (in thousands):
|
|
|
|
|
|
|
Year
Ended December 31, 2022 |
|
Losses on sales
of inventory associated with restructuring(1) |
$ |
8,598 |
|
|
Restructuring
costs related to operating leases(2) |
3,277 |
|
|
Losses on sale
or disposal of property and equipment(2) |
2,325 |
|
|
Losses on early
decommissioning of capitalized internal-use software(2) |
6,524 |
|
|
Severance, retention,
and CEO transition(2) |
3,671 |
|
|
Labor and other
costs incurred to close facilities(2) |
5,204 |
|
| Total |
$ |
29,599 |
|
(1)Included
in cost of sales on the Company’s consolidated statements of operations.
(2)Included
in restructuring expenses on the Company’s consolidated
statements of operations.
Losses
on sales of inventory associated with restructuring represents inventory that has been or will be disposed of through the wholesale channel
to adapt inventory levels to the Company's new geographic footprint, as well as losses on retail sales incurred due to liquidation efforts.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Restructuring
costs related to operating leases represents costs associated with the leases of the seven facilities that were closed as part of the
restructuring. Closing activities were substantially complete as of September 30, 2022. The Company anticipates that it will sublease
the affected properties representing the majority of the lease costs of closed facilities. An impairment test was performed on the lease
assets, which required estimates of the time and cost to obtain a subtenant and market rents. The impairment test did not result in material
impairment charges. For those properties with remaining lease terms too short to be probable of subleasing, the Company recognized a charge
of $2.2 million
related to lease costs that will continue to be incurred under the lease agreements for their remaining terms without economic benefit
to the Company. The Company also recognized a charge for termination fees of $0.5 million
related to one of its operating leases. The remaining amount relates to lease costs incurred following the closure of the facilities.
Loss
on sale or disposal of property and equipment represents losses on sales of property and equipment and additional depreciation expense
related to property and equipment that was disposed of other than by sale. An impairment test was performed on the property and equipment,
which required estimates of the fair value of the equipment based on secondary market prices for similar equipment. The impairment test
did not result in material impairment charges.
Losses
on early decommissioning of capitalized internal-use software represents $6.5 million
additional amortization expense recognized as a result of the Company's review of its capitalized software portfolio in light of the business
strategy changes involved in the Restructuring Plan. The Company reassessed the estimated useful lives of its capitalized software projects
and fully depreciated certain software projects that will not be used following the restructuring. An impairment test was performed on
the capitalized software, which required estimates of the fair value of the software based on the cost to recreate method. Management
applied judgment in estimating the fair value of the capitalized software, which involved the use of significant assumptions such as the
cost and time to build the acquired technology, developer’s profit and rate of return. The impairment test did not result in material
impairment charges.
Severance,
retention, and CEO transition represents one time termination benefits paid or payable in connection with the Restructuring Plan and the
CEO transition. The following
table is a reconciliation of the beginning and ending restructuring liability for the year ended December 31, 2022 related to the Restructuring
Plan:
|
|
|
|
|
|
| Balance
at December 31, 2021 |
$ |
— |
|
| Accruals
and accrual adjustments |
3,339 |
|
| Cash
payments |
(2,545) |
|
| Balance
at December 31, 2022 |
$ |
794 |
|
Labor
and other costs incurred to close facilities represents operating costs incurred at closing facilities from the announcement date of the
Restructuring Plan to the final closure of the facilities. The operating costs include facilities costs, personnel costs, and other costs
incurred prior to the complete closure of the facilities.
CEO
Transition
On
September 1, 2022, the Company announced that Jeffrey Clementz was appointed as the Company's Chief Executive Officer, succeeding George
Arison, one of our co-founders, as the Company's Chief Executive Officer. Mr. Arison will continue to serve in his capacity as a member
of the Board. Mr. Clementz previously served as our President since September 2021. The Company has entered into an amended employment
agreement with Mr. Clementz in connection with his appointment as Chief Executive Officer.
Assets
and Liabilities Held for Sale
In
connection with the acquisition of CarLotz, the Company acquired several leases for real estate at the acquisition date. A plan of sale
related to these and several other leases as well as certain lease-related assets and liabilities of the Orange Grove Fleet Solutions,
LLC subsidiary was adopted in December 2022. These assets were measured at fair value less cost to sell as of the acquisition date. Therefore,
no
gain or loss on sale was recognized for the year ended December 31, 2022. The impact on net loss of these leases and subsidiaries held
for sale was immaterial for the year ended December 31, 2022. All real estate leases held for sale at December 31, 2022 were disposed
of by lease assignment or termination during the first fiscal quarter of 2023. All other assets and liabilities held for sale are expected
to be sold within one year of the date of the CarLotz Merger.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
carrying amount of assets and liabilities classified as held for sale is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2022 |
| Assets |
|
|
| Accounts
receivable, net |
|
$ |
689 |
|
| Prepaid
expenses and other current assets |
|
226 |
|
| Property
and equipment, net |
|
2,584 |
|
| Operating
lease assets |
|
9,572 |
|
| Finance
lease assets |
|
4,155 |
|
| Total
assets |
|
$ |
17,226 |
|
| Liabilities |
|
|
| Accounts
payable |
|
$ |
70 |
|
| Accrued
expenses and other liabilities |
|
101 |
|
| Operating
lease liabilities |
|
10,138 |
|
| Finance
lease liabilities |
|
5,036 |
|
| Other
non-current liabilities |
|
87 |
|
| Total
liabilities |
|
$ |
15,432 |
|
17.
INCOME TAXES
Net
loss before income taxes was $171.7
million and $166.0
million for the years ended December 31, 2022 and 2021, respectively. The Company had income tax expense of $0.3
million and $0.2
million for the years ended December 31, 2022 and 2021, respectively.
The
following table presents a reconciliation of the statutory federal rate and our effective tax rate (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31, |
|
2022 |
|
2021 |
| Provision
for income taxes at federal statutory rates |
$ |
(36,060) |
|
|
$ |
(34,869) |
|
| State
taxes, net of federal benefit |
(12,983) |
|
|
(9,618) |
|
| Permanent
differences |
(8,399) |
|
|
1,406 |
|
| Change
in valuation allowance |
59,628 |
|
|
42,278 |
|
| Other |
(1,860) |
|
|
1,029 |
|
| Total |
$ |
326 |
|
|
$ |
226 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Significant
components of the Company’s deferred tax assets and liabilities for federal, state and foreign income taxes are as follows at December 31,
2022 and 2021, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31, |
|
2022 |
|
2021 |
| Deferred
tax assets: |
|
|
|
| Accruals,
reserves, and other |
$ |
17,255 |
|
|
$ |
16,777 |
|
| Lease
liabilities |
17,436 |
|
|
— |
|
| Depreciation |
13,908 |
|
|
804 |
|
| Federal
net operating loss carryover |
175,365 |
|
|
91,632 |
|
| State
net operating loss carryover |
49,553 |
|
|
29,420 |
|
| Total
gross deferred tax assets |
273,517 |
|
|
138,633 |
|
| Less:
valuation allowance |
(258,765) |
|
|
(138,633) |
|
| Net
deferred tax assets |
14,752 |
|
|
— |
|
|
|
|
|
| Deferred
tax liabilities: |
|
|
|
| Right
of use assets |
(14,752) |
|
|
— |
|
| Total
gross deferred tax liabilities |
(14,752) |
|
|
— |
|
| Net
deferred taxes |
$ |
— |
|
|
$ |
— |
|
As
of December 31, 2022, the Company had U.S. federal net operating loss carryforwards of approximately $835.1
million, which may be available to offset future federal income and expire at various years beginning with 2033. As of December 31,
2022, the Company also had state net operating loss carryforwards of approximately $833.6
million, which may be available to offset future state income tax and expire at various years beginning with 2033.
The
Company has evaluated the positive and negative evidence bearing upon the deferred tax assets and whether they will be realized. Based
on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its
deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as
of December 31, 2022 and 2021 of $258.8
million and $138.6
million, respectively.
The
Company has not performed a Section 382 study to determine whether it had experienced a change in ownership and, if so, whether the tax
attributes (net operating losses or credits) were impaired. Under Section 382 of the Internal Revenue Code of 1986, as amended, the Company’s
ability to utilize net operating loss or other tax attributes, such as research tax credits, in any taxable year may be limited if the
Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase
of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of
a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws.
As
of December 31, 2022 and 2021, the Company does not
have any unrecognized tax benefits.
The
Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2022 and 2021,
the Company had not
accrued interest or penalties related to uncertain tax positions and for the years ended December 31, 2022 and 2021 no
amounts have been recognized in the Company’s statements of operations.
The
Company is subject to taxation in the United States and other state jurisdictions. The material jurisdictions in which the Company is
subject to potential examination include the United States, California, Oregon and Virginia. The tax years from fiscal year 2016 and onward
remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject.
The Company is not currently under examination by any taxing authority. The
following table presents the Company’s NOLs by jurisdiction as of December 31, 2022 and 2021:
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
2022 |
|
2021 |
| Federal |
$ |
835,071 |
|
|
$ |
436,344 |
|
| California |
554,100 |
|
397,270 |
| Oregon |
97,091 |
|
32,733 |
| Virginia |
79,371 |
|
3,301 |
| Other |
103,038 |
|
2,876 |
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The
CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before
2022. In addition, the CARES Act allows NOLs incurred in 2019, 2020, and 2021 to be carried back to each of the five preceding taxable
years to generate a refund of previously paid income taxes. The Company has evaluated the impact of the CARES Act and determined that
the NOL carryback provision of the CARES Act would not result in a material cash benefit since the company has had taxable losses since
inception.
18.
NET LOSS PER SHARE
The
following table sets forth the computation of net loss per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year
Ended
December 31, |
| (in
thousands, except share and per share amounts) |
|
2022 |
|
2021 |
| Net
loss |
|
$ |
(172,042) |
|
|
$ |
(166,268) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
|
8,638,073 |
|
|
7,811,414 |
|
| Net
loss per share, basic and diluted |
|
$ |
(19.92) |
|
|
$ |
(21.29) |
|
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 December 31, |
| |
2022 |
|
2021 |
| Escrow
Shares |
300,010 |
|
|
300,010 |
|
| Public
and private warrants |
1,146,727 |
|
|
— |
|
| Earnout
Shares |
489,841 |
|
|
— |
|
| Convertible
Notes |
1,779,834 |
|
|
1,779,834 |
|
| Stock
options |
519,323 |
|
|
159,779 |
|
| Restricted
stock units |
489,341 |
|
|
1,151,357 |
|
| Contingently
repurchasable early exercise shares |
1,177 |
|
|
5,963 |
|
| Total |
4,726,253 |
|
|
3,396,943 |
|
19.
EMPLOYEE BENEFIT PLANS
We
currently maintain a 401(k) retirement savings plan for our employees, including our named executive officers, who satisfy certain eligibility
requirements. The Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits,
on a pre-tax basis through contributions to the 401(k) plan. The Company did not
make any matching contributions for the years ended December 31, 2022 and 2021.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
20.
SUBSEQUENT EVENTS
Amendment
to Inventory Financing Agreement
On
February 7, 2023, the Company along with its wholly owned subsidiaries CarLotz, Inc., (“CarLotz”), CarLotz Group, Inc.,
a Delaware corporation (“CarLotz Group”), CarLotz, Inc., an Illinois corporation (“CarLotz Illinois”), CarLotz
California, LLC, a California limited liability company (“CarLotz California” and, together with CarLotz, CarLotz Group and
CarLotz Illinois, the “CarLotz Borrowers”), and Shift Operations LLC, a Delaware limited liability company (“Shift Operations”
and, together with the CarLotz Borrowers, the “Borrowers”), entered into an Amendment to Inventory Financing and Security
Agreement (the “First Amendment”) with Ally Bank (“Ally Bank”) and Ally Financial Inc. (“Ally Financial”
and, together with Ally Bank, the “Lender”).
Effective
as of February 7, 2023 (the “Effective Date”), the First Amendment amends that certain Inventory Financing and Security
Agreement dated December 9, 2021 (the “Ally Facility”), by and among the Company, Shift Operations and the Lender, to
(i) join the CarLotz Borrowers as borrowers under the Ally Facility and terminate the inventory financing arrangement between the CarLotz
Borrowers and the Ally Parties that was entered into prior to the Company’s acquisition of CarLotz, (ii) reduce the maximum available
credit line under the Ally Facility from $100
million to $75
million and (iii) require the Borrowers to make monthly principal reduction payments for each vehicle subject to the floor plan for more
than 150
days rather than 180
days. In addition, effective February 1, 2023, the First Amendment increases the per annum interest rate applicable to Advances (as defined
in the Ally Facility) to be equal to the prime rate designated from time to time by Ally Bank plus 175 basis points (from 150 basis points).
The
Ally Facility is secured by a grant of a security interest in substantially all of the assets of the Company, the Borrowers and each other
wholly owned subsidiary of the Company domiciled in the United States, and payment is guaranteed by the Company, the Borrowers and each
other wholly owned subsidiary of the Company domiciled in the United States.
Facility
Closures and Reduction in Force
During
the first fiscal quarter of 2023, the Company reduced its total headcount by approximately 41%
as a result of continued efforts to improve overhead efficiency and elimination of redundancies resulting from the CarLotz Merger. The
reduction in force resulted in total new cash charges of approximately $0.9
million, consisting primarily of severance and related personnel reduction costs. In addition, the Company closed its facility in Downers
Grove, Illinois and the former CarLotz headquarters facility in Richmond, Virginia.
Nasdaq
Deficiency Letter and Reverse Stock Split
On
October 4, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock
Market LLC (“Nasdaq”) notifying us that, for the last 30
consecutive business days, the bid price for our Class A common stock had closed below the $1.00
per share minimum bid price requirement for continued inclusion on the Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(a)(1)
(the "Bid Price Requirement"). Under Nasdaq Listing Rule 5810(c)(3)(A) (the "Compliance Period Rule"), we have a 180-calendar
day grace period, or until April 3, 2023 (the “Compliance Date”), to regain compliance with the Bid Price Requirement. During
this period, our Class A common stock will continue to trade on the Nasdaq Global Market. If at any time before the Compliance Date the
bid price of Class A common stock closes at or above $1.00
per share for a minimum of 10
consecutive business days as required under the Compliance Period Rule, the Staff will provide written notification to the Company that
it has regained compliance with the Bid Price Requirement (unless the Staff exercises its discretion to extend this 10
business day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H)).
At
the Company’s Special Meeting of Stockholders held on December 7, 2022, the Company’s stockholders approved a proposal to
authorize a reverse stock split of the Company’s common stock, at a ratio within the range of 1-for-5 to 1-for-10. The Board approved
a 1-for-10 reverse split ratio, and on March 7, 2023, the Company filed a Certificate of Amendment to its Second Amended and Restated
Certificate of Incorporation (the “Charter Amendment”) to effect the reverse split effective March 8, 2023. On March 22,
2023, the Company was notified by Nasdaq that the Company has regained compliance with the Bid Price Requirement.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM
9A. CONTROLS AND PROCEDURES
1.
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (the "Disclosure Controls") within the meaning of Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Our Disclosure Controls are designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms. Our Disclosure Controls are also designed to ensure
that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management
recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily applied its judgment in evaluating and implementing possible controls and procedures.
As
of the end of the period covered by this Annual Report on Form 10-K, we evaluated the effectiveness of the design and operation of our
Disclosure Controls, which was done under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer. Based on the evaluation of our Disclosure Controls, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2022, our Disclosure Controls were not effective due to material weaknesses in the
Company's internal control over financial reporting as disclosed below.
2.
Management’s Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a‑15(f)
and 15d‑15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Management
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 using the criteria
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on that evaluation, management believes that our internal control over financial reporting was not effective as of December 31,
2022.
Management
excluded CarLotz Inc. and its wholly owned subsidiaries from its assessment of internal control over financial reporting as of December 31,
2022 because it was acquired in a business combination on December 9, 2022. Total assets and total revenue that were excluded from management's
assessment represented approximately 46% and less than 1%, respectively, of consolidated total assets and total revenue, as of and for
the year ended December 31, 2022.
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis.
As
previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, we identified material weaknesses in our
internal control over financial reporting. The first material weakness relates to lack of a process to demonstrate commitment to attracting,
developing, and retaining competent individuals in alignment with objectives. This material weakness impacted the effectiveness of our
control environment and our entity level controls. It resulted in the Company not maintaining a complement of personnel with an appropriate
level of accounting knowledge, experience and training in the application of U.S. GAAP commensurate with its financial reporting requirements
and the complexity of the Company’s operations and transactions. The second material weakness relates to insufficient selection
and development of Information Technology General Controls ("ITGCs") to support the achievement of objectives.
These
material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement of
our annual or interim consolidated financial statements that may not be detected.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or prevent or detect all
error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions, and can provide only
reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company
have been detected. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This
Annual Report on Form 10-K does not include an attestation report of internal controls from our independent registered public accounting
firm due to our status as an emerging growth company under Section 2(a)(19) of the Securities Act and our status as a non-accelerated
filer.
3.
Plan to Remediate Material Weaknesses
The
Company is devoting significant time, attention, and resources to remediating the above material weaknesses. The Company has executed
or continues to execute the following steps intended to remediate the material weaknesses described above and strengthen our internal
control:
•The
Company hired experienced finance and accounting executives in the positions of Chief Financial Officer, Chief Accounting Officer, Corporate
Controller, Director of SEC Reporting, and Director of Information Technology.
•The
Company continues to train and develop experienced accounting personnel with a level of accounting knowledge and experience in the application
of US GAAP commensurate with our financial reporting requirements and the complexity of our operations and transactions.
•The
Company has engaged external specialists as needed to provide assistance in accounting for significant, non-routine or complex transactions.
•The
Company engaged external consultants to assist the Company in designing, implementing, and monitoring an appropriate system of internal
control, including ITGCs.
•The
Company is executing several initiatives to strengthen our ITGC environment, including but not limited to:
◦Implementing
additional training to ensure a clear understanding of risk assessment, controls and monitoring activities related to automated processes
and systems and ITGCs related to financial reporting;
◦Implementing
improved IT policies, procedures and control activities for key systems which impact our financial reporting; and,
◦Dedicating
an appropriate amount of resources to monitoring ITGCs related to financial reporting, including a sufficient complement of personnel
with the appropriate level of knowledge, experience and training to ensure compliance with policies and procedures.
The
Company has made significant progress in addressing the previously identified material weaknesses, and the results of management’s
testing indicate that the Company’s control environment has improved since the material weaknesses were first identified. However,
remediation efforts in the second half of 2022 were negatively impacted by factors including employee turnover in relevant roles and changes
in business processes resulting from restructuring activities, as well as the business acquisitions completed during the period. As a
result, management was unable to conclude that the material weaknesses were fully remediated as of December 31, 2022. The material
weaknesses will not be considered fully remediated until we have concluded, through testing, that applicable controls have been designed
and operating effectively for a sufficient period of time.
We
plan to continue to devote significant time and attention to remediate the above material weaknesses as soon as reasonably practicable.
As we continue to evaluate our controls, we will make the changes described above as well as any others determined to be needed to enhance
our control environment and remediate the material weaknesses. We believe these actions will be sufficient to remediate the identified
material weaknesses and strengthen our internal control over financial reporting; however, there can be no guarantee that such remediation
will be sufficient. We will continue to evaluate the effectiveness of our controls and will make any further changes management determines
appropriate.
4.
Changes in Internal Control over Financial Reporting
Except
as described above, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31,
2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
Item 9C. DISCLOSURE
REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
Part
III
Item 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
Directors
Our
business and affairs are managed under the direction of our Board of Directors, which is composed of nine directors. Our Second Amended
and Restated Certificate of Incorporation (our “Certificate”) provides that the authorized number of directors may be changed
only by resolution of our Board of Directors. Our Certificate also provides that our Board of Directors will be divided into three classes
of directors, with the classes as nearly equal in number as possible. At each annual meeting of stockholders, a class of directors will
be elected for a three-year
term to succeed the class whose term is then expiring. The current term of our Class III directors will expire at the 2023 annual meeting
of stockholders; the current term of our Class I directors will expire at the 2024 annual meeting of stockholders; and the current term
of our Class II directors will expire at the 2025 annual meeting of stockholders.
The
following table sets forth the director class, name, age as of December 31, 2022, and other information for each member of our Board:
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Name |
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Class |
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Age |
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Principal
Occupation and Other Information |
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Victoria McInnis |
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I |
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61 |
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Victoria
McInnis has served as a director of the Company since October 2020 and Lead Director since December 2022. Prior to joining the Board
of Directors, Ms. McInnis served as an independent board member and audit committee chair for VectoIQ Acquisition Company, a special purpose
acquisition company, from May 2018 to June 2020. Prior to that, Ms. McInnis held various positions with General Motors Corporation
from 1995 until her retirement in 2017, including Vice President, Tax and Audit March 2015 to August 2017, Chief Tax Officer from 2009
to March 2015 and, prior to that, Executive Director, Tax Counsel, General Tax Director, Europe, Director of Federal Tax Audits, and Senior
Tax Counsel, GM Canada. The board has determined that Ms. McInnis is well qualified to serve as a director based on her extensive experience
in the automotive industry and her financial expertise. |
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Kellyn Smith
Kenny |
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I |
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45 |
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Ms. Smith Kenny
has served as a director of the Company since October 2020. She has been recognized by Fortune, Adweek, Brand Innovators, and HotTopics
for marketing innovation, effectiveness, and leadership, where she is featured as a Top 100 Most Innovative CMO in the World, Top 50 CMO,
Top 20 Most Tech Savvy CMO, Top 100 Women in Brand Marketing, and Working Mother of the Year. She is the Chief Marketing & Growth
Officer at AT&T Communications, where she is responsible for accelerating customer acquisition, increasing customer lifetime value,
and delivering a customer value proposition that strengthens AT&T’s premium position. Prior to AT&T, Kellyn served as the
global Chief Marketing Officer at Hilton Worldwide, and held senior positions at Uber, Capital One and Microsoft. She holds a Bachelor
of Arts in Economics from Colgate University and a Master of Business Administration from Northwestern University.
The board has
determined that Ms. Smith Kenny is well qualified to serve as a director based on her intimate knowledge of how to build and maintain
a strong brand and her extensive experience in senior management positions at public companies. |
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Name |
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Class |
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Age |
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Principal
Occupation and Other Information |
| Kimberly
H. Sheehy |
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I |
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58 |
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Kimberly
H. Sheehy has served as a director of the Company and Chair of the Audit Committee since December 2022. Prior to that, Ms. Sheehy was
a member of the board of directors, Chair of the audit committee and member of the compensation committee for CarLotz, Inc. from January
2021 to December 2022. In addition, she served as a member of the board of directors and Chair of the audit committee for a Switch Inc.,
a public high growth technology infrastructure company, from December of 2017 until December 6, 2022. Ms. Sheehy has served as a member
of the board of directors for Evolv Technologies since July of 2021, and CVB Financial Corp. since June of 2022. Until May of 2020, Ms.
Sheehy served as Chief Financial Officer of ResMan LLC, a privately owned software company providing software solutions to multi-family
residential property managers. Prior to ResMan LLC, Ms. Sheehy served as Chief Financial Officer of Lori’s Gifts Inc., a privately
owned retail company serving hospitals through-out the United States, from March 2018 through April 2019. Ms. Sheehy served as Chief Financial
Officer of Stackpath LLC, a privately held entity offering a secure edge platform from December 2015 through October 2017. Prior to joining
StackPath, Ms. Sheehy served as Chief Financial & Administrative Officer of CyrusOne Inc., a public high-growth real estate investment
trust specializing in engineering, building and managing data center properties from November 2012 through September 2015. Prior to CyrusOne
Inc., she held various roles between 1996 and 2012 at Cincinnati Bell Inc., including Treasurer and Vice President of Investor Relations,
Vice President of Finance and Treasurer, Vice President of Financial Planning and Analysis, and Managing Director of Corporate Tax. Prior
to joining Cincinnati Bell Inc., Ms. Sheehy held accounting and tax positions at Ernst & Young from 1989 to 1996. Ms. Sheehy received
her Bachelor’s of Arts Degree in Accounting from the University of Cincinnati and holds her Certified Public Accounting license
in the State of Ohio.
The board has determined that Ms. Sheehy is well qualified to serve as a director based on her extensive accounting
and audit experience with over 30 years of tax, accounting, financial and executive experience, experience in public accounting and public
companies, and service on public company boards, including service as a chair of an audit committee. |
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Name |
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Class |
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Age |
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Principal
Occupation and Other Information |
| Luis
I. Solorzano |
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II |
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50 |
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Luis
Ignacio Solorzano has served as a director of the Company since December 2022. Prior to that, Mr. Solorzano served as the Chairman of
the board of directors and member of the compensation and nominating and corporate governance committees for CarLotz, Inc. from November
2018 to December 2022. Mr. Solorzano is a Partner and Chief Executive Officer of Acamar Partners, an investment management firm. In addition,
Mr. Solorzano is Co-founder of Brabex Capital, an investment management firm. Mr. Solorzano is also a member of the board of directors
of Grupo Aeroportuario Centro Norte, S.A.B. de C.V. since April 2018. Mr. Solorzano is a former director of Acamar Partners Acquisition
Corp., a special purpose acquisition company, from 2019 to 2021 when Acamar Partners Acquisition Corp. merged with CarLotz, Inc. Prior
to joining Acamar Partners Acquisition Corp, Solorzano served on the boards of various public and private companies, including Dufry,
Grupo Aeroportuario del Centro Norte, Aerodom, InverCap Holdings and Viakem. Mr. Solorzano previously served as Partner, Managing Director
and Chairman of the Latin America’s Investment Committee of Advent International from 2001 to 2017, becoming Partner and Managing
Director in 2008. He served as Chairman of the Latin America’s Investment Committee and during his tenure at Advent, Mr. Solorzano
participated in various investments and management activities encompassing various of Advent’s private equity funds, including Advent’s
acquisition of a majority stake in Dufry in which Mr. Solorzano co-led this transaction and played a significant role in the execution
of Dufry’s operating plan, Dufry’s IPO process, and the negotiation, execution and integration of several add-on acquisitions
made by Dufry in various geographies. He was also a key executive involved in the raising of three funds and he played a leading role
in fifteen investment transactions in various sectors, including retail and consumer, financial services, industrials, information technology
and infrastructure. Mr Solorzano also played a significant role in supporting portfolio companies in the design and implementation of
various strategic, operating and financial value creation initiatives. Mr. Solorzano began his career with BankBoston Capital, where he
spent four years making private equity investments and corporate loans across Latin America from 1985 to 1999. Mr. Solorzano graduated
with a degree in Economics (cum laude) from the Instituto Tecnologico Autonomo de Mexico (ITAM) and a Masters of Business Arts from Harvard
Business School.
The
board has determined that Mr. Solorzano is well qualified to serve as a director based on his experience serving on the boards of various
public and private companies, in addition to his extensive experience supporting companies in the design and implementation of various
strategic, operating and financial value creation initiatives, with over 20 years of investment experience across various sectors and
geographies covering both the Americas and Europe, including serving in leading roles in investment transactions in various sectors, including
retail and consumer, financial services, industrials, information technology and infrastructure.
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Name |
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Class |
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Age |
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Principal
Occupation and Other Information |
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Adam Nash |
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II |
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48 |
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Adam
Nash has served as director of the Company since October 2020 and as a director of Shift Platform, Inc. from May 2020 to September
2022. Mr. Nash is the President & CEO of Aside, Inc. and has served on the board of directors of Acorns, a financial technology &
services company that specializes in micro-investing, since February 2017 and is an adjunct lecturer in Computer Science at Stanford University,
a position he has held since September 2017. Previously, he served as the Vice President of Product & Growth at Dropbox, a leading
provider of cloud-based storage and collaboration applications, from 2018 to 2020. Prior to joining Dropbox, Mr. Nash was the
President and Chief Executive Officer of Wealthfront, Inc. (“Wealthfront”) from 2014 to 2016. Before Wealthfront, he held
roles as an Executive in Residence at Greylock Partners and Vice President of Product at LinkedIn. In addition, Mr. Nash has held
strategic and technical roles at eBay, Atlas Venture, Preview Systems, and Apple. Mr. Nash holds both Bachelor of Science and Master
of Science degrees in Computer Science from Stanford University, and a Master of Business Administration from Harvard University. The
board has determined that Mr. Nash is qualified to serve as a director based upon his prior service as a director of Shift Platform,
Inc., his extensive experience with early-stage companies as an angel investor and advisor, his knowledge of ecommerce and the innovation
economy in California, and his knowledge of the business communities in Shift’s principal markets. |
| Jeff
Clementz |
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II |
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48 |
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Jeff
Clementz has served as the Chief Executive Officer of Shift since September 2022 and director since November 2022, and a director of Shift
Platform, Inc. since September 2022. He previously served as President of Shift from October 2021 to September 2022. Prior to joining
Shift, Mr. Clementz served in various management positions at Walmart from October 2015 to September 2021, most recently serving as its
Senior Vice President and General Manager of Marketplace and Partner Operations. Prior to that, he served in various management positions
at PayPal from May 2003 to October 2015, including as its Vice President and Managing Director of Australia and New Zealand. Mr. Clementz
also previously served in various positions with Vendio Services and Intel. Mr. Clementz holds a Master of Business Administration from
the University of California, Berkeley and a Bachelor of Arts in Business Administration from the University of Washington.
The board
has determined that Mr. Clementz is qualified to serve as a director of the Company due to his extensive experience and knowledge of technical
issues in the industry. |
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Principal
Occupation and Other Information |
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George Arison |
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III |
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45 |
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George
Arison, has served as a director of the Company since October 2020. Mr. Arison incorporated Shift Platform, Inc. in December 2013, and
served as a director and Chief Executive Officer of Shift Technologies, Inc. until August 2022. He currently serves as the Chief Executive
Officer of Grindr, Inc. (NYSE: GRND), the world’s largest social network and dating application for the LGBTQ+ community and he
joined the Board of Directors of Grindr, Inc. in June 2022. Prior to co-founding Shift Platform, Inc., he served in various positions
at Google from 2010 to 2013, most recently as a product manager. From 2007 to 2010, he co-founded Taxi Magic (now known as Curb) with
Mr. Russell. From 2005 to 2007 he worked for Boston Consulting Group. Mr. Arison has been an investor in numerous startups, including
Shipper, Carrot, Eden, Fathom, AutoLeap, Pulsar AI (acquired by Impel), Zero (acquired by Avant), TravelBank (acquired by US Bank), Fyusion
(acquired by Cox Automotive) and Omni (acquired by Coinbase). He was a co-founder and member of the board of directors of Belong Acquisition
Corp., a blank check company. Prior to his business career, Mr. Arison was a policy analyst and ran a political campaign in Georgia, the
country of his birth, about which he wrote Democracy and Autocracy in Eurasia: Georgia in Transition. Mr. Arison holds a bachelor’s
degree from Middlebury College. The board has determined that Mr. Arison is qualified to serve as a director due to his previous position
as Chief Executive Officer of the Company and due to his extensive experience in numerous startups. |
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Toby Russell |
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III |
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45 |
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Toby
Russell, has served as a director of the Company since October 2020 and served as Co-Chief Executive Officer from October 2020 through
January 2022 and President from October 2020 through September 2021. Mr. Russell is a co-founder and director of Shift Platform,
Inc. and was employed by the Shift Platform, Inc. from November 2015 through January 2022, most recently serving as its Co-Chief
Executive Officer. Prior to joining Shift Platform, Inc., he was Managing Vice President at Capital One from 2011 to 2015 where he led
the digital transformation of the bank, including creating a completely new mobile and desktop customer experience for customers. In 2007,
he co-founded Taxi Magic (now known as Curb) with Mr. Arison, which invented the use of native mobile applications for on-demand services,
in its case transportation. In addition to his work in the private sector, Mr. Russell has spent time in public service, leading
a $12 billion renewable energy and efficiency investment program for the U.S. Department of Energy. After finishing his Doctorate
at Oxford University, he worked as a project leader at the Boston Consulting Group. Mr. Russell holds a bachelor’s degree from
Middlebury College. The board has determined that Mr. Russell is qualified to serve as a director due to his previous position as Chief
Executive Officer of the Company and due to his extensive technical experience in the industry. |
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Principal
Occupation and Other Information |
| James
E. Skinner |
II |
III |
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69 |
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James
E. Skinner has served as a director of the Company and member of the Audit Committee and Leadership Development, Compensation and Governance
Committee since December 2022. Prior to that, Mr. Skinner served as a member of the board of directors, Chair of the nominating and corporate
governance committee and member of the audit committee for CarLotz, Inc. from February 2020 to December 2022. Mr. Skinner also serves
on the board of directors of Ares Commercial Real Estate (NYSE: ACRE) since 2016. He has previously served on the board of directors of
Hudson Ltd. (NYSE: HUD), Acamar Partners (NASDAQ: ACAM), and Fossil Group, Inc. [Nasdaq: FOSL] Mr. Skinner is also on the Advisory Board
of RevTech, an incubator/accelerator focused on the retail technology. Mr. Skinner held various senior management positions with Neiman
Marcus Group, Inc. and its related and predecessor companies from June 2001 until his retirement in February 2016, including serving as
Vice Chairman, Executive Vice President, Chief Operating Officer and Chief Financial Officer During his 15 years with NMG, Mr. Skinner
was responsible for numerous areas including: finance, accounting, strategy, business development, distribution and logistics, real estate
and construction, investor relations, legal, and information technology. Prior to NMG, Mr. Skinner was with CompUSA, a pioneer in computer
retailing, which he joined shortly before the initial public offering and left after the sale of the company in 2000 and held various
positions, including Executive Vice President and Chief Financial Officer. Prior to that, Mr. Skinner began his career with Ernst &
Young, an international professional services firm, where he served for sixteen years until 1991, including the last four years as a partner.
Mr. Skinner received his Bachelor’s of Business Administration Degree in Accounting from Texas Tech University and holds his Certified
Public Accounting license in the State of Texas.
The board has determined that Mr. Skinner is well qualified to serve as a director
based on his extensive accounting and audit experience with over 30 years of tax, accounting, financial and executive experience in numerous
areas including: finance, accounting, strategy, business development, distribution and logistics, real estate and construction, investor
relations, legal, and information technology, experience in public accounting and public companies, and service on public company boards,
including chairing audit and compensation committees. |
Executive
Officers
Set
forth below is certain information regarding the Company’s executive officers as of December 31, 2022:
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Name |
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Age |
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Position |
| Jeff
Clementz |
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48 |
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Chief
Executive Officer and Director |
| Oded
Shein |
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61 |
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Chief
Financial Officer |
| Sean
Foy |
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55 |
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Chief Operating
Officer |
____________
Jeff
Clementz biography
is included above under our Board of Directors.
Oded
Shein has
served as the Chief Financial Officer of Shift since March 2021. Prior to joining Shift, Mr. Shein served as Chief Financial Officer of
The Fresh Market, Inc. beginning in August 2018. Prior to that, he served as Executive Vice President and Chief Financial Officer of Stage
Stores from January 2011 to August 2018. From July 2004 until January 2011, Mr. Shein served in various financial positions at Belk, Inc.,
including as its Vice President, Finance and Treasurer. Prior to joining Belk, Inc., Mr. Shein served as the Vice President, Treasurer
of Charming Shoppes, Inc. Mr. Shein serves on the board of directors of Conn’s, Inc. Mr. Shein holds a Bachelor of Business Administration
in Information Systems from Baruch College and a Master of Business Administration in Finance from Columbia University.
Sean
Foy has served
as our Chief Operating Officer since October 2020 and as Chief Operating Officer of Shift Platform, Inc. since November 2018. Prior to
joining Shift, Mr. Foy served as Head of Logistics, Supply Chain and Fulfillment Operations for Enjoy Technology, Inc., an operator of
mobile retail stores across the U.S., U.K. and Canada from February 2017 until July 2017 and then as Head of Operations through November
2018. He previously served as Director of Operations for Kindle, Fire, Echo and Amazon Devices at Amazon Lab126 from 2014 to 2017. Prior
to joining Amazon Lab126, he served in positions of increasing responsibility for Kobo Europe, Amazon, Grafton Group plc, Ascott Management
Solutions, Primafruit Ltd, Sears and Allied Distillers. He holds a master’s degree in Global Management from the University of Salford.
Delinquent
Section 16(a) Reports
During
the fiscal year ended December 31, 2022 and through March 31, 2023, the filing date for the Annual Report on Form 10-K, three Form
4's were filed late by or on behalf of Toby Russell, one Form 4 was filed late by or on behalf of Jeff Clementz, two Form 4's were filed
late by or on behalf of Sean Foy, one Form 4 was filed late by or on behalf of Karan Gupta, one Form 4 was filed late by or on behalf
of George Arison, one Form 4 was filed late by or on behalf of Emily Melton, one Form 4 was filed late by or on behalf of Manish Patel,
one Form 4 was filed late by or on behalf of Adam Nash, one Form 4 was filed late by or on behalf of Victoria McInnis, one Form 4 was
filed late by or on behalf of Kellyn Smith Kenny, one Form 4 was filed late by or on behalf of Jason Krikorian, and one Form 4 was filed
late by or on behalf of Oded Shein.
Equity
dispositions from Mr. Russell related to tax withholding were not reported within two business days of February 1, 2022, and the Form
4 filed on February 28, 2022 on behalf of Mr. Russell corrected the error by reporting the dispositions. An equity disposition for Mr.
Russell related to tax withholding was not reported within two business days of May 20, 2022, and the Form 4 filed on June 6, 2022 on
behalf of Mr. Russell corrected the error by reporting the disposition.
An
equity grant and disposition to Mr. Clementz was not reported within two business days of May 12, 2022, and the Form 4 filed on June 6,
2022 on behalf of Mr. Clementz corrected the error by reporting the equity grant and disposition. The grant and disposition were related
to a modification of certain of Mr. Clementz's previously reported equity awards.
An
equity grant and disposition to each of Messrs. Foy and Gupta was not reported within two business days of May 20, 2022, and the Form
4s filed on June 6, 2022 on behalf of Messrs. Foy and Gupta corrected the errors by reporting the equity grants and dispositions. The
grant and disposition were related to modifications of certain previously reported equity awards.
An
equity disposition for Mr. Foy related to tax withholding was not reported within two business days of February 22, 2023, and the Form
4 filed on March 7, 2023 on behalf of Mr. Foy corrected the error by reporting the disposition.
An
equity disposition for Mr. Arison related to tax withholding was not reported within two business days of May 20, 2022, and the Form 4
filed on June 6, 2022 on behalf of Mr. Arison corrected the error by reporting the disposition.
An
equity grant to each of Mr. Russell, Ms. Melton, Mr. Patel, Mr. Nash, Ms. McInnis, Ms. Smith-Kenny, and Mr. Krikorian was not reported
within two business days of July 13, 2022, and the Form 4s filed from July 18, 2022 to July 20, 2022 on behalf of each respective recipient
corrected the errors by reporting the equity grants.
An
equity disposition for Mr. Shein related to tax withholding was not reported within two business days of February 22, 2023, and the Form
4 filed on March 7, 2023 on behalf of Mr. Shein corrected the error by reporting the disposition.
In
each case, the delinquency was due to an administrative oversight.
Code
of Business Conduct and Ethics
We
have adopted a Code of Business Conduct and Ethics for our employees, officers, and directors, and those of our subsidiaries and affiliates,
a copy of which is available on the Company’s website at www.shift.com.
If we amend or grant a waiver of one or more of the provisions of our Code of Business Conduct and Ethics, we intend to satisfy the requirements
under Item 5.05 of Form 8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Business Conduct and Ethics
that apply to our principal executive officers, principal financial officer and principal accounting officer by posting the required information
on the Company’s website at www.shift.com.
The information found on the website is not part of this filing.
Board
Committees
Each
of our three standing committees of our Board of Directors has the composition and responsibilities described below. In addition, from
time to time, special committees may be established under the direction of our Board of Directors when necessary to address specific issues.
Each of the Audit Committee and Leadership Development, Compensation and Governance Committee operates under a written charter, which
can be found at our website at www.investors.shift.com/corporate-governance/governance-documents.
Any stockholder also may request them in print, without charge, by contacting the Corporate Secretary of Shift Technologies Inc. at 290
Division Street, Suite 400, San Francisco, California 94103.
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| Director |
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Audit
Committee |
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Leadership
Development, Compensation and Governance Committee |
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Finance
Committee |
| Adam
Nash |
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X |
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X |
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X |
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George Arison |
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- |
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- |
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X |
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James Skinner |
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X |
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- |
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- |
| Jeff
Clementz |
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- |
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- |
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X |
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Kellyn Smith
Kenny |
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- |
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X |
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- |
| Kimberly
Sheehy |
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Chair |
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- |
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- |
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Luis Solorzano |
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- |
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- |
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X |
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Toby Russell |
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- |
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- |
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Chair |
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Victoria McInnis |
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X |
|
Chair |
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- |
Audit
Committee Information
Shift
has established an Audit Committee comprised of independent directors. The Audit Committee consists of Ms. McInnis and Sheehy and Messrs.
Skinner and Nash, with Ms. Sheehy serving as its chairperson. Each of the members of the Audit Committee is independent under Nasdaq’s
listing rules and under Rule 10A-3(b)(1)
of the Exchange Act.
The
Audit Committee will at all times be composed exclusively of independent directors who are “financially literate” as defined
under Nasdaq’s listing rules. The Nasdaq listing rules define “financially literate” as being able to read and understand
fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.
In
addition, the Company is required to certify to Nasdaq that the Audit Committee has, and will continue to have, at least one member who
has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience
or background that results in the individual’s financial sophistication. We have determined that Ms. Sheehy satisfies Nasdaq’s
definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules
and regulations of the SEC.
The
Audit Committee is responsible for overseeing the Company’s financial reporting process on behalf of our Board of Directors. The
Audit Committee duties, as specified in more detail in its charter, include but are not limited to reviewing and discussing with management
the Company’s audited and unaudited financial statements and any major issues regarding accounting principles and financial statement
presentations, assessing the Company’s major financial risk exposures, selecting and managing the relationship with the Company’s
independent auditors, and overseeing the Company’s internal accounting and quality-control procedures.
Leadership
Development, Compensation and Governance Committee Information
Shift
has established a Leadership Development, Compensation and Governance Committee comprised of independent directors. The Leadership Development,
Compensation and Governance Committee consists of Mses. McInnis and Smith Kenny and Mr. Nash, with Ms. McInnis serving as its chairperson.
Each of the members of the Leadership Development, Compensation and Governance Committee is independent under Nasdaq’s listing rules
and each qualifies as a “non-employee director” as defined in Rule 16b-3 of the Exchange Act.
The
Leadership Development, Compensation and Governance Committee serves as the Company’s compensation committee and nomination committee.
The committee’s duties, as specified in more detail in its charter, include but are not limited to reviewing, recommending and approving
matters relating to the compensation of executive officers, overseeing the Company’s compensation and benefits programs and policies,
developing the selection criteria for directors and recommending the nomination of directors, and reviewing committee structures, changes
in directors’ qualifications, and other corporate governance matters. The Leadership Development, Compensation and Governance Committee
consults with and acts upon the recommendation of the Chief Executive Officer with respect to compensation matters relating to the other
officers of the Company.
The
committee may delegate any of its responsibilities to one or more subcommittees as it may deem appropriate to the extent allowed by applicable
law and the Nasdaq listing rules.
Finance
Committee Information
Shift
has established a Finance Committee comprised of five directors. The Finance Committee consists of Messrs. Russell, Arison, Clementz,
Nash, and Solorzano, with Mr. Russell serving as its chairperson. The committee’s duties include but are not limited to reviewing
and considering investment and financing transactions and capital structure matters for the Company.
Item 11. EXECUTIVE
COMPENSATION
Overview
We
provide our executives with an annual base salary as a fixed, stable form of compensation, and we grant our executives equity-based compensation
to provide an additional incentive to grow our business and further link the interests of our executives with those of our stockholders.
In addition, we provided certain cash incentive opportunities to our executives for fiscal year 2022 (as described below) to incentivize
the executives to achieve specified financial and operating objectives we believed would help create long-term value for our stockholders.
Certain executives also received retention bonuses in recognition of their value to the Company in meeting its financial and strategic
business objectives. We have also entered into agreements with our executives that provide for severance benefits upon certain terminations
of employment.
The
Leadership Development, Compensation and Governance Committee reviews our executive officers’ overall compensation packages on an
annual basis (or more frequently as it deems warranted) to help ensure we continue to attract and retain highly talented executives and
provide appropriate incentives to continue to grow our company.
We
have opted to comply with the executive compensation rules applicable to "emerging growth companies" and “smaller reporting companies,”
as such terms are defined under the Securities Act, which require compensation disclosure for the Company’s principal executive
officer and the next two most highly compensated executive officers.
The
tabular disclosure and discussion that follow describe our executive compensation program during the fiscal year ended December 31, 2022
with respect to our named executive officers as of December 31, 2022: Jeff Clementz, Chief Executive Officer; Oded Shein, Chief Financial
Officer; and Sean Foy, Chief Operating Officer (collectively, the “named executive officers” or “NEOs”). Effective
February 1, 2022, Mr. Russell voluntarily transitioned from his position as Co-Chief Executive Officer and Mr. Arison became the Company’s
sole Chief Executive Officer. Effective September 1, 2022, Mr. Arison voluntarily transitioned from his position as Chief Executive Officer
and Mr. Clementz became the Company’s Chief Executive Officer.
At
the Company’s Special Meeting of Stockholders held on December 7, 2022, the Company’s stockholders approved a proposal to
authorize a reverse stock split of the Company’s common stock, at a ratio within the range of 1-for-5 to 1-for-10. The Board approved
a 1-for-10 reverse split ratio, and on March 7, 2023, the Company filed a Certificate of Amendment to its Second Amended and Restated
Certificate of Incorporation (the “Charter Amendment”) to effect the reverse split effective March 8, 2023. All share and
per-share amounts have been retrospectively adjusted to reflect the impact of the reverse stock split.
Summary
Compensation Table - 2022
The
following table sets forth the compensation paid to the named executive officers that is attributable to services performed during fiscal
years 2022 and 2021.
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Name and Principal
Position |
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Year |
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Salary
($) |
|
Bonus
($)(1) |
|
Stock
Awards ($)(2) |
|
Option
Awards ($) |
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Nonequity
Incentive Plan Compensation ($)(3) |
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All
Other Compensation ($) |
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Total
($) |
| George
Arison |
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2022 |
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467,083 |
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- |
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- |
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- |
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354,000 |
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122,917 |
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(4) |
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944,000 |
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| Former
Co-CEO |
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2021 |
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490,000 |
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- |
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21,146,274 |
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- |
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1,470,000 |
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- |
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23,106,274 |
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| Toby
Russell |
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2022 |
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49,165 |
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- |
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- |
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- |
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- |
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540,835 |
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(4) |
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590,000 |
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| Former
Co-CEO |
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2021 |
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490,000 |
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- |
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21,146,274 |
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- |
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1,470,000 |
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- |
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23,106,274 |
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| Jeff
Clementz |
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2022 |
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510,000 |
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1,650,000 |
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- |
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- |
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306,000 |
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- |
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2,466,000 |
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| Chief
Executive Officer |
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| Oded
Shein |
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2022 |
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420,000 |
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400,000 |
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127,950 |
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- |
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168,000 |
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- |
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1,115,950 |
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| Chief
Financial Officer |
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2021 |
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308,750 |
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- |
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2,517,973 |
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- |
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624,000 |
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- |
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3,450,723 |
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| Sean
Foy |
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2022 |
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405,000 |
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440,166 |
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126,341 |
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- |
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162,000 |
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8,925 |
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(5) |
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1,142,432 |
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| Chief
Operating Officer |
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2021 |
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357,504 |
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- |
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2,288,431 |
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- |
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715,542 |
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30,955 |
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3,392,432 |
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____________
(1)
Bonuses were paid pursuant to the each executive’s respective employment agreement, as amended. For more information, please see
below under “Material Compensatory Agreements.”
(2)
In accordance with SEC rules, these amounts represent the aggregate grant date fair value of the stock awards granted to the named executive
officer during the applicable fiscal year computed in accordance with ASC 718. Shift’s equity awards valuation approach and related
underlying assumptions for awards granted in 2022 and 2021 are described in Note 2 “Summary of Significant Accounting Policies -
Stock-Based Compensation Expense” and Note 14 “Stock-Based Compensation Plans” to the accompanying Consolidated Financial
Statements. The reported amounts do not necessarily reflect the value that may be realized by the executive with respect to the awards,
which will depend on future changes in stock value and may be more or less than the amount shown.
(3)
Each of our NEOs was eligible to earn a performance-based annual bonus for 2022, as described in more detail below under “- Material
Compensatory Agreements - 2022 Annual Bonuses.” The amounts the NEOs earned, as reflected in the table above, were paid in cash.
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| Name |
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2022
Target Bonus |
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2022
Earned Bonus |
| George
Arison |
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$ |
1,180,000 |
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$ |
354,000 |
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| Toby
Russell |
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$ |
1,180,000 |
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|
$ |
— |
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| Jeff
Clementz |
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$ |
765,000 |
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$ |
306,000 |
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| Oded
Shein |
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$ |
420,000 |
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$ |
168,000 |
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| Sean
Foy |
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$ |
405,000 |
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$ |
162,000 |
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(4)
Messrs. Arison and Russell received salary continuation payments pursuant to their respective employment and transition agreements. For
more information, please see below under “Material Compensatory Agreements.”
(5)
Mr. Foy received $30,955 and 8,925 for accommodations expenses in 2021 and 2022, respectively. The perquisite was discontinued in March
2022.
Material
Compensatory Agreements
Arison
Employment Agreement
Mr.
Arison serves as the Company’s Chief Executive Officer pursuant to that certain Employment Agreement dated as of October 13, 2020
(as amended by that certain First Amendment to the Employment Agreement dated as of February 24, 2022, the “Arison Employment Agreement”).
The Arison Employment Agreement does not have a specified term and is subject to termination by either party at any time.
The
Arison Employment Agreement provides for a base salary of $490,000 per year through 2021 and a base salary of $590,000 commencing in 2022,
which thereafter is subject to review and may be increased (but not decreased) by the Leadership Development, Compensation and Governance
Committee. Pursuant to the agreement, Mr. Arison received an annual bonus of $75,000 for continued employment through the end of 2020.
Beginning with 2021, Mr. Arison is eligible for an annual incentive bonus with a target set at no less than 200% of his annual base salary,
subject to achievement of performance goals to be established by the Leadership Development, Compensation and Governance Committee in
consultation with Mr. Arison. The agreement provides that for 2021, Mr. Arison was eligible to earn (i) a bonus equaling 200% of his 2021
annual salary if the Company met the performance goals established by the Leadership Development, Compensation and Governance Committee
based on the 2021 budget as approved by the Board of Directors, and (ii) an additional 100% of his 2021 annual salary if the Company met
the performance goals established by the Leadership Development, Compensation and Governance Committee based on stretch goals when compared
to the Company’s 2021 budget as approved by the Board of Directors. The Arison Employment Agreement also provides that Mr. Arison
is eligible to receive a bonus of $1,750,000 in connection with the IAC Merger, which amount was paid in full on October 31, 2020. The
Arison Employment Agreement also provides that Mr. Arison is eligible to participate in certain benefit plans made available to the Company’s
executives, and that Mr. Arison is entitled to paid time off (vacation, holiday, and sick leave) in accordance with the Company’s
policies; provided, however, that Mr. Arison may take five weeks of paid time off annually. All equity awards granted to Mr. Arison under
the Shift 2014 Stock Incentive Plan that were outstanding and unvested as of October 13, 2020 became fully vested on March 31, 2021.
Pursuant
to the Arison Employment Agreement, on February 2, 2021, the Company granted Mr. Arison 228,320 restricted stock units that vest based
on the passage of time (“Time RSUs”) and 76,106 restricted stock units that vest upon the achievement of specified performance
metrics (“Performance RSUs”). On April 5, 2021, (i) the Company and Mr. Arison entered into an amendment to the foregoing
grant, whereby 104,427 Time RSUs were rescinded and cancelled, and (ii) the Company newly granted Mr. Arison 104,427 Time RSUs. 123,893
of Mr. Arison’s Time RSUs vest quarterly from January 12, 2021 through July 31, 2022 and 104,427 of Mr. Arison’s Time RSUs
vest quarterly from July 12, 2022 through October 12, 2023, in each case, subject to Mr. Arison’s continued employment through each
applicable vesting date. Mr. Arison’s 76,106 Performance RSUs vest quarterly over the two-year period commencing on October 13,
2022, subject to the achievement of the applicable pre-determined performance target for the applicable performance year and Mr. Arison’s
continued employment through each applicable vesting date.
If
Mr. Arison is terminated without cause or resigns for good reason (as such terms are defined in the Arison Employment Agreement), he will
be entitled to receive as severance: (i) continued payment of his base salary for 18 months (at the rate in effect for the year in which
his termination occurs) and (ii) a prorated annual bonus for the year in which his termination occurs (determined based on actual performance
against the Company goals established for the year and with any personal goals to be considered to be fulfilled on a prorated basis).
In addition, Mr. Arison will be entitled to continued health insurance coverage if he timely elects continuation coverage under the Consolidated
Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for up to 18 months on substantially the same terms as provided to the
Company’s other senior executives, provided he pays an amount equal to the amount active employees pay for such coverage as of the
date of his termination. Mr. Arison’s right to receive these severance benefits is conditioned upon his timely execution of a release
of claims in favor of the Company and continued compliance with the confidentiality, non-solicitation and other restrictive covenants
contained in the Arison Employment Agreement.
The
Arison Employment Agreement also provides that if a change of control of the Company occurs, any payments or benefits provided to Mr.
Arison that constitute “parachute payments” within the meaning of Internal Revenue Code Section 280G will either be paid in
full (and subject to applicable excise tax) or reduced to the extent necessary so that no portion of such payments will be subject to
the excise tax, whichever results in the greatest economic benefit to Mr. Arison on an after-tax basis.
Arison
Transition Agreement
In
connection with his transition from employment with the Company, the Company and Mr. Arison entered into a Transition and Separation Agreement
on October 17, 2022 (the “Agreement”) that reflects the terms of his transition and the benefits he is eligible to receive.
Pursuant to the Agreement, Mr. Arison will be entitled to receive the following benefits: (i) a cash payment equal to eighteen (18) months
of his 2022 monthly base salary, payable in equal installments on the Company’s regular payroll cycles over an 18-month period following
his termination of employment, (ii) payment of his 2022 annual bonus, prorated for the number of days employed by the Company in 2022
and determined based on actual performance (with any personal goals considered to be fulfilled), and payable at such time that annual
bonuses are otherwise generally paid to employees of the Company, and (iii) payment of COBRA premiums for eighteen (18) months following
the Separation Date (to the extent Mr. Arison elects COBRA continuation coverage), less amounts equal to the amount active employees pay
for such coverage during such time period, and subject to reduction or elimination if Mr. Arison becomes entitled to duplicative benefits
through other employment. The Company and Mr. Arison also agreed that Mr. Arison will resign as Chairman of the Board at the next Board
meeting following the Separation Date. Mr. Arison is not resigning as a member of the Board.
In addition,
upon execution of the Agreement and in connection with his October 14, 2022 termination of employment, Mr. Arison will provide a general
waiver and release of claims in favor of the Company. Mr. Arison will be subject to certain restrictive covenants following his termination
of employment with the Company.
Russell
Employment Agreement
Mr.
Russell served as the Company’s Co-Chief Executive Officer and President pursuant to that certain Employment Agreement dated as
of October 13, 2020 (as amended by that certain First Amendment to the Employment Agreement dated as of August 17, 2021, the “Russell
Employment Agreement”). Mr. Russell voluntarily transitioned from his position as Co-Chief Executive Officer, effective February
1, 2022, pursuant to that certain Transition and Separation Agreement dated as of November 4, 2021 (the “Russell Transition Agreement”),
which is discussed below.
The
Russell Employment Agreement provided for a base salary of $490,000 per year through 2021 and a base salary of $590,000 commencing in
2022. Pursuant to the agreement, Mr. Russell received an annual bonus of $75,000 for continued employment through the end of 2020. Beginning
with 2021, Mr. Russell was eligible for an annual incentive bonus with a target set at no less than 200% of his annual base salary, subject
to achievement of performance goals to be established by the Leadership Development, Compensation and Governance Committee in consultation
with Mr. Russell. The agreement provided that for 2021, Mr. Russell was eligible to earn (i) a bonus equaling 200% of his 2021 annual
salary if the Company met the performance goals established by the Leadership Development, Compensation and Governance Committee based
on the 2021 budget as approved by the Board of Directors, and (ii) an additional 100% of his 2021 annual salary if the Company met the
performance goals established by the Leadership Development, Compensation and Governance Committee based on stretch goals when compared
to the Company’s 2021 budget as approved by the Board of Directors. The Russell Employment Agreement also provided for him to receive
a bonus of $1,592,955 in connection with the IAC Merger, which amount was paid in full on October 31, 2020. The bonus amount was reduced
from $1,750,000 to $1,592,955 and Mr. Russell instead received a bonus in October 2020 (as described under “Russell Bonus Letter”
below) to assist him with satisfying certain partial recourse promissory notes executed by Mr. Russell in favor of the Company. The Russell
Employment Agreement also provided that Mr. Russell was eligible to participate in certain benefit plans made available to the Company’s
executives, and that Mr. Russell was entitled to paid time off (vacation, holiday, and sick leave), in accordance with the Company’s
policies; provided, however, that Mr. Russell was permitted to take five weeks of paid time off annually. All equity awards granted to
Mr. Russell under the Shift 2014 Stock Incentive Plan that were outstanding and unvested as of October 13, 2020 became fully vested on
March 31, 2021.
Pursuant
to the Russell Employment Agreement, on February 2, 2021 the Company granted Mr. Russell 228,320 Time RSUs and 76,106 Performance RSUs.
On April 5, 2021, (i) the Company and Mr. Russell entered into an amendment to the foregoing grant, whereby 104,427 Time RSUs were rescinded
and cancelled, and (ii) the Company newly granted Mr. Russell 104,427 Time RSUs. 123,893 of Mr. Russell’s Time RSUs vest quarterly
from January 12, 2021 through July 31, 2022 and 104,427 of Mr. Russell’s Time RSUs vest quarterly from July 12, 2022 through October
12, 2023, in each case subject to Mr. Russell’s continued employment. Mr. Russell’s 76,106 Performance RSUs vest quarterly
over the two-year period commencing on October 13, 2022, subject to the achievement of the applicable pre-determined performance target
for the applicable performance year and Mr. Russell’s continued employment through each applicable vesting date. Following Mr. Russell’s
voluntary separation from the Company, certain of his outstanding and unvested equity awards vested pursuant to the terms of the Russell
Transition Agreement, as described below. The remainder of his unvested restricted stock units were forfeited in accordance with the terms
of the applicable award agreement.
The
Russell Employment Agreement also provided that if a change of control of the Company occurred, any payments or benefits provided to Mr.
Russell that constituted “parachute payments” within the meaning of Internal Revenue Code Section 280G would either be paid
in full (and subject to applicable excise tax) or reduced to the extent necessary so that no portion of such payments would be subject
to the excise tax, whichever resulted in the greatest economic benefit to Mr. Russell on an after-tax basis.
Russell
Transition Agreement
Mr.
Russell entered into the Russell Transition Agreement in connection with his voluntary transition from the Company as its Co-Chief Executive
Officer, effective February 1, 2022. After his transition from employment on February 1, 2022, Mr. Russell has continued to serve as a
non-employee director of the Company (and is expected to do so until the completion of his current term in 2023) and is also serving in
an advisory capacity to the senior management of the Company until May 1, 2022 to assist with the orderly transition of his duties and
responsibilities.
Pursuant
to the Russell Transition Agreement, Mr. Russell is entitled to receive a cash payment equal to $590,000 (i.e., his 2022 base salary),
payable in equal installments on the Company’s regular payroll cycles for 12 months. In addition, Mr. Russell is entitled to a cash
payment equal to his annual bonus for 2022, prorated for the number of days he was employed by the Company in 2022 and determined based
on actual performance (with any personal goals considered to be fulfilled), and payable at such time that annual bonuses are otherwise
generally paid to employees of the Company. The Russell Transition Agreement also provides that Mr. Russell will receive payment of COBRA
premiums for 12 months following February 1, 2022, less amounts equal to the amount active employees pay for such coverage during such
time period, and subject to reduction or elimination if Mr. Russell becomes entitled to duplicative benefits through other employment.
The Russell Transition Agreement further provides that Mr. Russell’s outstanding and unvested equity awards as of February 1, 2022
shall continue to vest for 3 months following such date, if any such awards would be eligible to vest by May 1, 2022. Following his transition
from employment with the Company, Mr. Russell remains subject to certain restrictive covenants from the Russell Employment Agreement,
which covenants were incorporated into the Russell Separation Agreement and remain in full force and effect.
Clementz
Employment Agreement
Pursuant
to the employment agreement entered into between the Company and Mr. Clementz, dated September 27, 2021 (the “Employment Agreement”),
Mr. Clementz shall initially receive an annual base salary of $450,000, increasing to $510,000 beginning January 1, 2022. Mr. Clementz
shall also receive a signing bonus of $500,000, payable in two equal installments on April 1, 2022 and October 1, 2022, subject to continued
employment with the Company through each applicable payment date. Mr. Clementz will be eligible to participate in annual bonus programs
established by the Company, with a target annual bonus amount of up to two hundred fifty percent (250%) of Mr. Clementz’s base salary
in 2021, which amount will be prorated for the remainder of 2021. Thereafter, Mr. Clementz will be eligible to participate in annual bonus
programs established by the Company with a target annual bonus amount of up to at least one hundred fifty percent (150%) of Mr. Clementz’s
base salary in the applicable performance year. Mr. Clementz will also be eligible to receive a one-time special cash bonus of $2,000,000,
payable on October 1, 2024, subject to continued employment with the Company and achievement of performance acceptable to the Board of
Directors of the Company (the “Board”) in the sole discretion of the Board.
Also pursuant
to the Employment Agreement, Mr. Clementz will be granted no later than December 31, 2021 an equity grant of 78,178 restricted stock units
(“RSUs”). 58,633 RSUs will vest based on the passage of time (“Time RSUs”), with twenty-five percent (25%) of
Time RSUs vesting on Mr. Clementz’s one-year anniversary and the remaining Time RSUs vesting quarterly in equal installments over
the following three years. 19,544 RSUs will vest quarterly over the third and fourth years of Mr. Clementz’s employment, provided
that the applicable performance hurdle for the applicable performance year is met. The vesting of the foregoing RSUs is subject to Mr.
Clementz’s continued employment with the Company.
First
Clementz Amendment
Also on February
24, 2022, Shift Platform entered into a First Amendment to the Employment Agreement with Jeff Clementz, President of the Company (the
“Clementz Amendment”), amending that certain Employment Agreement dated as of September 27, 2021, by and between Shift Platform
and Mr. Clementz (the “Clementz Agreement”). The Clementz Amendment provides that, at the discretion of the Company’s
Leadership Development, Compensation and Governance Committee, the second installment payment of the Signing Bonus (as defined in the
Clementz Agreement) may be paid prior to September 27, 2022 but no earlier than April 30, 2022. The Clementz Amendment also accelerates
the grant date of the Year Four Special Equity Grant (as defined in the Clementz Agreement) to be no later than December 31, 2022. In
addition, the Clementz Amendment provides that Mr. Clementz is eligible to receive a new cash bonus equal to $650,000 payable on or within
thirty (30) days of April 1, 2022, subject to Mr. Clementz’s employment being in good standing through the payment date. As well,
the definitions of “Cause” and “Good Reason” in the Clementz Agreement were amended to provide revised triggering
criteria and notice provisions. The Clementz Amendment also amended the performance vesting criteria of the Year Three Special Equity
Grant (as defined in the Clementz Agreement) and Year Four Special Equity Grant, including in each case to add new performance criteria.
Second
Clementz Amendment
On May 12, 2022,
Shift Platform, Inc. (“Shift Platform”), a wholly-owned subsidiary of the Company entered into a Second Amendment to the Employment
Agreement with Jeff Clementz, President of the Company (the “Second Clementz Amendment”), amending that certain Employment
Agreement by between Shift Platform and Mr. Clementz dated as of September 27, 2021, as amended on February 24, 2022 (the “Clementz
Agreement”).
The Second Clementz
Amendment accelerates the payment dates of the Special Cash Incentive (as defined in the Clementz Agreement), subject to continued employment
through the applicable payment date, with the first installment equal to $500,000 to be paid on the first payroll date that occurs after
September 30, 2022, and the second installment equal to $1,500,000 to be paid on the first payroll date that occurs after September 30,
2023. The Second Clementz Amendment also provides that in the event that Mr. Clementz voluntarily resigns employment with the Company
without Good Reason (as defined in the Clementz Agreement), after September 30, 2022, but prior to September 30, 2023, Mr. Clementz must
return to the Company the amount equal to the portion of the Special Cash Incentive actually received as of such time. Additionally, the
Second Clementz Amendment provides that upon a “Change in Control Termination” (as defined in the Second Clementz Amendment),
Mr. Clementz will be eligible to receive the full payment of the Special Cash Incentive (less any portion already paid) and full vesting
of all outstanding unvested equity awards held by Mr. Clementz under the Shift Technologies, Inc. 2020 Omnibus Equity Compensation Plan,
as amended, subject to Mr. Clementz’s employment being in good standing as of his termination date and executing a release of claims
in favor of the Company. In addition, the Second Clementz Amendment provides that if Mr. Clementz voluntarily resigns from his position
for any reason or no reason, no payments shall be due under the Clementz Agreement except (i) the Accrued Obligations (as defined in the
Clementz Agreement) and (ii) if Mr. Clementz voluntarily resigns after September 30, 2022, but prior to payment of the 2022 Annual Bonus,
then he will be paid a prorated portion of the 2022 Annual Bonus (as defined in the Second Clementz Amendment) at such time that bonuses
are paid to other employees of the Company, subject to achievement of the applicable performance criteria.
The Second Clementz
Amendment also amended the 2021 Equity Grant (as defined in the Clementz Agreement) to (i) adjust the vesting criteria, including elimination
of performance-based vesting criteria, and (ii) provide for accelerated vesting of the 2021 Equity Grant in certain circumstances. The
Second Clementz Amendment also amended the Clementz Agreement to combine the “Year Three Special Equity Grant” (as defined
in the Clementz Agreement) and the “Year Four Special Equity Grant” (as defined in the Clementz Agreement) into a single Special
Equity Grant (as defined in the Second Clementz Amendment), and increase the restricted stock units (“RSUs”) underlying such
grant to a total of 58,633 RSUs, to be granted no later than May 31, 2022. The Special Equity Grant shall vest in full on September 30,
2023. Each of the 2021 Equity Grant and the Special Equity Grant is subject to Mr. Clementz’s continued employment with the Company
through the applicable vesting dates, and, for the Special Equity Grant, achievement of performance acceptable to the Board. Additionally,
the Second Clementz Amendment provides that if the Company terminates Mr. Clementz’s employment without Cause (as defined in the
Clementz Agreement) after September 30, 2022 but prior to September 30, 2023, and subject to Mr. Clementz’s employment being in
good standing as of the date of such termination of employment and the Release Requirement (as defined in the Clementz Agreement), Mr.
Clementz shall receive a prorated portion of each of the 2021 Equity Grant and the Special Equity Grant.
Third
Clementz Amendment
On August 8,
2022, Shift Platform, Inc. (“Shift Platform”), a wholly-owned subsidiary of the Company entered into a Third Amendment to
the Employment Agreement with Mr. Clementz (the “Third Clementz Amendment”), amending that certain Employment Agreement by
between Shift Platform and Mr. Clementz dated as of September 27, 2021, as amended on February 24, 2022 and May 12, 2022 (the “Clementz
Agreement”).
The Third Clementz
Amendment amends Mr. Clementz’s duties to reflect his new role as Chief Executive Officer as of the Succession Effective Date. The
Third Clementz Amendment also provides that as Chief Executive Officer, Mr. Clementz shall report to the Shift Board. The Third Clementz
Amendment further provides that Mr. Clementz shall be appointed to the Shift Board on or as soon as reasonably practical following the
Succession Effective Date and that the Company will include Mr. Clementz as a nominee for election as a director at each applicable annual
shareholder meeting during the Term (as defined in the Clementz Agreement).
The Third Clementz
Amendment provides that subject to the Shift Board’s determination in its sole discretion, Mr. Clementz will be eligible for an
additional equity award grant in the third quarter of 2023 based on such factors as determined by the Shift Board (including, without
limitation, the performance of the Chief Executive Officer and Company during his period as Chief Executive Officer of the Company, and
evaluation of market compensation data taking into account Chief Executive Officer’s position with the Company and customary award
grants of similar publicly-traded companies). In addition, the definition of “Good Reason” was amended to provide revised
triggering criteria provisions.
The Third Clementz
Amendment also provides that subject to Mr. Clementz’s employment through the applicable grant date, Mr. Clementz shall be eligible
to receive a new equity grant in 2023 to be made no later than June 30, 2023 (the “2023 Promotion Equity Grant”) of 150,000
restricted stock units (“RSUs”). Subject to Mr. Clementz’s continuous employment with the Company or an Affiliate of
the Company (as defined in the Clementz Agreement) through the applicable vesting date, 82,500 RSUs will vest on a quarterly basis over
a three (3) year period based on the passage of time starting on March 31, 2024 (the “Time RSUs”) and 67,500 RSUs shall vest
on a quarterly basis starting in 2024 upon the achievement of specified Performance Hurdles (as defined in the Third Clementz Amendment)
for the applicable Performance Year (as defined in the Third Clementz Amendment) has been met (the “Performance RSUs” or “PSUs”).
Notwithstanding the foregoing, the Company’s obligation to grant the 2023 Promotion Equity Grant is contingent upon approval by
the Shift Board.
Under the 2023
Promotion Equity Grant, a prorated number of unvested Time RSUs (less Time RSUs previously vested) shall be accelerated and become vested
if the Company terminates Mr. Clementz’s employment without Cause (as defined in the Clementz Agreement) or if Mr. Clementz resigns
for Good Reason (as defined in the Third Clementz Amendment) on or after October 1, 2023, and subject to Mr. Clementz’s employment
being in good standing as of the date of such termination of employment and the Release Requirement (as defined in the Third Clementz
Amendment). Additionally, the Third Clementz Amendment provides that if the Company terminates Mr. Clementz’s employment without
Cause or if Mr. Clementz resigns for Good Reason, within one (1) year following a Change of Control (as defined in the Third Clementz
Amendment), subject to the Release Requirement, any Time RSUs and PSUs that are outstanding and unvested pursuant to the 2023 Promotion
Equity Grant as of the date of termination shall become vested when the General Release (as defined in the Clementz Agreement) is in full
force and effect (and no longer subject to revocation).
Shein
Employment Agreement
Mr.
Shein serves as the Company’s Chief Financial Officer pursuant to that certain Employment Agreement dated as of March 15, 2021 (as
amended by that certain First Amendment to the Employment Agreement dated as of January 27, 2022, the “Shein Employment Agreement”).
The Shein Employment Agreement does not have a specified term and is subject to termination by either party at any time.
The
Shein Employment Agreement provides for a base salary of $390,000 per year, which is subject to review and may be increased (but not decreased)
by the Leadership Development, Compensation and Governance Committee. For 2021, Mr. Shein was eligible to receive (i) 100% of his annual
salary if the Company met the performance goals established by the Leadership Development, Compensation and Governance Committee for senior
executives based on the 2021 budget as approved by the Board of Directors, and (ii) an additional 100% of his annual salary if the Company
met the performance goals for 2021 established by the Leadership Development, Compensation and Governance Committee, based on stretch
goals when compared to the Company’s 2021 annual budget as approved by the Board of Directors, pro-rated for the number of days
Mr. Shein worked for the Company in 2021. Beginning in 2022, Mr. Shein is eligible for an annual incentive bonus with a target set at
no less than 100% of his annual base salary, subject to achievement of performance goals to be established by the Leadership Development,
Compensation and Governance Committee in consultation with Mr. Arison. The Shein Employment Agreement also provides that Mr. Shein is
eligible to participate in certain benefit plans made available to the Company’s executives, and that Mr. Shein is entitled to paid
time off (vacation, holiday, and sick leave) in accordance with the Company’s policies.
Pursuant
to the Shein Employment Agreement, on March 5, 2021, the Company granted Mr. Shein 20,498 Time RSUs and 6,832 Performance RSUs. 25% of
the Time RSUs will vest on March 15, 2022, and the remaining Time RSUs will vest quarterly in equal installments thereafter, in each case
subject to Mr. Shein’s continued employment through the applicable vesting date. The Performance RSUs vest quarterly over the 2-year
period commencing on March 14, 2023, subject to achievement of specified performance targets for the applicable performance year and Mr.
Shein’s continued employment through each applicable vesting date.
If
Mr. Shein is terminated without cause or resigns for good reason (as such terms are defined in the Shein Employment Agreement), he will
be entitled to receive as severance: (i) continued payment of his base salary for 6 months (at the rate in effect for the year in which
his termination occurs) and (ii) a prorated annual bonus for the year in which his termination occurs (determined based on actual performance
against the Company goals established for the year and with any personal goals to be considered to be fulfilled on a prorated basis).
In addition, Mr. Shein will be entitled to continued health insurance coverage if he timely elects continuation coverage under COBRA for
up to 12 months on substantially the same terms as provided to the Company’s other senior executives, provided he pays an amount
equal to the amount active employees pay for such coverage as of the date of his termination. Mr. Shein’s right to receive these
severance benefits is conditioned upon his timely execution of a release of claims in favor of the Company and continued compliance with
the confidentiality, non-solicitation and other restrictive covenants contained in the Shein Employment Agreement.
The
Shein Employment Agreement also provides that if a change of control of the Company occurs, any payments or benefits provided to Mr. Shein
that constitute “parachute payments” within the meaning of Internal Revenue Code Section 280G will either be paid in full
(and subject to applicable excise tax) or reduced to the extent necessary so that no portion of such payments will be subject to the excise
tax, whichever results in the greatest economic benefit to Mr. Shein on an after-tax basis.
Shein
Award Agreement
On
December 2, 2021, the Company granted Mr. Shein (i) 9,375 Time RSUs, 25% of which will vest on March 15, 2023, and the remaining of which
will vest quarterly in equal installments thereafter, in each case subject to Mr. Shein’s continued employment through the applicable
vesting date, and (ii) 31,250 Performance RSUs, which will vest quarterly over the 2-year period commencing on March 14, 2024 subject
to achievement of specified performance targets for the applicable performance year and Mr. Shein’s continued employment through
each applicable vesting date. The foregoing grant was made in connection with Leadership Development, Compensation and Governance Committee’s
determination to increase Mr. Shein’s base salary to $420,000 beginning January 1, 2022.
Shein
Amended and Restated Retention Bonus Agreement
On September
7, 2022, Shift Technologies, Inc. (the “Company”) entered into an Amended and Restated Retention Bonus Agreement with Oded
Shein, Chief Financial Officer of the Company (the “Amended and Restated Retention Agreement”). Pursuant to the Amended and
Restated Retention Agreement (which replaces and supersedes in its entirety that certain retention bonus agreement between Mr. Shein and
the Company dated June 22, 2022), Mr. Shein will be eligible to receive a cash award of $1,700,000 to be paid in three (3) installments,
subject to continued employment with the Company as a full-time employee in good standing through the applicable payment date and executing
a release agreement in favor of the Company, to be paid as follows: (i) the first installment equal to $400,000 to be paid no later than
the first payroll date that occurs after the release effective date applicable to such payment, (ii) the second installment equal to $650,000
to be paid no later than the first payroll date that occurs after the release effective date applicable to such payment, and (iii) the
third installment equal to $650,000 to be paid no later than the first payroll date that occurs after the release effective date applicable
to such payment.
The Amended
and Restated Retention Agreement further provides that if (i) Mr. Shein resigns from his position for any reason, (ii) Mr. Shein’s
employment with the Company is terminated due to death or disability (as defined under the Company’s long-term disability plan and/or
policy applicable to the Employee, as may be modified or implemented from time to time), or (iii) the Company terminates Mr. Shein’s
employment for “Cause” (as defined in the then existing employment agreement between Mr. Shein and the Company, if any, and
otherwise as defined in the Amended and Restated Retention Agreement), in each case, at any time prior to November 1, 2024, Mr. Shein
will no longer be eligible to receive any unpaid installments of the cash award. In addition, if the Company terminates Mr. Shein’s
employment without “Cause” prior to November 1, 2023, Mr. Shein will receive any unpaid first and second installments of the
cash award, subject to Mr. Shein executing a release agreement in favor of the Company. In addition, if the Company terminates Mr. Shein’s
employment without Cause prior to November 1, 2023, Mr. Shein will no longer be eligible to receive any unpaid third installment of the
cash award. If the Company terminates Mr. Shein’s employment without Cause after November 1, 2023, but prior to November 1, 2024,
then, subject to Mr. Shein executing a release agreement in favor of the Company, Mr. Shein shall receive any unpaid portion of the third
installment of the cash award.
Foy
Retention Agreement
On
January 10, 2022, the Company entered into a Retention Bonus Agreement with Mr. Foy (the “Foy Retention Agreement”). Pursuant
to the Foy Retention Agreement, Mr. Foy will be eligible to receive a cash payment of $2,000,000 (the “Retention Bonus”) subject
to his remaining a full-time employee in good standing through November 19, 2023 and executing a release of claims in favor of the Company.
If (i) Mr. Foy resigns from his position for any reason, (ii) Mr. Foy’s employment with the Company is terminated due to death or
disability (as defined under the Company’s long-term disability plan and/or policy applicable to Mr. Foy, as may be modified or
implemented from time to time), or (iii) the Company terminates Mr. Foy’s employment for cause (as defined in the Foy Retention
Agreement), in each case, at any time prior to November 19, 2023, Mr. Foy will no longer be eligible to receive the Retention Bonus. If
the Company terminates Mr. Foy’s employment without cause prior to May 19, 2023, Mr. Foy will no longer be eligible to receive the
Retention Bonus. However, if the Company terminates Mr. Foy’s employment without cause after May 19, 2023 and prior to November
19, 2023, then, subject to Mr. Foy executing a release of claims in favor of the Company, Mr. Foy will be paid a prorated portion of the
Retention Bonus (with such proration based on whole months worked).
Foy
Amended and Restated Retention Bonus Agreement
On
June 22, 2022, Shift Technologies, Inc. (the “Company”) entered into an Amended and Restated Retention Bonus Agreement with
Sean Foy, Chief Operating Officer of the Company (the “Amended and Restated Retention Agreement”). Pursuant to the Amended
and Restated Retention Agreement (which replaces and supersedes in its entirety that certain retention bonus agreement between Mr. Foy
and the Company dated January 7, 2022), Mr. Foy will be eligible to receive a cash award of $2,000,000 to be paid in two installments,
subject to continued employment with the Company as a full-time employee in good standing through the applicable payment date and executing
a release agreement in favor of the Company, with the first installment equal to $400,000 to be paid no later than the first payroll date
that occurs after the release effective date applicable to such payment, and the second installment equal to $1,600,000 to be paid no
later than the first payroll date that occurs after the release effective date applicable to such payment. If (i) Mr. Foy resigns from
his position for any reason, (ii) Mr. Foy’s employment with the Company is terminated due to death or disability (as defined under
the Company’s long-term disability plan and/or policy applicable to the Employee, as may be modified or implemented from time to
time), or (iii) the Company terminates Mr. Foy’s employment for “Cause” (as defined in the Amended and Restated Retention
Agreement), in each case, at any time prior to November 19, 2023, Mr. Foy will no longer be eligible to receive any unpaid installments
of the cash award. In addition, if the Company terminates Mr. Foy’s employment without Cause prior to July 19, 2023, Mr. Foy will
no longer be eligible to receive any unpaid installments of the cash award. If the Company terminates Mr. Foy’s employment without
Cause after July 19, 2023 but prior to November 19, 2023, then, subject to Mr. Foy executing a release agreement in favor of the Company,
Mr. Foy shall receive a prorated payment of any unpaid portion of the second installment of the cash award.
Modifications
of Performance Based Awards
On
August 23, 2022, The Leadership Development, Compensation and Governance Committee modified all of the outstanding Performance RSUs previously
granted to each of Messrs. Shein and Foy to remove the performance hurdles based on the market price of our Class A Common Stock. The
modified awards are Time RSUs, which shall vest on the respective measurement dates of each performance hurdle included in the original
awards.
Severance
Plan for Key Management Employees
On
January 6, 2022, the Compensation Committee adopted a Severance Plan for Key Management Employees (the “Severance Plan”) to
provide severance benefits to certain key management employees of the Company, including but not limited to the NEOs; provided, however,
that the Severance Plan will not apply to the Chief Executive Officer until his participation is approved by the Board, which is expected
to occur in the first quarter of 2022. Participating executives are eligible to receive severance benefits if their employment is terminated
for cause or without good reason (each as defined in the Severance Plan) and they enter into a release agreement with the Company within
60 days of such termination. Specific severance benefits are dependent on each executive’s position and whether their termination
occurs upon or within one year of a change in control (as defined in the Shift Technologies, Inc. 2020 Omnibus Equity Compensation Plan,
as amended (the “Equity Plan”)). Generally, following a qualifying termination, an executive will be eligible to receive certain
cash severance and the option to receive certain continuing health insurance coverage under COBRA. If such termination occurs upon or
within one year of a change in control, an executive will also be eligible to receive: (i) a payment equal to the executive’s prorated
annual bonus, (ii) vesting of all or a portion of the outstanding unvested equity awards held by the executive under the Equity Plan,
and (iii) to the extent applicable to the executive, a payment equal to a prorated portion of any unpaid retention payment payable under
a written retention agreement then in place between the executive and the Company. Severance benefits payable under the Severance Plan
are not intended to be duplicative of other separation payments or benefits that may be payable to an executive under another agreement
or arrangement with the Company, including, for the avoidance of doubt, under any executive employment agreement.
2022
Annual Bonuses
Each
of the named executive officers were eligible to receive an annual incentive bonus up to the following amounts, pursuant to their respective
employment agreement or offer letter, as applicable:
|
|
|
|
|
|
|
|
|
|
Name |
|
Payout
Upon Achievement of Target Goals |
|
George Arison |
|
200%
Base Salary |
|
Toby Russell |
|
200%
Base Salary |
| Jeff
Clementz |
|
150%
Base Salary |
|
Oded Shein |
|
100%
Base Salary |
|
Sean Foy |
|
100%
Base Salary |
For fiscal year
2022, the Company’s target goals were based on sliding scale, with 100% attainment at total consolidated Adjusted EBITDA loss: of
$(127.5) million and 0% attainment at $(136.0) million. For the purpose of determining bonus amounts, the thresholds were applied excluding
the incremental Adjusted EBITDA loss resulting from the bonuses themselves.
In
fiscal year 2022, the Company’s Adjusted EBITDA loss excluding the annual bonuses was $(132.9) million Accordingly, the Leadership
Development, Compensation and Governance Committee determined to pay 2022 annual bonuses in amounts reflecting the 40% achievement of
target goals for fiscal year 2022.
Adjusted
EBITDA is non-GAAP financial measure used to supplement our financial statements, which are based on U.S. generally accepted accounting
principles (GAAP). For a definition and discussion of this measure, see “Definitions of Non-GAAP Financial Measures” at the
end of this Item 11.
Retirement
Benefit Programs
We
maintain the Shift Technologies 401(k) Plan, a tax-qualified defined contribution plan (the “401(k) Plan”) that provides retirement
benefits to employees. The NEOs (other than Mr. Russell, who voluntarily transitioned from employment with the Company on February 1,
2022) are eligible to participate in the 401(k) Plan on the same terms as other participating employees. Employees may elect to defer
a percentage of their eligible compensation (not to exceed the statutorily prescribed annual limit) in the form of elective deferral contributions
to the 401(k) Plan. The plan also has a “catch-up contribution” feature for employees aged 50 or older (including those who
qualify as “highly compensated” employees) who can defer amounts over the statutory limit that applies to all other employees.
We do not currently provide matching or other contributions under the plan.
Outstanding
Equity Awards at 2022 Fiscal Year-End
The
following table sets forth outstanding equity awards held by the named executive officers as of December 31, 2022:
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|
Option
Awards |
|
Stock
Awards |
|
Name |
|
Grant
Date |
|
Number
of securities underlying unexercised options (#) exercisable |
|
Number
of securities underlying unexercised options (#) unexercisable |
|
Equity
incentive plan awards: Number of securities underlying unexercised unearned options (#) |
|
Option
exercise price ($) |
|
Option
expiration date |
|
Number
of shares or units of stock that have not vested (#) |
|
Market
value of shares of units of stock that have not vested ($)(1) |
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(1) |
|
George Arison |
|
7/31/2019(2) |
|
33,604 |
|
|
- |
|
|
- |
|
|
3.00 |
|
7/31/2029 |
|
- |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Toby Russell |
|
9/13/2017(3) |
|
49 |
|
- |
|
- |
|
0.80 |
|
9/13/2027 |
|
- |
|
- |
|
- |
|
- |
|
|
7/31/2019(3) |
|
52,546 |
|
|
- |
|
- |
|
3.00 |
|
7/31/2029 |
|
- |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Jeff
Clementz |
|
12/2/2021(4) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
29,316 |
|
|
43,681 |
|
|
- |
|
- |
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|
|
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|
Oded Shein |
|
5/5/2021(5) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
11,529 |
|
|
17,178 |
|
|
- |
|
- |
|
|
12/2/2021(6) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
9,375 |
|
|
13,969 |
|
|
- |
|
- |
|
|
6/3/2022(7) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
3,500 |
|
|
5,215 |
|
|
- |
|
- |
|
|
8/23/2022(8) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
9,957 |
|
|
14,836 |
|
|
- |
|
- |
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|
Sean Foy |
|
1/28/2019(9) |
|
2,786 |
|
|
- |
|
- |
|
3.00 |
|
|
1/28/2029 |
|
- |
|
- |
|
- |
|
- |
|
|
7/31/2019(10) |
|
7,895 |
|
|
1,814 |
|
|
- |
|
3.00 |
|
|
7/31/2029 |
|
- |
|
- |
|
- |
|
- |
|
|
2/2/2021(11) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
6,659 |
|
|
9,922 |
|
|
- |
|
- |
|
|
12/2/2021(12) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
7,031 |
|
|
10,476 |
|
|
- |
|
- |
|
|
6/3/2022(13) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
3,500 |
|
|
5,215 |
|
|
- |
|
- |
|
|
8/23/2022(14) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
9,784 |
|
|
14,578 |
|
|
- |
|
- |
____________
(1) Determined
based on the closing price of $1.49 of Class A common stock on the Nasdaq Capital Market on the last business day of fiscal year 2022
(December 31, 2022).
(2) Pursuant
to the terms of the Arison Employment Agreement, all outstanding options issued under the Shift 2014 Stock Incentive Plan became fully
vested on March 31, 2021.
(3) Pursuant
to the terms of the Russell Employment Agreement, all outstanding options issued under the Shift 2014 Stock Incentive Plan became fully
vested on March 31, 2021.
(4) The unvested
Time RSUs vest on September 30, 2023, subject to continued employment.
(5) Twenty-five
percent (25%) of the unvested Time RSUs vested on March 15, 2022, and the remaining Time RSUs vest quarterly through March 15, 2025, subject
to continued employment.
(6) Twenty-five
percent (25%) of the unvested Time RSUs vest on March 15, 2023, and the remaining Time RSUs vest quarterly through March 15, 2026, subject
to continued employment.
(7) The award
vests on May 20, 2023, subject to continued employment.
(8) Of the 9,957
unvested Time RSUs, 6,832 vest in eight equal quarterly installments beginning on June 14, 2023 and ending on March 14, 2025, and 3,125
unvested Time RSUs vest in eight equal quarterly installments beginning on June 14, 2024 and ending on March 14, 2026.
(9) The unvested
portion of this option vests monthly through August 19, 2022. Pursuant to the terms of the Shift 2014 Stock Incentive Plan, the unvested
portion may be exercised prior to the vesting date, with any shares acquired on such “early exercise” of the option being
subject to the option’s vesting schedule. The portion of the option reported in the “unexercisable” column of the table
represents the portion of the option that was unvested as of December 31, 2022.
(10) The unvested
portion of this option vests monthly through December 1, 2023. Pursuant to the terms of the Shift 2014 Stock Incentive Plan, the unvested
portion may be exercised prior to the vesting date, with any shares acquired on such “early exercise” of the option being
subject to the option’s vesting schedule. The portion of the option reported in the “unexercisable” column of the table
represents the portion of the option that was unvested as of December 31, 2022.
(11) Unvested
Time RSUs vest quarterly beginning January 12, 2023 and through October 12, 2024, subject to continued employment.
(12) Twenty-five
percent (25%) of the unvested Time RSUs vest on November 19, 2022, and the remaining Time RSUs vest quarterly through August 19, 2025,
subject to continued employment.
(13) The award
vests on May 20, 2023, subject to continued employment.
(14) Of the 9,784
unvested Time RSUs, 6,659 vest in eight equal quarterly installments beginning on January 12, 2023 and ending on October 12, 2024, and
3,125 unvested Time RSUs vest in eight equal quarterly installments beginning on February 18, 2024 and ending on November 18, 2025.
Compensation
of Directors
Our
Leadership Development, Compensation and Governance Committee periodically reviews the competitiveness of our Directors Compensation Policy
applicable to non-employee directors. Directors who are also our employees or officers do not receive additional compensation for serving
on the Board of Directors. Members of the Board of Directors are not paid separate fees for meeting attendance.
Shares
for equity awards pursuant to the Directors Compensation Policy are issued from our stockholder-approved equity compensation plan in effect
at the time of award (currently the Equity Plan) and pursuant to which we are authorized to grant shares of our common stock and share-based
awards to directors. To the extent we are unable to issue registered shares under an effective Form S-8 at the time quarterly cash payments
are to be made, any amount otherwise payable in shares shall be paid in cash for purposes of the relevant quarter.
Our
Directors Compensation Policy was determined in accordance with industry practice and standards. Our non-employee directors are compensated
with a combination of cash and equity in the Company, with additional compensation for service on Board committees. The Directors Compensation
Policy for fiscal year 2022, which has been in effect since February 10, 2021, includes the following compensation components for services
rendered by our non-employee directors:
•
Annual cash retainer of $40,000.
•
Additional annual cash retainer of $50,000 for serving as the Lead Director, if applicable.
•
Additional annual cash retainer of $20,000 for serving as Chairperson and $10,000 for serving as a member (other than the chairperson)
of the Audit Committee, payable quarterly in arrears.
•
Additional annual cash retainer of $15,000 for serving as Chairperson and $5,000 for serving as a member (other than the chairperson)
of the Leadership, Development, Compensation and Governance Committee, payable quarterly in arrears.
•
Annual grant of Time RSUs having a fair market value (as determined under the Equity Plan) of $100,000 on the date of our annual meeting
of stockholders and which Time RSUs shall vest in full on the date of the first annual meeting of stockholders following the grant date
as explained above.
If
a non-employee director is elected at any time other than at our annual meeting of stockholders, such director will receive an initial
grant of restricted stock units having a fair market value (as determined under the Equity Plan) of $100,000 on the date of such non-employee
director’s election, if applicable, prorated in the case of service for less than an entire quarterly period or annual period, as
the case may be.
Additionally,
a non-employee director may elect annually in advance to receive fees that would otherwise be payable in cash in the form of shares, in
which case the non-employee director would receive at the time the cash fees would have been payable, shares of stock having an equivalent
fair market value (as determined under the Equity Plan) on such date.
Director
Compensation Table - 2022
The
following table sets forth the total compensation paid during fiscal year 2022 to the non-employee directors for their service on the
Board of Directors. Mr. Clementz, who were employed by the Company during fiscal year 2022, did not receive any additional compensation
for his service on the Board of Directors in 2022. Messrs. Arison and Russell were employed by the Company for a part of fiscal year 2022,
received prorated compensation from the date their employment with the Company ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Fees
Earned or Paid in Cash ($) |
|
Stock
Awards ($)(1) |
|
Option
Awards ($) |
|
All
Other Compensation ($) |
|
Total
($) |
|
Kellyn Smith
Kenny(2) |
|
45,000 |
|
|
97,818 |
|
|
- |
|
- |
|
142,818 |
|
|
Jason Krikorian(3) |
|
81,667 |
|
|
101,062 |
|
|
- |
|
- |
|
182,729 |
|
|
Victoria McInnis(4) |
|
60,000 |
|
|
97,818 |
|
|
- |
|
- |
|
157,818 |
|
|
Emily Melton(5) |
|
47,083 |
|
|
97,818 |
|
|
- |
|
- |
|
144,901 |
|
|
Adam Nash(6) |
|
50,000 |
|
|
97,818 |
|
|
- |
|
- |
|
147,818 |
|
|
Manish Patel(7) |
|
55,000 |
|
|
97,818 |
|
|
- |
|
- |
|
152,818 |
|
|
George Arison(8) |
|
8,391 |
|
|
- |
|
- |
|
- |
|
8,391 |
|
|
Toby Russell(9) |
|
33,333 |
|
|
99,303 |
|
|
- |
|
- |
|
132,636 |
|
|
Kimberly Sheehy(10) |
|
3,710 |
|
|
- |
|
- |
|
- |
|
3,710 |
|
|
Luis Solorzano(11) |
|
2,473 |
|
|
- |
|
- |
|
- |
|
2,473 |
|
|
James Skinner(12) |
|
3,401 |
|
|
- |
|
- |
|
- |
|
3,401 |
|
____________
(1)
As of December 31, 2022, the following Time RSUs were outstanding:
|
|
|
|
|
|
|
|
|
|
Name |
|
Number
of Time RSUs |
| Kellyn
Smith Kenny |
|
9,316 |
|
| Jason
Krikorian |
|
- |
| Victoria
McInnis |
|
9,316 |
|
| Emily
Melton |
|
- |
| Adam
Nash |
|
9,316 |
|
| Manish
Patel |
|
- |
| George
Arison |
|
- |
| Toby
Russell |
|
9,872 |
|
| Kimberly
Sheehy |
|
- |
| Luis
Solorzano |
|
- |
| James
Skinner |
|
- |
(2) Ms. Smith
Kenny’s 2022 compensation includes amounts for her service as a member of the Leadership Development, Compensation and Governance
Committee.
(3) Mr. Krikorian
resigned from the Board on December 9, 2022, forfeiting all outstanding Time RSUs. The amount of cash compensation and number of Time
RSUs granted to Mr. Krikorian in 2022 reflects a timing difference in compensation as a result of Mr. Krikorian receiving prorated compensation
for service during the previous term.
(4) Ms. McInnis’s
2022 compensation includes amounts for her service as Chairperson of the Audit Committee.
(5) Ms. Melton’s
2022 compensation includes amounts for her service as Lead Director of the Board of Directors and a member of the Leadership Development,
Compensation and Governance Committee. Ms. Melton resigned from the Board on August 31, 2022, forfeiting all outstanding Time RSUs.
(6) Mr. Nash’s
2022 compensation includes amounts for his service as a member of the Audit Committee.
(7) Mr. Patel’s
2022 compensation includes amounts for his service as chairperson of the Leadership Development, Compensation and Governance Committee.
Mr. Patel resigned from the Board on December 9, 2022, forfeiting all outstanding Time RSUs.
(8) Mr. Arison's
cash compensation is prorated for service as a non-employee director beginning on October 14, 2022.
(9)The number
of Time RSUs granted to Mr. Russell in 2022 reflects a timing difference in compensation as a result of Mr. Russel receiving prorated
compensation for service during the previous term.
(10) Ms. Sheehy
joined the Board of Directors on December 9, 2022. Ms. Sheehy's cash compensation was prorated to reflect a partial year of service.
(11) Mr. Solorzano
joined the Board of Directors on December 9, 2022. Mr. Solorzano's cash compensation was prorated to reflect a partial year of service.
(12) Mr. Skinner
joined the Board of Directors on December 9, 2022. Mr. Skinner's cash compensation was prorated to reflect a partial year of service.
Definitions
of Non-GAAP Financial Measures
In
this Item 11, we refer to Adjusted EBITDA. This is a non-GAAP financial measure used to supplement our financial statements, which are
based on U.S. generally accepted accounting principles (GAAP). We define Adjusted EBITDA as net loss adjusted to exclude stock-based compensation
expense, depreciation and amortization, net interest income or expense, impact of change in fair value of financial instruments, warrant
milestone impact, and other cash and non-cash based income or expenses that we do not consider indicative of our core operating performance.
The
non-GAAP amounts for Adjusted EBITDA shown in the following table should not be considered as substitutes for net income or other data
prepared and reported in accordance with GAAP, but should be viewed in addition to our reported results prepared in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
| Adjusted
EBITDA Reconciliation |
|
|
|
|
2022 |
|
2021 |
| Net
Loss |
|
|
|
|
$ |
(172,042) |
|
|
$ |
(166,268) |
|
| (+)
Interest and other expense, net |
|
|
|
|
10,950 |
|
|
8,082 |
|
| (+)
Stock-based compensation |
|
|
|
|
13,029 |
|
|
25,130 |
|
| (+)
Change in fair value of financial instruments |
|
|
|
|
— |
|
|
(18,893) |
|
| (+)
Depreciation & amortization |
|
|
|
|
11,662 |
|
|
6,253 |
|
|
(+)
Warrant impact adjustment - contra-revenue (1) |
|
|
|
|
637 |
|
|
637 |
|
|
(+)
Merger and acquisition transaction costs (2) |
|
|
|
|
19,972 |
|
|
141 |
|
|
(+)
Costs related to closed locations excluding severance
(3) |
|
|
|
|
11,857 |
|
|
— |
|
| (+)
Sales tax penalty accrual (recovery) |
|
|
|
|
(2,149) |
|
|
5,951 |
|
| (+)
At-the-market sales agreement costs |
|
|
|
|
266 |
|
|
— |
|
| (+)
Provision for income taxes |
|
|
|
|
326 |
|
|
226 |
|
|
(+)
Severance, retention, and CEO costs (4) |
|
|
|
|
8,455 |
|
|
1,166 |
|
|
(+)
Restructuring costs from inventory, property and equipment, and capitalized internal-use software (5) |
|
|
|
|
17,447 |
|
|
— |
|
| (+)
Impairment expense |
|
|
|
|
17,319 |
|
|
— |
|
| (+)
Bargain purchase gain |
|
|
|
|
(76,685) |
|
|
— |
|
| Adjusted
EBITDA |
|
|
|
|
$ |
(138,956) |
|
|
$ |
(137,575) |
|
(1)Includes
non-cash charges related to the Lithia warrants and recorded as contra-revenue on the consolidated statements of operations and comprehensive
loss.
(2)Includes
transaction costs for the Fair acquisition in the second quarter and the CarLotz merger in the third and fourth quarters.
(3)Includes
non-cash lease charges related to the closure of the Company’s facilities in Miami and Las Vegas. Includes termination fees and
non-cash lease expense related to leases of closing hubs due to the Restructuring Plan. Includes fulfillment, lease, payroll, facilities,
and other operating expenses related to the process of closing various hubs due to the Restructuring Plan.
(4)Includes
severance amounts related to the Restructuring Plan and the CEO transition.
(5)Includes
net losses on inventory liquidated as part of the previously announced Restructuring Plan. Includes losses on property sold or disposed
from closing hubs due to the Restructuring Plan. Includes non-cash charges related to the early decommissioning of capitalized internal
use software costs due to changes in business strategy arising from the Restructuring Plan
Item 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table sets forth information as of December 31, 2022 with respect to the shares of common stock that may be issued upon
the exercise of options and other rights under our existing equity compensation plans and arrangements in effect as of December 31,
2022. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options and the
number of shares remaining available for future grant, excluding the shares to be issued upon exercise of outstanding options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Plan
category |
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights |
|
Weighted-
average exercise price of outstanding options, warrants and rights |
|
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| Equity
compensation plans approved by security holders |
|
955,835 |
|
|
$ |
27.47 |
|
|
354,649 |
|
| Equity
compensation plans not approved by security holders |
|
52,829 |
|
|
$ |
8.70 |
|
|
53,345 |
|
| Total |
|
1,008,664 |
|
|
$ |
26.02 |
|
|
407,994 |
|
On
January 1, 2023, 344,261 additional shares were authorized for issuance under the 2020 Plan’s evergreen refresh mechanism and
added to the pool of shares available to be issued to settle future share-based compensation awards.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding the beneficial ownership of our outstanding shares of common stock as of March
17, 2023 by: (a) each person or “group” (as such term is used in Section 13(d)(3) of the Exchange Act) who is known by us
to beneficially own 5% or more of our shares of Common Stock, (b) each of our directors and each of our NEOs, and (c) all of our directors
and executive officers as a group. Except as otherwise indicated, the persons named in the table below have sole voting and investment
power with respect to all of the common stock owned by them.
Unless
otherwise provided, beneficial ownership of common stock of the Company is based on 17,228,479 shares of common stock of the Company issued
and outstanding as of March 31, 2023.
Unless
otherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to all shares
of common stock beneficially owned.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock |
| Name
and Address of Beneficial Owners |
|
Number |
|
%
of class |
| Directors
and Executive Officers:(1) |
|
|
|
|
| Jeff
Clementz |
|
27,592 |
|
|
* |
| George
Arison(2) |
|
218,384 |
|
|
1.3 |
% |
| Toby
Russell(3) |
|
188,601 |
|
|
1.1 |
% |
| Oded
Shein(4) |
|
10,692 |
|
|
* |
| Sean
Foy(5) |
|
34,211 |
|
|
* |
| Victoria
McInnis(6) |
|
3,470 |
|
|
* |
| Kellyn
Smith Kenny |
|
1,970 |
|
|
* |
| Adam
Nash(7) |
|
3,696 |
|
|
* |
| James
Skinner |
|
18,175 |
|
|
* |
| Kimberly
Sheehy |
|
17,469 |
|
|
* |
| Luis
Solorzano(8) |
|
454,278 |
|
|
2.6 |
% |
| All
directors and executive officers as a group (eleven individuals) |
|
978,538 |
|
|
5.7 |
% |
|
|
|
|
|
| 5%
or Greater Beneficial Owners: |
|
|
|
|
| TRP
Capital Partners, LP (9) |
|
1,563,872 |
|
|
9.1 |
% |
| Lithia
Motors Inc.(10) |
|
1,282,782 |
|
|
7.4 |
% |
____________
* Less than 1
percent.
(1) Unless otherwise
noted, the business address of each of the following individuals is c/o Shift Technologies, Inc., 290 Division Street, Suite 400, San
Francisco, CA 94103.
(2) Includes
5,304 shares allocated to Mr. Arison and held in escrow, pursuant to the terms of the IAC Merger Agreement (“Additional Shares”).
Includes 15,191 shares, including their allocation of Additional Shares, held by Mr. Arison’s family members that Mr. Arison exercises
voting control over pursuant to a permanent voting proxy, which shares Mr. Arison disclaims beneficial ownership of. Includes 33,604 shares
of common stock subject to currently exercisable options and restricted stock unit awards subject to release within 60 days of March 17,
2023.
(3) Includes
5,497 Additional Shares allocated to Mr. Russell and held in escrow, pursuant to the terms of the IAC Merger Agreement. Includes 52,596
shares of common stock subject to currently exercisable options.
(4) Includes
3,625 restricted stock unit awards subject to release within 60 days of March 17, 2023.
(5) Includes
898 Additional Shares allocated to Mr. Foy and held in escrow, pursuant to the terms of the IAC Merger Agreement. Includes 14,160 shares
of common stock subject to currently exercisable options and restricted stock unit awards subject to release within 60 days of March 17,
2023. If the stock options are exercised in full as of the date of this table, 48,650 shares would be subject to a right of repurchase
in our favor.
(6) Shares are
held directly by the Victoria McInnis Grantor Retained Annuity Trust, u/a/d May 26, 2021.
(7) Includes
13 Additional Shares allocated to Mr. Nash and held in escrow, pursuant to the terms of the IAC Merger Agreement. Shares are held directly
by the Adam and Carolyn Nash Family Trust. Includes 2,265 shares underlying stock options and restricted stock unit awards subject to
release within 60 days of March 17, 2023.
(8) Includes
89,346 shares issuable upon the exercise of warrants that are currently exercisable and held directly by Mr. Solorzano. Includes 269,378
shares held directly by Acamar Partners Sponsor I LLC. As a managing member of Acamar Partners Sponsor I LLC, Mr. Solorzano may be deemed
to share beneficial ownership of the shares of common stock owned by such entities. Mr. Solorzano disclaims beneficial ownership of such
shares, except to the extent of any pecuniary interest therein.
(9) Per the Schedule
13G filed on December 19, 2022: TRP Capital Partners, LP has the sole voting power with respect to 1,563,872 shares and the sole dispositive
power with respect to 1,563,872 shares. The address of TRP Capital Partners, LP is 380 N. Old Woodward Ave., Suite 205, Birmingham, MI.
(10) Per the
Schedule 13G filed on February 8, 2023: Lithia Motors, Inc. has the sole voting power with respect to 1,282,782 shares and the sole dispositive
power with respect to 1,282,782 shares. The address of Lithia Motors, Inc. is 150 North Bartlett Street, Medford, OR.
Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review
of Related Party Transactions
Pursuant
to the charter of the Audit Committee, the Audit Committee reviews with both management and the independent auditors and approves any
related party transactions or dealing between parties related to the Company. In accordance with this policy, the Audit Committee reviews
and considers for approval any transactions in which (i) Shift or one of its subsidiaries is a participant, (ii) the amount involved exceeds
$120,000 and (iii) a related person has a direct or indirect material interest, other than transactions available to all employees of
the Company generally. In assessing a related party transaction brought before it for approval the Audit Committee considers, among other
factors it deems appropriate, whether the related party transaction is on terms no less favorable than terms generally available to an
unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction.
The Audit Committee may then approve or disapprove the transaction in its discretion.
For
purposes of this policy, “related person” and “transaction” have the meanings contained in Item 404 of Regulation
S-K. The individuals and entities that are considered “related persons” include:
•
Directors, nominees for director and executive officers of Shift;
•
Any person known to be the beneficial owner of five percent or more of our common stock (a “5% Stockholder”); and
•
Any immediate family member, as defined in Item 404(a) of Regulation S-K, of a director, nominee for director, executive officer or 5%
Stockholder.
Any
related person transaction will be disclosed in the applicable SEC filing as required by the rules of the SEC.
Related
Party Transactions
Sales
with Related Party
The
Company operated a one-sided marketplace (“OSM”) program whereby the Company acquired cars from various sources in Oxnard,
California and sold them directly and solely to Lithia. The Company invoiced Lithia based on the purchase price of the car plus an agreed
upon margin. During the year ended December 31, 2022 and 2021, the Company recognized approximately $4.7 million and $16.8 million,
respectively, of sales from the OSM agreement with Lithia. The OSM program was terminated in the second quarter of 2022 with the last
sale to Lithia taking place in March 2022.
During
the period from the execution of the Merger Agreement with CarLotz on August 9, 2022 until the merger closing on December 9, 2022, the
Company sold vehicles totaling $3.0 million to CarLotz, included in retail revenue, net on the consolidated statements of operations.
Accounts
Receivable from Related Party
As
of December 31, 2021, the Company had $2.1 million in outstanding accounts receivable from Lithia, which is comprised $2.0 million
in vehicle sales and $77 thousand, respectively, in commissions based on the number of loan contracts booked with US bank. There were
no receivables due from Lithia at December 31, 2022.
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 8,666,154 shares of Legacy Shift common stock at an exercise price of $0.10 per
share (the “Warrant Shares”). The Warrant Shares were scheduled to vest and become exercisable in six separate tranches of
1,444,359 shares each. Vesting and exercisability was 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. All Warrant Shares became vested prior to the Vesting Termination Date and were exercised
prior to the IAC Merger.
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. The estimated fair value of the in substance upfront
payment to AWS was $2.8 million with an offsetting entry recorded to additional paid-in capital, representing a capital transaction
with a related party.
Milestone
5 was met in October 2019 and the Company recorded the 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 $0.4 million and was recorded to other non-current
assets on the consolidated balance sheets. The combined asset recorded of $3.2 million is subject to amortization over a five-year
period expected period of benefit. During year ended December 31, 2022 and 2021 the Company amortized $0.6 million and $0.6 million, respectively
of the asset as a reduction to finance and insurance sales, which is recorded within other revenue, net on the consolidated statements
of operations. As of December 31, 2022 and 2021, the remaining asset, net of amortization, was $0.6 million and $1.2 million,
respectively.
Lease
Agreements
On
November 1, 2018 and July 10, 2019, pursuant to Milestone 3 and 4, 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 Concord and Portland facilities
of Lithia, respectively. Both agreements expired on October 12, 2021. During the year ended December 31, 2021, total costs related to
these agreements were $0.1 million. The lease costs were expensed to selling, general and administrative expenses on the consolidated
statements of operations.
Flooring
Line of Credit Guarantee
In
February 2019, the Company entered into a guarantee agreement with Lithia. The interest rate was 1.50% per annum based on a daily outstanding
flooring line of credit and was payable monthly to Lithia. For the year ended December 31, 2021, the Company recorded $78 thousand of
interest and $2.1 million of deferred borrowing cost amortization to interest and other expense, net on the consolidated statements of
operations. The guarantee expired coterminously with the FLOC on October 11, 2021.
Accounts
Payable Due to Related Party
As
of December 31, 2022 and 2021 payables and accruals to Lithia consisted of other miscellaneous expenses of $0.2 million and $0.2
million, respectively.
Director
Independence
As
a result of our common stock being listed on the Nasdaq Stock Market (“Nasdaq”), Shift adheres to the rules of such exchange
in determining whether a director is independent. Nasdaq listing rules require that a majority of the board of directors of a company
listed on Nasdaq be composed of “independent directors,” which is defined generally as a person other than an officer or employee
of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of
directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director.
Our
Board of Directors has undertaken a review of its composition, the composition of its committees and the independence of our directors
and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent
judgment in carrying out his or her responsibilities. Based upon information requested from and provided by each director concerning his
or her background, employment and affiliations, including family relationships, our Board of Directors has determined that none of Victoria
McInnis, Kellyn Smith Kenny, Adam Nash, Kimberly Sheehy, Luis Solorzano and James Skinner has a relationship that would interfere with
the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors qualifies as
an independent director under the Nasdaq listing rules. In making these determinations, our Board of Directors considered any current
and prior relationships that each non-employee director has with the Company and all other facts and circumstances our Board of Directors
deemed relevant in determining independence, including the beneficial ownership of our common stock by each non-employee director.
Item 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Principal
Accountant Fees and Services
The
table below sets forth the aggregate fees billed by Deloitte in 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
2021 |
|
Audit Fees(1) |
|
$ |
2,887,000 |
|
|
$ |
1,165,000 |
|
|
Audit-Related
Fees(2) |
|
586,000 |
|
|
— |
|
|
Tax Fees |
|
— |
|
|
— |
|
|
All Other Fees(3) |
|
3,790 |
|
|
3,790 |
|
Total |
|
$ |
3,476,790 |
|
|
$ |
1,168,790 |
|
____________
(1)
Audit fees include fees for services performed to comply with the standards established by the Public Company Accounting Oversight Board,
including the audit of our consolidated financial statements. This category also includes fees for audits provided in connection with
statutory filings or services that generally only the principal independent auditor reasonably can provide, such as comfort letters, consents
and assistance with and review of our SEC filings.
(2) Represents
fees billed for services involving due diligence performed in connection with the Company's acquisitions of Fair Dealer Services, LLC
and CarLotz, Inc.
(3) Represents
a subscription to the Deloitte Accounting Research Tool.
Pre-Approval
Policies and Procedures
The
charter of the Audit Committee requires that the Audit Committee (i) approve the annual audit fees to be paid to the independent auditors
and (ii) pre-approve all audit services, as well as all permitted non-audit services to be performed for the Company by the independent
auditors as and to the extent required by the Exchange Act and the Sarbanes-Oxley Act of 2002. The Audit Committee must consider whether
the provision of permitted non-audit services by the independent auditors is compatible with maintaining the auditor’s independence,
and shall solicit the input of management and the independent auditors on that issue. The chair of the Audit Committee (or any other member
if the chair is unavailable) may pre-approve such services in between Committee meetings; provided, however, that the chair (or such other
member) must disclose all such pre-approved services to the full Committee at the next scheduled meeting.
Part
IV
Item
15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report
(1)
All financial statements
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| Index
to Consolidated Financial Statements |
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(2)
Financial Statement Schedules
Not
applicable to Smaller Reporting Companies.
(3)
Exhibits required by Item 601 of Regulation S-K
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| Exhibit
No. |
|
Description |
| 2.1 |
|
Asset
Purchase Agreement, dated as of March 14, 2022, by and among Shift Technologies, Inc., Fair Financial Corp., Fair IP, LLC, and, solely
for purposes of Article IV, Article IX and Article X thereof, Cayman Project 2 Limited (incorporated by reference to Exhibit 2.1 of the
Current Report on Form 8-K filed on March 15, 2022). |
| 2.2 |
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| 2.3 |
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| 2.4 |
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| 3.1 |
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| 3.2 |
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| 3.3 |
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| 4.1 |
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| 4.2 |
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| 10.1 |
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| 10.2 |
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| 10.3 |
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| 10.4 |
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| 10.5 |
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| 10.6 |
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| 10.7 |
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| 10.8 |
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| 10.9 |
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| 10.10 |
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| 10.11 |
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| 10.12 |
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| 10.13 |
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| 10.14 |
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| 10.15 |
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| 10.16 |
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| 10.17 |
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| 10.18 |
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| 10.19 |
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| 10.20 |
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| 10.21 |
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| 10.22 |
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Note
Purchase Agreement, dated May 11, 2022, by and between Shift Technologies, Inc., the subsidiaries of Shift Technologies, Inc. as guarantors
thereto, and SB LL Holdco, Inc., as purchaser (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on May
13, 2022). † |
| 10.23 |
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|
| 10.24 |
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| 10.25 |
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| 10.26 |
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| 10.27 |
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| 10.28 |
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| 10.29 |
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| 10.30 |
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| 10.31 |
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| 10.32 |
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|
| 10.33 |
|
Amendment
to Inventory Financing and Security Agreement, dated as of February 7, 2023, by and among Shift Technologies, Inc., CarLotz, Inc., a Delaware
corporation, CarLotz Group, Inc., CarLotz, Inc., an Illinois corporation, CarLotz California, LLC, Shift Operations LLC, Ally Bank and
Ally Financial Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 10, 2023) |
| 14.1 |
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| 21.1 |
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| 23.1 |
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| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
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| 101.INS |
|
Inline
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within
the Inline XBRL document |
| 101.SCH |
|
Inline
XBRL Taxonomy Extension Schema Document |
| 101.CAL |
|
Inline
XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
|
Inline
XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
|
Inline
XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE |
|
Inline
XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 |
|
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
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† |
Schedules and
similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Shift agrees to furnish a supplemental copy of any
omitted schedule or attachment to the SEC upon request. |
| * |
Indicates management
contract or compensatory plan or arrangement. |
Item 16. FORM
10-K SUMMARY
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
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|
SHIFT
TECHNOLOGIES, INC. |
|
/s/
Oded Shein |
|
Oded
Shein |
|
Chief
Financial Officer |
|
June
29, 2023 |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
|
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|
(Mark
One) |
| ☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For
the quarterly period ended March 31,
2023 |
| ☐ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For
the transition period from _______ to _______ |
Commission
file number: 001-38839
Shift
Technologies, Inc.
(Exact
name of registrant as specified in its charter)
|
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|
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| Delaware |
82-5325852 |
| (State
or other jurisdiction of incorporation or organization) |
(IRS
Employer Identification No.) |
|
|
|
290
Division Street, Suite
400, San
Francisco, California
94103-4893
(Address
of principal executive offices) |
Registrant's
telephone number, including area code: (855)
575-6739
Securities
registered pursuant to Section 12(b) of the Exchange Act:
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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 |
Securities
registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes
☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”,
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated
filer |
☐ |
|
Accelerated filer |
☐ |
|
Non-accelerated
filer |
☒ |
|
Smaller reporting
company |
☒ |
|
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. ☐ |
Indicate by check
mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. ☐
If securities
are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check
mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As
of May 16, 2023, the registrant had 16,956,933
shares of Class A common stock outstanding.
EXPLANATORY
NOTE
Shift Technologies,
Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (the “Amendment”) to the Company’s Quarterly
Report on Form 10-Q for the three-month period ended March 31, 2023, which was originally filed with the Securities and Exchange Commission
(the “SEC”) on May 17, 2023 (the “Original Report”), for the sole purpose of amending Exhibits 31.1 and 31.2 (the
"Exhibits") that were filed with the Original Report. The Exhibits were amended to include the required certifications of internal control
over financial reporting in paragraph 4 of the Exhibits, which were omitted due to administrative oversight.
Except as described
above, no other changes have been made to the Original Report and this Amendment does not modify or update disclosures in the Original
Report and does not reflect subsequent events occurring after the date of the Original Report. Accordingly, this Amendment should be read
in conjunction with the Original Report, which continues to speak as of the date of the Original Report, and the Company’s other
filings with the SEC. The filing of this Amendment is not an admission that the Original Report, when filed, included any untrue statement
of a material fact or omitted to state a material fact necessary to make a statement not misleading.
TABLE
OF CONTENTS
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained
in this Quarterly Report on Form 10-Q that reflect our current views with respect to future events and financial performance, business
strategies, and expectations for our business constitute “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. 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,”
the negative of any of these and any similar expressions may identify forward-looking statements, but the absence of these words does
not mean that a statement is not forward-looking.
Some factors
that could cause actual results to differ include, but are not limited to:
•general
business and economic conditions
and risks
related to the larger automotive ecosystem, including, but not limited to, unemployment levels, consumer confidence, fuel prices, changes
in the prices of used vehicles, and interest rates;
•competition,
and the ability of the Company to grow and manage growth profitably;
•our
history of losses and ability to achieve or maintain profitability in the future;
•our
ability to establish our software as a platform to be used by automotive dealers;
•risks
relating to our inspection, reconditioning and storage facilities;
•impacts
of COVID-19 and other pandemics;
•our
reliance on third-party carriers for transportation;
•our
current geographic concentration where we provide reconditioning services and store inventory;
•cyber-attacks
or other privacy or data security incidents;
•the
impact of copycat websites;
•failure
to adequately protect our intellectual property, technology and confidential information;
•our
reliance on third-party service providers to provide financing;
•the
impact of federal and state laws related to financial services on our third-party service providers;
•risks
that impact the quality of our customers' experience, our reputation, or our brand;
•changes
in the prices of new and used vehicles;
•our
ability to correctly appraise and price vehicles;
•access
to desirable vehicle inventory;
•our
ability to expeditiously sell inventory;
•our
ability to expand product offerings;
•risks
that impact the affordability and availability of consumer credit;
•changes
in applicable laws and regulations and our ability to comply with applicable laws and regulations;
•risks
related to income taxes and examinations by tax authorities;
•access
to additional debt and equity capital;
•potential
dilution resulting from future sales or issuances of our equity securities;
•risks
related to compliance with Nasdaq listing standards;
•risks
related to compliance with the Telephone Consumer Protection Act;
•changes
in government regulation of ecommerce;
•changes
in technology and consumer acceptance of such changes;
•risks
related to online payment methods;
•risks
related to our marketing and branding efforts;
•our
reliance on internet search engines, vehicle listing sites and social networking sites to help drive traffic to our website;
•any
restrictions on the sending of emails or messages or an inability to timely deliver such communications;
•seasonal
and other fluctuations in our quarterly results of operations;
•changes
in the auto industry and conditions affecting automotive manufacturers;
•customers
choosing not to shop online;
•natural
disasters, adverse weather events and other catastrophic events;
•adequacy
and availability of insurance coverage;
•our
dependence on key personnel;
•increases
in labor costs and compliance with labor laws;
•our
reliance on third-party technology and information systems;
•our
use of open-source software;
•claims
asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former
employers;
•significant
disruptions in service on our platform;
•impairment
charges;
•our
level of indebtedness, changes in interest rates, and our reliance on our Flooring Line of Credit with Ally Bank;
•volatility
in the price of our common stock;
•issuances
of our Class A common stock and future sales of our Class A common stock;
•anti-takeover
provisions under Delaware law;
•risks
related to our financial guidance and coverage by securities analysts;
•our
ability to establish and maintain effective internal control over financial reporting;
•the
effect of the announcement of the Restructuring Plan on our ability to retain and hire key personnel and maintain relationships with our
customers, suppliers and others with whom we do business;
•our
ability to successfully realize the anticipated benefits of the Restructuring Plan;
•our
ability to successfully integrate Fair Dealer Services, LLC’s operations, technologies and employees;
•our
ability to realize anticipated benefits and synergies of the Fair acquisition, including the expectation of enhancements to our products
and services, greater revenue or growth opportunities, operating efficiencies and cost savings;
•our
ability to realize anticipated benefits and synergies of the CarLotz Merger, including the expectation of enhancements to our products
and services, greater revenue or growth opportunities, operating efficiencies and cost savings;
•our
ability to ensure continued performance and market growth of the combined company’s business; and
•other
economic, business and/or competitive factors, risks and uncertainties, including those described in Part II, Item 1A. "Risk Factors.”
We do not undertake,
and expressly disclaim, any 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. We caution you not to place undue reliance on the forward-looking
statements, which speak only as of the date of this filing.
Part
I - Financial Information
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(in
thousands, except share and per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2023 |
|
As
of December 31, 2022 |
| ASSETS |
|
|
|
| Current
assets: |
|
|
|
| Cash
and cash equivalents |
$ |
58,784 |
|
|
$ |
96,159 |
|
| Restricted
cash, current |
7,907 |
|
|
10,632 |
|
| Marketable
securities at fair value |
— |
|
|
1,264 |
|
|
Accounts
receivable, net of allowance for doubtful accounts of $603
and $93 |
4,393 |
|
|
4,558 |
|
| Inventory |
34,019 |
|
|
40,925 |
|
| Prepaid
expenses and other current assets |
6,257 |
|
|
7,657 |
|
| Operating
and finance lease assets, property and equipment, accounts receivable, and other assets held for sale or classified as discontinued operations |
12,749 |
|
|
17,226 |
|
| Total
current assets |
124,109 |
|
|
178,421 |
|
| Restricted
cash, non-current |
1,030 |
|
|
1,055 |
|
| Marketable
securities at fair value, non-current |
— |
|
|
707 |
|
| Property
and equipment, net |
2,012 |
|
|
6,797 |
|
| Operating
lease assets |
28,366 |
|
|
44,568 |
|
| Finance
lease assets, net |
112 |
|
|
152 |
|
| Capitalized
website and internal use software costs, net |
9,633 |
|
|
10,657 |
|
| Goodwill |
2,070 |
|
|
2,070 |
|
| Deferred
borrowing costs |
193 |
|
|
268 |
|
| Other
non-current assets |
1,971 |
|
|
3,323 |
|
| Total
assets |
$ |
169,496 |
|
|
$ |
248,018 |
|
|
|
|
|
| LIABILITIES
AND STOCKHOLDERS’ DEFICIT |
|
|
|
| Current
liabilities: |
|
|
|
| Accounts
payable |
$ |
14,280 |
|
|
$ |
12,085 |
|
| Accrued
expenses and other current liabilities |
23,136 |
|
|
33,872 |
|
| Operating
lease liabilities, current |
5,490 |
|
|
8,865 |
|
| Finance
lease liabilities, current |
50 |
|
|
271 |
|
| Flooring
line of credit |
22,165 |
|
|
24,831 |
|
| Operating
and finance lease liabilities and other liabilities associated with assets held for sale or classified as discontinued operations |
18,159 |
|
|
15,432 |
|
| Total
current liabilities |
83,280 |
|
|
95,356 |
|
| Long-term
debt, net |
163,879 |
|
|
163,363 |
|
| Operating
lease liabilities, non-current |
27,245 |
|
|
44,985 |
| Finance
lease liabilities, non-current |
1,496 |
|
|
3,989 |
| Other
non-current liabilities |
65 |
|
|
111 |
|
| Total
liabilities |
275,965 |
|
|
307,804 |
|
|
|
|
|
|
Commitments and
contingencies (Note 10) |
|
|
|
|
|
|
|
| Stockholders’
deficit: |
|
|
|
|
Preferred
stock – par value $0.0001
per share; 1,000,000
shares authorized at March 31, 2023 and December 31, 2022, respectively |
— |
|
|
— |
|
|
Common
stock – par value $0.0001
per share; 500,000,000
shares authorized at March 31, 2023 and December 31, 2022, respectively; 17,227,910
and 17,212,130
shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively |
2 |
|
|
2 |
|
| Additional
paid-in capital |
554,379 |
|
|
552,968 |
|
| Accumulated
other comprehensive loss |
— |
|
|
(3) |
| Accumulated
deficit |
(660,850) |
|
|
(612,753) |
|
| Total
stockholders’ deficit |
(106,469) |
|
|
(59,786) |
|
| Total
liabilities and stockholders’ deficit |
$ |
169,496 |
|
|
$ |
248,018 |
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
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
March 31, |
| |
2023 |
|
2022 |
| Revenue |
|
|
|
| Retail
revenue, net |
$ |
48,907 |
|
|
$ |
183,081 |
|
| Other
revenue, net |
1,652 |
|
|
8,712 |
|
| Wholesale
vehicle revenue |
3,549 |
|
|
27,787 |
|
| Total
revenue |
54,108 |
|
|
219,580 |
|
| Cost
of sales |
50,944 |
|
|
208,792 |
|
| Gross
profit |
3,164 |
|
|
10,788 |
|
| Operating
expenses: |
|
|
|
| Selling,
general and administrative expenses |
42,591 |
|
|
63,537 |
|
| Depreciation
and amortization |
4,399 |
|
|
1,680 |
|
| Loss
on impairment |
931 |
|
|
— |
|
| Total
operating expenses |
47,921 |
|
|
65,217 |
|
| Loss
from operations |
(44,757) |
|
|
(54,429) |
|
| Interest
and other expense, net |
(2,791) |
|
|
(2,578) |
|
| Loss
before income taxes |
(47,548) |
|
|
(57,007) |
|
| Provision
for income taxes |
55 |
|
|
41 |
|
| Net
loss from continuing operations |
(47,603) |
|
|
(57,048) |
|
| Loss
from discontinued operations |
494 |
|
|
— |
|
| Net
loss and comprehensive loss |
$ |
(48,097) |
|
|
$ |
(57,048) |
|
| Net
loss and comprehensive loss per share, basic and diluted |
$ |
(2.84) |
|
|
$ |
(6.97) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
16,920,600 |
|
|
8,182,525 |
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Stockholders' Equity (Deficit)
(in
thousands, except share and per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock |
|
Additional
Paid
in
Capital |
|
Accumulated
Deficit |
|
Accumulated
Other Comprehensive Loss |
|
Total
Stockholders’ Deficit |
|
|
Shares |
|
Amount |
|
|
| Balance
at December 31, 2022 |
|
17,212,130 |
|
|
$ |
2 |
|
|
$ |
552,968 |
|
|
$ |
(612,753) |
|
|
$ |
(3) |
|
|
$ |
(59,786) |
|
| Vesting
of early exercised options |
|
— |
|
|
— |
|
|
14 |
|
|
— |
|
|
— |
|
|
14 |
|
| Stock-based
compensation |
|
— |
|
|
— |
|
|
1,416 |
|
|
— |
|
|
— |
|
|
1,416 |
|
| Issuance
of common stock under stock-based compensation plans, net of shares exchanged for withholding tax |
|
15,780 |
|
|
— |
|
|
(19) |
|
|
— |
|
|
— |
|
|
(19) |
|
| Other
comprehensive income, net of tax |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3 |
|
|
3 |
|
| Net
loss and comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
(48,097) |
|
|
— |
|
|
(48,097) |
|
| Balance
at March 31, 2023 |
|
17,227,910 |
|
|
$ |
2 |
|
|
$ |
554,379 |
|
|
$ |
(660,850) |
|
|
$ |
— |
|
|
$ |
(106,469) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock |
|
Additional
Paid
in
Capital |
|
Accumulated
Deficit |
|
Accumulated
Other Comprehensive Loss |
|
Total
Stockholders’ Equity |
|
|
Shares |
|
Amount |
|
|
| Balance
at December 31, 2021 |
|
8,136,931 |
|
|
$ |
1 |
|
|
$ |
515,982 |
|
|
$ |
(440,711) |
|
|
$ |
— |
|
|
$ |
75,272 |
|
| Issuance
of common stock upon exercise of vested options |
|
1,231 |
|
|
— |
|
|
3 |
|
|
— |
|
|
— |
|
|
3 |
|
| Repurchase
of shares related to early exercised options |
|
(278) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| Vesting
of early exercised options |
|
— |
|
|
— |
|
|
35 |
|
|
— |
|
|
— |
|
|
35 |
|
| Stock-based
compensation |
|
— |
|
|
— |
|
|
4,517 |
|
|
— |
|
|
— |
|
|
4,517 |
|
| Issuance
of common stock under stock-based compensation plans, net of shares exchanged for withholding tax |
|
130,029 |
|
|
— |
|
|
(2,162) |
|
|
— |
|
|
— |
|
|
(2,162) |
|
| Net
loss and comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
(57,048) |
|
|
— |
|
|
(57,048) |
|
| Balance
at March 31, 2022 |
|
8,267,913 |
|
|
$ |
1 |
|
|
$ |
518,375 |
|
|
$ |
(497,759) |
|
|
$ |
— |
|
|
$ |
20,617 |
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March 31, |
| |
2023 |
|
2022 |
| CASH
FLOWS FROM OPERATING ACTIVITIES |
|
|
|
| Net
loss |
$ |
(48,097) |
|
|
$ |
(57,048) |
|
| Adjustments
to reconcile net loss to net cash used in operating activities: |
|
|
|
| Depreciation
and amortization |
4,447 |
|
|
2,019 |
|
| Stock-based
compensation expense |
1,233 |
|
|
4,192 |
|
| Amortization
of operating lease right-of-use assets |
3,388 |
|
|
2,162 |
|
| Contra-revenue
associated with milestones |
601 |
|
|
159 |
|
| Amortization
of debt discounts |
591 |
|
|
365 |
|
| Loss
on impairment |
931 |
|
|
— |
|
| Loss
on disposal of long-lived assets |
3,460 |
|
|
— |
|
| Changes
in operating assets and liabilities: |
|
|
|
| Accounts
receivable |
845 |
|
|
130 |
|
| Inventory |
6,379 |
|
|
(37,762) |
|
| Prepaid
expenses and other current assets |
1,437 |
|
|
(2,179) |
|
| Other
non-current assets |
101 |
|
|
(27) |
|
| Accounts
payable |
1,934 |
|
|
(543) |
|
| Accrued
expenses and other current liabilities |
(9,780) |
|
|
(6,243) |
|
| Operating
lease liabilities |
(3,746) |
|
|
(1,925) |
|
| Other
non-current liabilities |
(38) |
|
|
(1,670) |
|
| Net
cash, cash equivalents, and restricted cash used in operating activities |
(36,314) |
|
|
(98,370) |
|
|
|
|
|
| CASH
FLOWS FROM INVESTING ACTIVITIES |
|
|
|
| Purchases
of property and equipment |
(390) |
|
|
(1,444) |
|
| Proceeds
from sale of property and equipment |
9 |
|
|
— |
|
| Proceeds
from sales of marketable securities |
806 |
|
|
— |
|
| Proceeds
from commutation of reinsurance contracts |
187 |
|
|
— |
|
| Proceeds
from sale of discontinued operations |
434 |
|
|
— |
|
| Capitalized
website internal-use software costs |
(1,991) |
|
|
(2,328) |
|
| Net
cash, cash equivalents, and restricted cash used in investing activities |
(945) |
|
|
(3,772) |
|
|
|
|
|
| CASH
FLOWS FROM FINANCING ACTIVITIES |
|
|
|
| Proceeds
from flooring line of credit facility |
33,229 |
|
|
126,903 |
|
| Repayment
of flooring line of credit facility |
(35,895) |
|
|
(110,150) |
|
| Principal
payments on finance leases |
(180) |
|
|
— |
|
| Proceeds
from stock option exercises, including from early exercised options |
— |
|
|
3 |
|
| Payment
of tax withheld for common stock issued under stock-based compensation plans |
(19) |
|
|
(2,162) |
|
| Repurchase
of shares related to early exercised options |
(1) |
|
|
(10) |
|
| Net
cash, cash equivalents, and restricted cash provided by (used in) financing activities |
(2,866) |
|
|
14,584 |
|
| Net
decrease in cash, cash equivalents and restricted cash |
(40,125) |
|
|
(87,558) |
|
| Cash,
cash equivalents and restricted cash, beginning of period |
107,846 |
|
|
194,341 |
|
| Cash,
cash equivalents and restricted cash, end of period |
$ |
67,721 |
|
|
$ |
106,783 |
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March 31, |
|
2023 |
|
2022 |
| SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
| Cash
paid for interest |
$ |
1,114 |
|
|
$ |
496 |
|
|
|
|
|
| SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
| Capital
expenditures in accounts payable |
$ |
— |
|
|
$ |
534 |
|
| Vesting
of exercised options |
14 |
|
|
35 |
|
| Stock-based
compensation capitalized to internal-use software |
183 |
|
|
325 |
|
| Imputation
of debt discounts reducing consideration transferred in business acquisitions |
2,103 |
|
|
— |
|
| Establishment
of lease right of use assets and lease liabilities |
|
|
|
| Operating
lease right of use assets |
$ |
— |
|
|
$ |
27,855 |
|
| Operating
lease liabilities |
— |
|
|
28,631 |
|
| Other
assets |
— |
|
|
1,716 |
|
| Other
liabilities |
— |
|
|
2,492 |
|
| Termination
of lease right of use assets and lease liabilities |
|
|
|
| Operating
lease right of use assets |
$ |
11,884 |
|
|
$ |
— |
|
| Operating
lease liabilities |
11,744 |
|
|
— |
|
| Finance
lease right of use assets |
4,660 |
|
|
— |
|
| Finance
lease liabilities |
4,746 |
|
|
— |
|
The
accompanying notes are an integral part of these consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
1.
DESCRIPTION OF THE BUSINESS
Shift
Technologies, Inc., which, together with its subsidiaries we refer to as Shift, we, us, our, SFT, or the Company, conducts its business
through its wholly owned subsidiaries. Shift Platform, Inc., formerly known as Shift Technologies, Inc. (“Legacy Shift”) was
incorporated in the State of Delaware on December 9, 2013.
Shift
Technologies, Inc. is a consumer-centric omnichannel retailer transforming the used car industry by leveraging its end-to-end ecommerce
platform and retail locations to provide a technology-driven, hassle-free customer experience.
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”).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
Our
unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). Intercompany accounts and transactions have been eliminated. In the opinion
of management, the interim condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature,
necessary for fair financial statement presentation.
The
interim condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, the interim condensed consolidated
statements of operations and comprehensive loss for the three months ended March 31, 2023 and 2022, condensed consolidated statements
of stockholders' equity for the three months ended March 31, 2023 and 2022, and condensed consolidated statements of cash flows for the
three months ended March 31, 2023 and 2022, 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 contained in the Company's most recent Annual Report on Form 10-K, and in management’s
opinion, reflect all adjustments, which are normal and recurring in nature, necessary for the fair financial statement presentation of
the Company’s condensed consolidated balance sheet as of March 31, 2023, and its results of operations for the three months
ended March 31, 2023 and 2022 and cash flows for the three months ended March 31, 2023 and 2022. The results for the three months ended
March 31, 2023 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, 2022 included in our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission
("SEC") on March 31, 2023.
At
the Company’s Special Meeting of Stockholders held on December 7, 2022, the Company’s stockholders approved a proposal to
authorize a reverse stock split of the Company’s Class A common stock, at a ratio within the range of 1-for-5 to 1-for-10. The Board
approved a 1-for-10 reverse split ratio, and on March 7, 2023, the Company filed a Certificate of Amendment to its Second Amended and
Restated Certificate of Incorporation (the “Charter Amendment”) to effect the reverse split effective March 8, 2023. All share
and per-share amounts have been retrospectively adjusted to reflect the impact of the reverse stock split.
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 Class A common stock, financial instruments, convertible debt, stock-based compensation and income taxes.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
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.
Accounts
Receivable
Accounts
receivable are primarily due from auction facilities and partner financial institutions that provide financing to our customers.
The
Company maintains an allowance for doubtful accounts that is calculated under the current expected credit loss (“CECL”) model.
The CECL model applies to financial assets measured at amortized cost, and requires the Company to reflect expected credit losses over
the remaining contractual term of the asset. As the large majority of the Company’s receivables settle within 30 days, the forecast
period under the CECL model is a relatively short horizon. The Company uses an aging method to estimate allowances for doubtful accounts
under the CECL model as the Company has determined that the aging method adequately reflects expected credit losses, as corroborated by
historical loss rates.
Marketable
Securities
The
Company acquired equity and debt security investments as a result of the CarLotz Merger on December 9, 2022. Equity and debt securities
are classified as Level 1 and Level 2 in the fair value hierarchy, respectively. Substantially all of the debt and equity
securities were sold between December 31, 2022 and March 31, 2023 and $3
thousand was reclassified from accumulated other comprehensive loss for net losses on marketable securities.
Discontinued
Operations
We
review the presentation of planned business dispositions in the condensed consolidated financial statements based on the available information
and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the
operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated
that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents
a strategic shift that has a major effect on operations and financial results. In addition, we evaluate whether the business has met the
criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established
criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the
business within one year.
Planned
business dispositions are presented as discontinued operations when all the criteria described above are met. For those divestitures that
qualify as discontinued operations, all comparative periods presented are reclassified in the condensed consolidated balance sheets. Additionally,
the results of operations of a discontinued operation are reclassified to income from discontinued operations, net of tax, for all periods
presented in the condensed consolidated statements of operations. Results of discontinued operations include all revenues and expenses
directly derived from such businesses; general corporate overhead is not allocated to discontinued operations.
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
1 —
Quoted prices in active markets for identical assets or liabilities.
Level
2 —
Observable 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.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Level
3 —
Unobservable 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. The Company recognizes transfers
between the levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between
levels during the three months ended March 31, 2023 and 2022. As of March 31, 2023, the Company had less than $0.1 million
in assets and liabilities, respectively, measured at fair value.
Escrow
Shares
In
connection with the closing of the Company's merger with Insurance Acquisition Corp. on October 13, 2020, (the "IAC Merger"), 600,021
shares of the Company’s Class A common stock (the “Escrow Shares”) were deposited into an escrow account, with each
former Legacy Shift stockholder listed as beneficiary in proportion to their percentage ownership of Legacy Shift common shares immediately
prior to the IAC Merger. The Escrow Shares will be released to the beneficiaries if the following conditions are achieved following October 13,
2020, the date of the closing of the IAC Merger:
i.If
at any time during the 12
months following the closing, the closing share price of the Company’s Class A common stock is greater than $120.00
over any 20
trading days within any 30
trading day period, 50%
of the Escrow Shares will be released.
ii.If
at any time during the 30
months following the closing, the closing share price of the Company’s Class A common stock is greater than $150.00
over any 20
trading days within any 30
trading day period, 50%
of the Escrow Shares will be released.
iii.If,
during the 30
months following the closing, there is a change of control (as defined in the IAC Merger Agreement) that will result in the holders of
the Company’s Class A common stock receiving a per share price equal to or in excess of $100.00
per share (as equitably adjusted for stock splits, stock dividends, special cash dividends, reorganizations, combinations, recapitalizations
and similar transactions affecting the Class A common stock after the date of the IAC Merger), then all remaining Escrow Shares shall
be released to the Legacy Shift stockholders effective as of immediately prior to the consummation of such change of control.
The
Escrow Shares are legally outstanding and the beneficiaries retain all voting, dividend and distribution rights applicable to the Company’s
Class A common stock while the shares are in escrow. If the conditions for the release of the Escrow Shares are not met, the shares and
any dividends or distributions arising therefrom shall be returned to the Company. The Escrow Shares are not considered outstanding for
accounting purposes, and as such are excluded from the calculation of basic net loss per share (see Note 17 - Net Loss Per Share).
The
Escrow Shares meet the accounting definition of a derivative financial instrument. Prior to the cancellation of the first tranche on October 13,
2021, the number of Escrow Shares that would have ultimately been released was partially dependent on variables (namely, the occurrence
of a change in control) that are not valuation inputs to a “fixed for fixed” option or forward contract, and therefore the
Escrow Shares were not considered to be indexed to the Company’s Class A common stock and were therefore classified as a liability.
The Company’s obligation to release the Escrow Shares upon achievement of the milestones was initially recorded to financial instruments
liability
on the condensed
consolidated balance sheets at fair value as of the date of the IAC Merger. Subsequent changes in the fair value of the liability were
recorded to change in fair value of financial instruments on the condensed consolidated statements of operations and comprehensive loss.
As
of the first anniversary of the IAC Merger on October 13, 2021, the first tranche of 300,011
Escrow Shares had failed to satisfy the $120.00
stock performance hurdle. As a result, the shares were returned to the Company for cancellation.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Following
the return of the first tranche of the Escrow Shares to the Company on October 13, 2021, the Escrow Shares met the "fixed for fixed" option
or forward contract criteria for equity classification. As such, changes in fair value of the Escrow Shares through October 13, 2021 were
recorded in change in fair value of financial instruments on the condensed consolidated statements of operations and comprehensive loss.
The fair value of the shares on October 13, 2021 of $6.3
million, measured using the Monte Carlo valuation model, was reclassified to additional paid-in capital on the condensed consolidated
balance sheets.
On
April 13, 2023 the second tranche of 300,010
Escrow Shares failed to satisfy the applicable stock performance hurdle. As a result, the shares were returned to the Company for cancellation.
Liquidity
and Management's Plan
For
the three months ended March 31, 2023 and 2022, the Company generated negative cash flows from operations of approximately $36.3
million and $98.4
million, respectively, and generated net losses of approximately $48.1
million and $57.0
million, respectively. As of March 31, 2023, the Company had unrestricted cash and cash equivalents of $58.8
million and total working capital of $40.8
million. Since inception, the Company has had negative cash flows and losses from operations which it has funded primarily through issuances
of common and preferred stock and through a reverse recapitalization via the IAC Merger in October 2020. The Company has historically
funded vehicle inventory purchases through its vehicle floorplan facilities (see Note 9 - Borrowings). The Company's current floorplan
facility expires on December 9, 2023. The Company also continually assesses other opportunities to raise debt or equity capital.
The
Company's plan is to raise capital to provide the liquidity necessary to satisfy its obligations over the next twelve months, and to secure
a new or amended floorplan financing arrangement to provide continuity when the current floorplan expires. The Company may also pursue
other strategic alternatives. The Company's ability to raise capital may be constrained by the price of and demand for the Company's Class
A common stock. There can be no assurance that the Company will be able to raise sufficient additional capital or obtain financing that
will provide it with sufficient liquidity to satisfy its obligations over the next twelve months.
The
Company continues to focus its strategy on improving unit economics and reducing selling, general, and administrative expenses and seeks
to achieve these goals by eliminating less profitable fulfillment channels, consolidating operations into fewer physical locations, and
reducing headcount accordingly. Please see Note 15 - Impairment, Restructuring and Discontinued Operations for additional information.
In
accordance with Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a
Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that
raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed
consolidated financial statements are issued. Management determined as a result of this evaluation, the Company’s losses and negative
cash flows from operations since inception, combined with its current cash, working capital position, and expiration of the current floorplan
financing arrangement on December 9, 2023, raise substantial doubt about the Company’s ability to continue as a going concern.
The
condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern which
contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. Accordingly,
the accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Recently
Adopted Accounting Standards
In
June 2016, the Financial Accounting Standards Board ("FASB") issued guidance codified in Accounting Standards Update ("ASU") 2016-13,
Financial
instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU
2016-13"), 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 adopted ASU 2016-13 under the private company transition guidance beginning January 1, 2023. The adoption did not materially impact
the Company's condensed consolidated financial statements.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
3.
BUSINESS COMBINATIONS
Fair
Dealer Services, LLC
On
May 11, 2022, the Company completed the acquisition of certain automotive dealer marketplace assets and all of the issued and outstanding
limited liability company interests of Fair Dealer Services, LLC (“Fair”), (collectively, the “Marketplace Assets”),
from Fair Financial Corp., Fair IP, LLC (“Fair IP”), and (for limited purposes) Cayman Project 2 Limited (“SB LL Holdco”),
pursuant to the terms of the Amended and Restated Purchase Agreement dated May 11, 2022. The Company purchased the Marketplace Assets
in order to acquire software and other assets to enable the listing of inventory owned by third-party dealerships for sale on the Company’s
ecommerce platform. The Company determined that the Marketplace Assets meet the definition of a business, and the purchase is properly
accounted for as a business combination.
The
Company incurred a total of $3.3
million of transaction related costs for the year ended December 31, 2022. There were no
transaction costs incurred during the three months ended March 31, 2023 or 2022.
The
consideration for the Marketplace Assets consisted of cash in the amount of $15.0
million (the “Cash Consideration”) and 206,698
shares of the Company’s Class A common stock (such shares being equal to 2.5%
of the issued and outstanding shares of the Company’s Class A common stock as of immediately prior to the closing of the transactions
contemplated by the Amended and Restated Purchase Agreement) (the “Stock Consideration”). The shares were issued and valued
as of May 11, 2022 at a per share market closing price of $10.20.
The
Company financed the acquisition of the Marketplace Assets through the issuance of the Senior Unsecured Notes to SB LL Holdco (see Note
9 - Borrowings). The stated interest rate on the Senior Unsecured Notes was determined to be below the market rate of interest, effectively
providing a discount on the purchase price of the Marketplace Assets. Therefore, the Company recognized an imputed discount of $2.1
million on the Senior Unsecured Notes based on an estimated market rate of interest of 10.5%,
and a corresponding reduction to the consideration transferred for the purchase of the Marketplace Assets.
The
following table presents an estimate of consideration transferred:
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
| Cash
consideration |
|
$ |
15,000 |
|
| Fair
value of shares of Shift Class A common stock issued |
|
2,481 |
|
| Allocation
of proceeds from Senior Unsecured Notes |
|
(2,103) |
|
| Acquisition
Consideration |
|
$ |
15,378 |
|
The
intangible assets acquired were recorded at their fair values as of the acquisition date. Management estimated the fair value of intangible
assets in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation
consultants. The initial allocation of the consideration transferred is based on a preliminary valuation and is subject to adjustments.
Balances subject to adjustment primarily include the valuations of acquired assets and tax-related matters. During
the measurement period, the Company may record adjustments to the provisional amounts recognized.
|
|
|
|
|
|
|
Estimated
Fair Value |
| Capitalized
website and internal use software costs |
$ |
12,500 |
|
| Other
intangible assets - Trade name |
100 |
|
| Other
intangible assets - Dealer network |
100 |
|
| Prepaid
expenses and other current assets |
154 |
|
| Goodwill |
2,524 |
|
| Total
fair value of purchase price |
$ |
15,378 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Identifiable
Intangible Assets
The
Company acquired intangible assets that consisted primarily of developed software, which had an estimated fair value of $12.5
million, and which is included in capitalized website and internal use software costs, net on the condensed consolidated balance sheets.
The Company also acquired other intangible assets with a total estimated fair value of $0.2 million.
The Cost to Recreate Method was used to value the acquired developed software asset. Management applied judgment in estimating the fair
value of this intangible asset, which involved the use of significant assumptions such as the cost and time to build the acquired technology,
developer’s profit and rate of return. The other intangible assets are included in other non-current assets on the condensed consolidated
balance sheets. The Company began amortizing the intangible assets on a straight-line basis over their estimated useful lives of three
years for the capitalized internal use software and trade name, and one
year for the dealer network. During the fourth quarter of 2022, the Company fully impaired these assets.
Goodwill
The
goodwill represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable
to the benefits expected from combining the Company’s expertise with Fair’s technology, resource base, and ability to effectively
integrate the Marketplace Assets with the Company's existing ecommerce platform. This goodwill is not deductible for income tax purposes.
Pro
forma information (unaudited)
The
unaudited pro forma results presented below include the effects of the Fair acquisition as if it had been consummated as of January 1,
2021, with adjustments to give effect to pro forma events that are directly attributable to the acquisition which includes adjustments
related to the amortization of acquired intangible assets. The unaudited pro forma results do not reflect any operating efficiency or
potential cost savings which may result from the integration of Fair. Accordingly, these unaudited pro forma results are presented for
informational purposes only and are not necessarily indicative of what the actual results of operation of the combined company would have
been if the acquisition had occurred as of January 1, 2021.
|
|
|
|
|
|
|
Three
Months Ended March 31, 2022 |
| Revenue |
$ |
219,580 |
|
| Loss
from operations |
(59,240) |
|
| Net
loss |
$ |
(62,196) |
|
| Net
loss per share, basic and diluted |
$ |
(7.69) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
8,089,211 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
CarLotz,
Inc.
On
December 9, 2022, the Company completed the acquisition of all of the issued and outstanding equity interests of CarLotz, Inc. (“CarLotz”),
a Delaware corporation, pursuant to the terms of the Agreement and Plan of Merger (the "CarLotz Merger") dated as of August 9, 2022 (the
“Merger Agreement”). The CarLotz Merger increased the liquidity available to the combined entity by adding the cash resources
of legacy CarLotz to the combined entity and obviating the need for legacy CarLotz to invest in technologies already developed by Shift.
The Company determined that the CarLotz Merger is properly accounted for as a business combination.
During
the three months ended March 31, 2023, the Company incurred an additional $0.1 million
of transaction related costs for a total of $16.3
million since the date of acquisition, which are included in selling, general and administrative expenses on the condensed consolidated
statements of operations and comprehensive loss.
The
following table presents an estimate of Merger Consideration transferred to effect the CarLotz Merger at Closing:
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
| Fair
value of shares of Shift Class A common stock issued to CarLotz stockholders |
|
$ |
22,411 |
|
| Replacement
of CarLotz equity awards |
|
562 |
|
| Merger
Consideration |
|
$ |
22,973 |
|
The
fair value of shares of Shift Class A common stock issued as Merger Consideration was based on approximately 8.6
million shares of Shift Class A common stock, including 0.1
million shares issued pursuant to accelerated vesting of certain CarLotz RSU Awards in connection with the CarLotz Merger, and the closing
price of Shift Class A common stock of $2.62
per share on December 9, 2022.
Consideration
transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the
acquisition date. Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable
accounting guidance for business combinations and utilized the services of third-party valuation consultants. The initial allocation of
the consideration transferred is based on a preliminary valuation and is subject to adjustments. Balances subject to adjustment primarily
include the valuations of acquired assets (tangible and intangible), liabilities assumed, as well as tax-related matters. During the measurement
period, the Company may record adjustments to the provisional amounts recognized. The
allocation of the consideration transferred will be finalized within the measurement period (up to one year from the acquisition date).
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
Estimated
Fair Value |
| Cash,
cash equivalents, and marketable securities |
$ |
97,710 |
|
| Accounts
receivable |
3,321 |
|
| Inventory |
7,062 |
|
| Other
current assets |
1,756 |
|
| Property
and equipment |
7,009 |
|
| Operating
lease right of use assets |
25,119 |
|
| Finance
lease right of use assets |
4,176 |
|
| Developed
technology |
3,190 |
|
| Trademarks |
970 |
|
| Other
non-current assets |
364 |
|
| Total
assets |
150,677 |
|
| Accounts
payable and accrued liabilities |
(11,899) |
|
| Operating
lease liabilities, current |
(4,127) |
|
| Finance
lease liabilities, current |
(273) |
|
| Other
current liabilities |
(694) |
|
| Operating
lease liabilities |
(24,713) |
|
| Finance
lease liabilities |
(8,940) |
|
| Other
non-current liabilities |
(373) |
|
| Total
liabilities |
(51,019) |
|
| Net
assets acquired |
99,658 |
|
| Gain
on Bargain purchase |
$ |
(76,685) |
|
| Consideration
transferred |
$ |
22,973 |
|
Identifiable
Intangible Assets
The
fair value of the trademarks and developed technology intangible assets has been determined using the relief-from-royalty method, which
involves the estimation of an amount of hypothetical royalty savings enjoyed by the entity that owns the intangible asset because that
entity is relieved from having to license that intangible asset from another owner. In using this method, third-party arm’s-length
royalty or license agreements were analyzed. The licensing transactions were selected as reflecting similar risks and characteristics
that make them comparable to the subject assets. The net revenue expected to be generated by the intangible asset during its expected
remaining life was then multiplied by the selected royalty rate. The selected estimated royalty rates for the trademarks and developed
technology were 0.3%
and 1.5%,
respectively. The estimated after-tax royalty streams were then discounted to present value using a discount rate of 19.4%,
to estimate the fair value of the subject intangible assets.
The
trademarks are included in other non-current assets on the condensed consolidated balance sheets. The developed technology is included
in capitalized website and internal use software costs, net on the condensed consolidated balance sheets. The Company fully amortized
the intangible assets on a straight-line basis over their estimated useful lives of three months, as the Company is decommissioning the
acquired intangible assets in favor of equivalent legacy Shift assets.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Bargain
Purchase
Any
excess of fair value of acquired net assets over the purchase price (negative goodwill) has been recognized as a gain in the period the
acquisition was completed. We have reassessed whether all acquired assets and assumed liabilities have been identified and recognized
and performed remeasurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued.
The remaining excess has been recognized as a gain in the consolidated statement of operations. Factors believed to contribute to the
bargain purchase include i) the management turnover, restructuring, and other indicators of distress experienced by CarLotz prior to the
CarLotz Merger, ii) successful cash conservation efforts by CarLotz during the period from the execution of the CarLotz Merger Agreement
to the closing of the merger, and iii) a significant decline in the market price of the Company's Class A common stock during the period
from the execution of the Merger Agreement to the closing of the merger, which reduced the fair market value of the stock paid as consideration
for the merger.
Pro
forma information (unaudited)
The
unaudited pro forma results presented below include the effects of the CarLotz Merger as if it had been consummated as of January 1, 2021,
with adjustments to give effect to pro forma events that are directly attributable to the acquisition. For the three months ended March
31, 2023, the pro forma adjustments include a reduction in stock-based compensation costs to reflect expected amortization of assumed
equity awards and a reduction in amortization expense to reflect the revaluation of certain technology assets. For the three months ended
March 31, 2022, the pro forma adjustments include a reduction in stock-based compensation expense to reflect expected amortization of
assumed equity awards, non-recurring transaction costs, and a gain on bargain purchase.
The
unaudited pro forma results do not reflect any operating efficiency or potential cost savings which may result from the integration of
CarLotz. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative
of what the actual results of operation of the combined company would have been if the acquisition had occurred as of January 1, 2021.
|
|
|
|
|
|
|
Three
Months Ended March 31, 2022 |
| Revenue |
$ |
282,594 |
|
| Loss
from operations |
(81,919) |
|
| Net
loss |
$ |
(80,305) |
|
| Net
loss per share, basic and diluted |
$ |
(4.88) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
16,472,676 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2023 |
|
As
of December 31, 2022 |
| Equipment |
$ |
3,841 |
|
|
$ |
4,545 |
|
| Furniture
and fixtures |
332 |
|
|
1,278 |
|
| Leasehold
improvements |
929 |
|
|
4,334 |
|
| Total
property and equipment |
5,102 |
|
|
10,157 |
|
| Less:
accumulated depreciation |
(3,090) |
|
|
(3,360) |
|
| Property
and equipment, net |
$ |
2,012 |
|
|
$ |
6,797 |
|
Depreciation
expense related to property and equipment was $0.5
million and $0.6
million for the three months ended March 31, 2023 and 2022, respectively. Depreciation expense related to reconditioning facilities for
the three months ended March 31, 2023 and 2022 was less than $0.1 million
and $0.3
million, respectively. Depreciation expense related to reconditioning facilities is included in cost of sales with the remainder included
in depreciation and amortization in the condensed consolidated statements of operations and comprehensive loss.
We
classified $2.4
million and $0.2
million of gross property and equipment and accumulated depreciation, respectively, as held-for-sale at March 31, 2023. In addition,
the Company recognized an impairment charge that was partly allocated to property and equipment. See Note 15 - Impairment, Restructuring
and Discontinued Operations for additional information.
5.
LEASES
The
Company is a tenant under various operating and finance leases with third parties, including leases of office facilities, vehicle inspection,
reconditioning locations, storage locations, and vehicle leases. The Company assesses whether each lease is an operating or finance lease
at the lease commencement date.
The
Company’s real estate leases often require it to make payments for maintenance in addition to rent as well as payments for real
estate taxes, and insurance. Maintenance, real estate taxes, and insurance payments are generally variable costs which are based on actual
expenses incurred by the lessor. Therefore, these amounts are generally not included in the consideration of the contract when determining
the right-of-use asset and lease liability, but are reflected as variable lease expenses in the period incurred.
Leases
with an initial term of 12
months or less are not recorded on the Company’s condensed consolidated balance sheets and expense for these leases are recognized
on a straight-line basis over the lease term.
As
the rate implicit in the lease is generally not readily determinable for the Company’s operating leases, the discount rates used
to determine the present value of the Company’s lease liabilities are based on the Company’s incremental borrowing rate at
the lease commencement date and commensurate with the remaining lease term. The incremental borrowing rate for a lease is the rate of
interest the Company would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments
in a similar economic environment. The Company uses its incremental borrowing rate based on the information available at commencement
date in determining the present value of lease payments.
The
Company recognized a loss on impairment of operating lease right of use assets of $0.9
million for the three months ended March 31, 2023. There was no
loss on impairment of operating lease right of use assets for the three months ended March 31, 2022.
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
balance sheet classification of leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Classification |
|
March
31, 2023 |
|
December
31, 2022 |
| Assets |
|
|
|
|
|
|
| Operating
leases |
|
Operating
lease assets |
|
$ |
28,366 |
|
|
$ |
44,568 |
|
|
|
Operating
and finance lease assets, property and equipment, accounts receivable, and other assets held for sale or classified as discontinued operations |
|
9,706 |
|
|
9,572 |
|
| Finance
leases |
|
Finance
lease assets, net |
|
112 |
|
|
152 |
|
|
|
Operating
and finance lease assets, property and equipment, accounts receivable, and other assets held for sale or classified as discontinued operations |
|
180 |
|
|
4,155 |
|
| Total
lease assets |
|
|
|
$ |
38,364 |
|
|
$ |
58,447 |
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
| Operating
leases |
|
Operating
lease liabilities, current |
|
$ |
5,490 |
|
|
$ |
8,865 |
|
|
|
Operating
and finance lease liabilities and other liabilities associated with assets held for sale or classified as discontinued operations |
|
14,918 |
|
|
10,138 |
|
|
|
Operating
lease liabilities, non-current |
|
27,245 |
|
|
44,985 |
|
| Total
operating lease liabilities |
|
|
|
$ |
47,653 |
|
|
$ |
63,988 |
|
|
|
|
|
|
|
|
| Finance
leases |
|
Finance
lease liabilities, current |
|
$ |
50 |
|
|
$ |
271 |
|
|
|
Operating
and finance lease liabilities and other liabilities associated with assets held for sale or classified as discontinued operations |
|
2,824 |
|
|
5,036 |
|
|
|
Finance
lease liabilities, non-current |
|
1,496 |
|
|
3,989 |
|
| Total
finance lease liabilities |
|
|
|
$ |
4,370 |
|
|
$ |
9,296 |
|
|
|
|
|
|
|
|
| Total
lease liabilities |
|
|
|
$ |
52,023 |
|
|
$ |
73,284 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
Company’s lease costs and activity were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
|
2023 |
|
2022 |
| Lease
cost |
|
|
|
| Operating
lease cost |
$ |
9,241 |
|
|
$ |
2,162 |
|
| Finance
lease amortization |
86 |
|
|
— |
|
| Finance
lease interest |
109 |
|
|
— |
|
| Short-term
lease cost |
168 |
|
|
832 |
|
| Variable
lease cost |
455 |
|
|
185 |
|
| Sublease
income |
(241) |
|
|
— |
|
| Total
lease cost |
$ |
9,818 |
|
|
$ |
3,179 |
|
|
|
|
|
| Cash
paid for amounts included in the measurement of operating lease liabilities |
|
|
|
| Operating
leases - Operating cash flows |
$ |
3,746 |
|
|
$ |
1,925 |
|
| Finance
leases - Operating cash flows |
$ |
731 |
|
|
$ |
— |
|
| Finance
leases - Financing cash flows |
$ |
180 |
|
|
$ |
— |
|
| Lease
assets derecognized with the sale of lease liabilities |
|
|
|
| Operating
leases |
$ |
11,884 |
|
|
$ |
— |
|
| Finance
leases |
$ |
4,660 |
|
|
$ |
— |
|
|
|
|
|
| Weighted
average remaining lease term - operating leases (in years) |
5.65 |
|
5.14 |
| Weighted
average discount rate - operating leases |
8.53 |
% |
|
7.30 |
% |
| Weighted
average remaining lease term - finance leases (in years) |
6.03 |
|
— |
|
| Weighted
average discount rate - finance leases |
11.10 |
% |
|
— |
% |
Leases
have remaining terms of 1
year to 13
years. There are no options that are reasonably certain to be exercised. Sublease income is derived from two subleases as of March 31,
2023
Operating
and finance lease liabilities by maturity date from March 31, 2023 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year
ended December 31, |
|
Operating
Leases |
|
Finance
Leases |
| 2023 |
|
$ |
9,198 |
|
|
$ |
592 |
|
| 2024 |
|
10,860 |
|
|
693 |
|
| 2025 |
|
9,456 |
|
|
708 |
|
| 2026 |
|
9,339 |
|
|
724 |
|
| 2027 |
|
9,353 |
|
|
680 |
|
| Thereafter |
|
13,935 |
|
|
4,091 |
|
| Total
minimum lease payments |
|
$ |
62,141 |
|
|
$ |
7,488 |
|
| Less:
Imputed interest |
|
14,488 |
|
|
3,118 |
|
| Total
lease liabilities |
|
$ |
47,653 |
|
|
$ |
4,370 |
|
SHIFT
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
As
of December 31, 2022, the Company guaranteed the lease obligation of two of its closed locations assigned to a third-party that operates
a used vehicle dealership. The Company continues as guarantor of such lease obligations with maximum total payments of $4,669
and will continue as the guarantor of one of the leases through March 2031 and the other lease through September 2031. The Company would
be required to perform under the guarantee if the third-party is in default. As of March 31, 2023, the Company does not anticipate
any material defaults under the forgoing leases, and therefore, no liability has been accrued.
6.
CAPITALIZED WEBSITE AND INTERNAL-USE SOFTWARE COSTS, NET
Capitalized
website and internal use software costs, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| |
As
of March 31, 2023 |
|
As
of December 31, 2022 |
| Capitalized
website domain costs – nonamortizable |
$ |
385 |
|
|
$ |
385 |
|
| Capitalized
website and internal-use software development costs – amortizable |
14,280 |
|
|
12,294 |
|
| Less:
accumulated amortization |
(5,032) |
|
|
(2,022) |
|
| Capitalized
website and internal-use software development costs, net |
$ |
9,633 |
|
|
$ |
10,657 |
|
Amortization
of capitalized software development costs is included in depreciation and amortization in the condensed consolidated statements of operations
and comprehensive loss. Amortization of capitalized software development costs amounted to $3.2
million and $1.4
million for the three months ended March 31, 2023 and 2022, respectively.
As
of March 31, 2023, the remaining weighted-average amortization period for internal-use capitalized software intangible assets was
approximately 1.24
years.
The
expected annual amortization expense to be recognized in future years as of March 31, 2023 consists of the following (in thousands):
|
|
|
|
|
|
|
As
of March 31, 2023 |
| 2023 |
$ |
1,871 |
|
| 2024 |
2,488 |
|
| 2025 |
1,382 |
|
| 2026 |
58 |
|
| Development
in progress |
3,449 |
|
| Total
amortizable costs |
9,248 |
|
| Nonamortizable
costs |
385 |
|
| Total
capitalized website and internal-use software development costs |
$ |
9,633 |
|
The
Company recognized an impairment charge that was partly allocated to internal-use capitalized software at December 31, 2022. See
Note 15 - Impairment, Restructuring and Discontinued Operations for additional information.
7.
GOODWILL
On
May 11, 2022 the Company acquired the Marketplace Assets for consideration totaling $15.4 million
(see Note 3 - Business Combinations). The purchase price was allocated to tangible assets of $0.2 million
and intangible assets of $12.7 million
based on their fair values on the acquisition date. Goodwill represents the excess purchase price over the fair value of the net assets
acquired. The excess of the purchase price over the amounts allocated to assets acquired was recorded to Goodwill, in the amount of $2.5
million, which was included in the retail segment.
Goodwill
is not amortized but is tested at least annually or more frequently when events or circumstances change that would, more likely than not,
reduce the fair value of a reporting unit below its carrying amount. The Company first assesses qualitative factors to determine if it
is not more likely than not that the fair value of its reporting unit is less than its carrying amount.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
During
the three months ended March 31, 2023, there were no impairments or other changes in the carrying amount of goodwill. During the fourth
fiscal quarter of 2022, management determined that indicators of impairment existed and performed a goodwill impairment test resulting
in an impairment charge of $0.5 million.
Management engaged third party valuation consultants to determine the fair value of the Retail segment (which also meets the definition
of a reporting unit for goodwill impairment purposes). The fair value was determined using a market approach based on comparison to peer
company valuation multiples.
8.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| |
As
of March 31, 2023 |
|
As
of December 31, 2022 |
| Accrued
payroll related costs |
$ |
10,196 |
|
|
$ |
14,048 |
|
| Provision
for DMV refunds |
1,089 |
|
|
1,080 |
|
| Accrued
sales taxes |
212 |
|
|
3,957 |
|
| Class
A common stock subject to repurchase liability, current |
34 |
|
|
44 |
|
| Interest
payable |
2,742 |
|
|
960 |
|
| Provision
for sales returns and cancellations |
3,146 |
|
|
4,304 |
|
| Other
accrued expenses |
5,717 |
|
|
9,479 |
|
| Total
accrued expenses and other current liabilities |
$ |
23,136 |
|
|
$ |
33,872 |
|
As
of March 31, 2023 and December 31, 2022, we classified $0.3
million and $0.1
million of accrued expenses associated with a long-lived asset disposal group as held-for-sale. See Note 15 - Impairment, Restructuring
and Discontinued Operations for further information.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
9.
BORROWINGS
Senior
Unsecured Notes
On
May 11, 2022, in connection with the Fair acquisition (see Note 3 - Business Combinations),
the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) by and between the Company, each of the
Company’s subsidiaries party thereto as guarantors (each, a “Guarantor” and, collectively, the “Guarantors”),
and SB LL Holdco, Inc., a Delaware corporation (“SB LL Holdco”). Pursuant to the Note Purchase Agreement and the terms and
conditions set forth therein, the Company agreed to issue and sell, and SB LL Holdco agreed to purchase, 6.00%
Senior Unsecured Notes due May 11, 2025 with a principal amount of $20.0 million
(the “Senior Unsecured Notes”) in a private placement in reliance on an exemption from registration under the Securities Act
of 1933, as amended (the “Securities Act”).
The
Senior Unsecured Notes bear interest at a rate of 6.00%
per annum and will mature on May 11, 2025. The Company may, at its option, prepay the Senior Unsecured Notes in their entirety (i)
if prior to November 11, 2024, at 100% of the principal amount plus accrued and unpaid interest thereon to (but excluding) such date and
a premium specified therein, or (ii) if on or after November 11, 2024, at 100% of the principal amount plus accrued and unpaid interest
thereon to (but excluding) such date. The Senior Unsecured Notes are senior unsecured indebtedness of the Company.
As
of March 31, 2023, discounts and deferred borrowing costs related to the Senior Unsecured Notes totaled $1.9
million and $0.2
million, respectively, and are included as a reduction to long-term debt, net on the condensed consolidated balance sheets. For the three
months ended March 31, 2023, the Company had $0.3
million of contractual interest expense and $0.2
million of discount and deferred borrowing cost amortization, with both recorded to interest and other expense, net on the condensed consolidated
statements of operations and comprehensive loss.
The
estimated fair value of the Senior Unsecured Notes (Level 2) as of March 31, 2023 was $17.1
million.
Convertible
Notes
On
May 27, 2021, the Company completed a private offering of its 4.75%
Convertible Senior Notes due 2026 (the “Notes”). The aggregate principal amount of the Notes sold in the offering was $150.0
million. The Notes are the Company’s senior unsecured obligations and will rank equally in right of payment with the Company’s
future senior unsecured indebtedness, senior in right of payment to the Company’s future indebtedness that is expressly subordinated
to the Notes and effectively subordinated to the Company’s future secured indebtedness, to the extent of the value of the collateral
securing that indebtedness.
The
Notes accrue interest payable semi-annually in arrears at a rate of 4.75%
per year. The Notes will mature on May 15, 2026, unless earlier converted, redeemed or repurchased by the Company.
The
Notes are convertible into shares of the Company’s Class A common stock at an initial conversion rate of 11.8654
shares of the Company’s Class A common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion
price of approximately $84.28
per share of the Company’s Class A common stock). The initial conversion price represents a premium of approximately 27.47%
over the last reported sale price of the Company’s Class A common stock on May 24, 2021, which was $66.10
per share. The conversion rate will be subject to adjustment upon the occurrence of certain events prior to the maturity date. The Company
will increase the conversion rate on a sliding scale to up to a maximum of 15.1284
per $1,000 principal amount for a holder who elects to convert its notes in connection with certain corporate events or the Company’s
delivery of a notice of redemption, as the case may be, in certain circumstances.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Noteholders
may convert their Notes at their option only in the following circumstances:
1.during
any calendar quarter commencing after the calendar quarter ending on June 30, 2021, if the last reported sale price per share of our Class
A common stock exceeds 130%
of the conversion price for each of at least 20
trading days during the 30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
2.during
the 5
consecutive business days immediately after any 10
consecutive trading day period (such 10
consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes
for each trading day of the measurement period was less than 98%
of the product of the last reported sale price per share of our Class A common stock on such trading day and the conversion rate on such
trading day;
3.upon
the occurrence of certain corporate events or distributions on our Class A common stock;
4.if
we call such Notes for redemption; and
5.at
any time from, and including, November 15, 2025 until the close of business on the second scheduled trading day immediately before the
maturity date.
Conversions
of the Notes will be settled in cash, shares of the Company's Class A common stock or a combination thereof, at the Company's election.
The
Notes will be redeemable, in whole or in part (subject to a partial redemption limitation), at the Company’s option at any time,
and from time to time, on or after May 20, 2024 and on or before the 40th
scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be
redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if (i) the last reported sale price
per share of the Company’s Class A common stock exceeds 130%
of the conversion price on (1) each of at least 20 trading days, whether or not consecutive, during the 30
consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption
notice; and (2) the trading day immediately before the date the Company sends such notice; and (ii) a registration statement covering
the resale of the shares of the Company’s Class A common stock, if any, issuable upon conversion of the Notes in connection with
such optional redemption is effective and available for use and is expected, as of the date the redemption notice is sent, to remain effective
and available during the period from, and including the date the redemption notice is sent to, and including, the business day immediately
before the related redemption date, unless the Company elects cash settlement in respect of the conversions in connection with such optional
redemption.
In
addition, calling any Note for redemption will constitute a make-whole fundamental change with respect to that Note, in which case the
conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called
for redemption and on or prior to the business day immediately before the related redemption date. If the Company elects to redeem less
than all of the outstanding Notes, at least $50.0 million
aggregate principal amount of Notes must be outstanding and not subject to redemption as of the date the Company sends the related redemption
notice.
Unamortized
deferred borrowing costs at March 31, 2023 were $4.2
million, and are included as a reduction to long-term debt, net on the condensed consolidated balance sheets. For the three months ended
March 31, 2023, the Company recorded $1.8
million of contractual interest expense and $0.3
million of deferred borrowing cost amortization, respectively. For the three months ended March 31, 2022, the Company recorded $2.1
million of contractual interest expense and $0.3
million, respectively, of deferred borrowing cost amortization. Contractual interest expense and deferred borrowing cost amortization
was recorded to interest and other expense, net on the condensed consolidated statements of operations and comprehensive loss. The effective
interest rate of the Notes is 5.73%.
The
estimated fair value of the Notes (Level 2) at March 31, 2023 was $15.3
million.
The
Company used a portion of the net proceeds from the sale of the notes to pay the cost of the Capped Call Transactions (see Note 11 - Stockholders'
Deficit), and is using the remaining proceeds for working capital and general corporate purposes.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Ally
Flooring Line of Credit
On
December 9, 2021, the Company entered into a $100.0
million flooring line of credit facility with Ally Bank to finance its used vehicle inventory (the “Ally FLOC”), which is
secured by substantially all of the Company’s assets. Borrowings under the Ally FLOC bear interest at the Prime Rate (as defined
in the agreement) plus 1.50%.
Under
the Ally FLOC, repayment of amounts drawn for the purchase of a vehicle should generally be made as soon as practicable after selling
or otherwise disposing of the vehicles. Outstanding balances related to vehicles held in inventory for more than 180
days require monthly principal payments equal to 10%
of the original principal amount of that vehicle until the remaining outstanding balance is 50%
(or less) of the original principal balance. Prepayments may be made without incurring a premium or penalty. Additionally, the Company
is permitted to make prepayments to the lender to be held as principal payments and subsequently reborrow such amounts.
The
Ally FLOC requires the Company to maintain unrestricted cash and cash equivalents of not less than 20%
of the total credit line, and to maintain an additional restricted cash balance equal to 10%
of the total credit line. Additionally, the Ally FLOC requires the company to maintain at least 10%
equity in the Company’s total inventory balance. As of March 31, 2023, the Company was in compliance with all covenants related
to the Ally FLOC.
Additionally,
the Company is required to pay an availability fee each calendar quarter if the average outstanding balance for such quarter is less than
50%
of the average total credit line for such quarter. The Company was required to pay an upfront commitment fee upon execution of the Ally
FLOC.
Effective
as of February 7, 2023 (the “Effective Date”), the Company amended the Ally FLOC to (i) join the CarLotz Borrowers as
borrowers under the Ally FLOC and terminate the inventory financing arrangement between the CarLotz Borrowers and the Ally Parties that
was entered into prior to the Company’s acquisition of CarLotz, (ii) reduce the maximum available credit line under the Ally FLOC
from $100
million to $75
million and (iii) require the Borrowers to make monthly principal reduction payments for each vehicle subject to the floor plan for more
than 150
days rather than 180
days. In addition, effective February 1, 2023, the First Amendment increases the per annum interest rate applicable to Advances (as defined
in the Ally Facility) to be equal to the prime rate designated from time to time by Ally Bank plus 175
basis points (from 150
basis points).
As
of March 31, 2023, the interest rate on borrowings outstanding under the Ally FLOC was 9.50%.
As of March 31, 2023, the Company had an outstanding balance under the facility of $22.2
million and $52.8
million of unused capacity. As of December 31, 2022, the Company had an outstanding balance under the facility of $24.8
million and $75.2
million in unused capacity.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
10.
COMMITMENTS AND CONTINGENCIES
Litigation
The
Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Other than the matters discussed
below, 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.
Stifel
matter
On
May 7, 2021, we were named in a lawsuit filed in the U.S. District Court for the Southern District of New York (Stifel, Nicolaus &
Company, Inc. v. Shift Technologies, Inc. 21-cv-04135) by a former financial advisor, Stifel, Nicolaus & Company, Inc. (“Stifel”),
claiming that we are required to pay the former financial advisor certain compensation as a result of the IAC Merger. In addition, the
complaint seeks punitive damages as a result of alleged unjust enrichment for the amount of the benefits allegedly conferred on Shift
by Stifel. On August 24, 2022, Stifel's suit was dismissed with prejudice. On September 16, 2022, Stifel filed a Notice of Appeal with
the U.S. Court of Appeals for the Second Circuit and formally filed its appeal with the Second Circuit on January 20, 2023. Shift filed
its responsive pleading on April 20, 2023. Following the dismissal of Stifel's initial suit, the probable incurred losses related to the
claim are immaterial as of March 31, 2023. Based on such information as is available to us, the range of additional reasonably possible
losses related to the claim does not exceed $4.0 million,
excluding any punitive damages which the Company cannot currently estimate. The Company believes the claim is without merit and intends
to defend itself vigorously; however, there can be no assurances that the Company will be successful in its defense.
CarLotz
stockholder matters
On
November 4, 2022, a lawsuit entitled Derek Dorrien v. CarLotz, Inc. et al., Case No. 1:22-cv-09463, was filed in the United States District
Court for the Southern District of New York against CarLotz and the members of the CarLotz board of directors (the “Dorrien Action”).
On November 4, 2022, a lawsuit entitled Sholom D. Keller v. CarLotz, Inc. et al., Case No. 2022-1006-NAC, was filed in the Court of Chancery
of the State of Delaware against CarLotz and the members of the CarLotz board of directors (the “Keller Action” and together
with the Dorrien Action, the “Actions”). The Dorrien Action alleges that the defendants violated Sections 14(a) (and Rule
14a-9 promulgated thereunder) and 20(a) of the Exchange Act by, among other things, omitting certain allegedly material information with
respect to the transactions contemplated by the Merger Agreement (the “Transactions”) in the registration statement on Form
S-4 (the “Registration Statement”) filed by us with the Securities and Exchange Commission on September 26, 2022. The Keller
Action alleges that the members of the CarLotz board of directors and Lev Peker, in his capacity as an officer of CarLotz, breached their
fiduciary duties in connection with the Transactions. The Actions seek, among other things, injunctive relief, money damages and the costs
of the Actions, including reasonable attorneys’ and experts’ fees. We believe that the plaintiffs’ allegations in the
Actions are without merit; however, litigation is inherently uncertain and there can be no assurance that CarLotz’s or our defense
of the action will be successful.
In
addition, on October 3, 2022, a purported stockholder of CarLotz sent a demand to CarLotz and us regarding the Registration Statement
(the “CarLotz Stockholder Demand”). The CarLotz Stockholder Demand alleges the Registration Statement omits material information
with respect to the Transactions and demands that CarLotz, the CarLotz board of directors, and Shift provide corrective disclosures. Shift
disagrees with and intends to vigorously defend against any claim, if asserted, arising from the CarLotz Stockholder Demand.
Delaware
Section 205 Petition
On
March 6, 2023, Shift filed a petition in the Delaware Court of Chancery under Section 205 of the Delaware General Corporation Law (the
“DGCL”) to resolve potential uncertainty with respect to the Company’s share capital. Such uncertainty was introduced
by a recent decision in Garfield v. Boxed, Inc., 2022 WL 17959766 (Del. Ch. Dec. 27, 2022) that potentially affects the Company and many
other similarly situated companies that were formed and became publicly traded as a special purpose acquisition company (“SPAC”).
Out of an abundance of caution, the Company elected to pursue the remedial actions described below. Concurrently with the filing of the
Petition, the Company filed a motion to expedite the hearing on the Petition, which was subsequently granted on March 6, 2023.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
In
October 2020, the Company, which was then a SPAC named Insurance Acquisition Corp. (“IAC”), held a special meeting of stockholders
(the “IAC Special Meeting”) to approve certain matters relating to the merger between IAC and a privately held company then
called Shift Technologies, Inc. One of these matters was a proposal to amend and restate IAC’s Amended and Restated Certificate
of Incorporation (the “SPAC Charter”) in order to, among other things, increase the number of authorized shares of Class A
common stock from 50,000,000
to 500,000,000
(such proposal, the “Share Increase Proposal” and, together with such other amendments to the SPAC Charter, the “Charter
Proposals”). At the IAC Special Meeting, the Charter Proposals were approved by a majority of the outstanding shares of Class A
common stock and a majority of the outstanding shares of Class B common stock of IAC as of the record date for the IAC Special Meeting,
voting together as a single class. After the IAC Special Meeting, IAC and Shift Technologies, Inc. closed the merger pursuant to which
the Company became the parent of Shift Technologies, Inc. (now named Shift Platform, Inc.), and the Company’s certificate of incorporation,
as amended to give effect to the Charter Proposals and to change the Company’s name to Shift Technologies, Inc., became effective.
The
recent ruling by the Delaware Court of Chancery in the Boxed case introduced uncertainty as to whether Section 242(b)(2) of the DGCL would
have required the Share Increase Proposal to be approved by the vote of the majority of IAC’s then-outstanding shares of Class A
common stock, voting as a separate class. The Company had been operating with the understanding that the Charter Proposals were validly
approved at the IAC Special Meeting. In light of this recent ruling, however, to resolve potential uncertainty with respect to the Company’s
share capital, the Company filed a petition in the Delaware Court of Chancery under Section 205 of the DGCL to seek validation of the
Charter Proposals. Section 205 of the DGCL permits the Court of Chancery, in its discretion, to ratify and validate potentially defective
corporate acts.
On
March 6, 2023, the Court of Chancery granted the motion to expedite and set a hearing date for the Petition to be heard. On March 17,
2023, the hearing took place and the Court of Chancery approved the Company’s request for relief. The Court of Chancery then entered
an order under Section 205 of the DGCL on March 17, 2023, declaring (i) the increase in aggregate number of authorized shares of Class
A common stock, par value $0.0001,
of the Company from 50,000,000
to 500,000,000
under the Company’s Second Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) and
the Certificate of Incorporation, including the filing and effectiveness thereof, are validated and declared effective retroactive to
the date of its filing with the Secretary of State of the State of Delaware on October 13, 2020 and (2) all shares of capital stock of
the Company issued in reliance on the effectiveness of the Certificate of Incorporation are validated and declared effective as of the
date and time of the original issuance of such shares.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
11.
STOCKHOLDERS' DEFICIT
Nasdaq
Deficiency Letter and Reverse Stock Split
On
October 4, 2022, the Company received a deficiency letter from the Listing Qualifications Department (the “Staff”) of The
Nasdaq Capital Market LLC (“Nasdaq”) notifying us that, for the last 30
consecutive business days, the bid price for our Class A common stock had closed below the $1.00
per share minimum bid price requirement for continued inclusion on the Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(a)(1)
(the "Bid Price Requirement"). Under Nasdaq Listing Rule 5810(c)(3)(A) (the "Compliance Period Rule"), we have a 180-calendar
day grace period, or until April 3, 2023 (the “Compliance Date”), to regain compliance with the Bid Price Requirement. During
this period, our Class A common stock will continue to trade on the Nasdaq Capital Market. If at any time before the Compliance Date the
bid price of Class A common stock closes at or above $1.00
per share for a minimum of 10
consecutive business days as required under the Compliance Period Rule, the Staff will provide written notification to the Company that
it has regained compliance with the Bid Price Requirement (unless the Staff exercises its discretion to extend this 10
business day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H)).
At
the Company’s Special Meeting of Stockholders held on December 7, 2022, the Company’s stockholders approved a proposal to
authorize a reverse stock split of the Company’s common stock, at a ratio within the range of 1-for-5 to 1-for-10. The Board approved
a 1-for-10 reverse split ratio, and on March 7, 2023, the Company filed a Certificate of Amendment to its Second Amended and Restated
Certificate of Incorporation (the “Charter Amendment”) to effect the reverse split effective March 8, 2023. On March 22,
2023, the Company was notified by Nasdaq that the Company has regained compliance with the Bid Price Requirement.
Capped
Call Transactions
On
May 27, 2021, in connection with the issuance of the Notes (see Note 9 - Borrowings), the Company consummated privately negotiated capped
call transactions (the “Capped Call Transactions”) with certain of the initial purchasers, their respective affiliates and
other counterparties (the "Capped Call Counterparties"). The Capped Call Transactions initially cover, subject to anti-dilution adjustments
substantially similar to those applicable to the Notes, the number of the Company’s Class A common shares underlying the Notes.
The Capped Call Transactions are expected generally to reduce the potential dilution to holders of the Company’s Class A common
stock upon conversion of the Notes and/or offset the potential cash payments that the Company could be required to make in excess of the
principal amount of any converted Notes upon conversion thereof, with such reduction and/or offset subject to a cap. The Capped Call Transactions
are settled from time to time upon the conversion of the Notes, with a final expiration date of May 15, 2026. The Capped Call Transactions
are settled in the same proportion of cash and stock as the converted Notes. The proportion of cash and stock used to settle the Notes
is at the discretion of the Company.
The
cap price of the Capped Call Transactions was initially approximately $148.725
per share, which represents a premium of approximately 125%
above the last reported sale price per share of Class A common stock on Nasdaq on May 24, 2021, and is subject to certain adjustments
under the terms of the Capped Call Transactions.
The
Capped Call Transactions are separate transactions entered into by the Company with the Capped Call Counterparties, are not part of the
terms of the Notes and will not change any holder’s rights under the Notes. Holders of the Notes will not have any rights with respect
to the Capped Call Transactions.
The
Company used approximately $28.4 million
of the net proceeds from the offering of the Notes to pay the cost of the Capped Call Transactions. The Capped Call Transactions do not
meet the criteria for separate accounting as a derivative as they are indexed to the Company's stock. The premiums paid for the Capped
Call Transactions have been included as a net reduction to additional paid-in capital on the condensed consolidated balance sheets.
The
settlement amount of the Capped Call Transactions at March 31, 2023 was zero.
The settlement amount shall be greater than zero
if the volume weighted average price ("VWAP") of the Company's Class A common stock is above $84.30
at any time over the 40
consecutive trading days immediately prior to settlement.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
At-the-Market
Offering
On
May 6, 2022, the Company entered into a Controlled Equity OfferingSM
Sales Agreement (the “Sales Agreement”), with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which the
Company may offer and sell, at its option, shares of the Company’s Class A common stock, par value $0.0001
per share, having an aggregate offering price of up to $150.0
million (the “Placement Shares”), through the Agent, as its sales agent, from time to time at prevailing market prices in
an “at-the-market offering” within the meaning of Rule 415 of the Securities Act, including sales made to the public directly
on or through The Nasdaq Capital Market and any other trading market for shares of our Class A common stock (the “Offering”).
Due to the Company's change at December 31, 2022 to a non-accelerated filer, the amount that can be raised through an offering is
limited by Nasdaq requirements.
Under
the Sales Agreement, the Company may from time to time deliver placement notices to the Agent designating the number of Placement Shares
and the minimum price per share thereof to be offered. However, subject to the terms and conditions of the Sales Agreement, the Agent
is not required to sell any specific number or dollar amount of Placement Shares but will act as Agent using their commercially reasonable
efforts consistent with their normal trading and sales practices and applicable state and federal laws, rules and regulations and the
rules of The Nasdaq Stock Market. The Company or the Agent may suspend the offering of Placement Shares by notifying the other party.
The Offering will terminate after the sale of all of the Placement Shares subject to the Sales Agreement, or sooner in accordance with
the Sales Agreement, upon proper notice by us and/or the Agents or by mutual agreement. The Company will pay the Agent a commission of
up to 3.0%
of the gross sales price of the shares of the Placement Shares sold under the Sales Agreement.
As
of March 31, 2023, the Company had not sold any shares pursuant to the Sales Agreement. The Company's ability to raise capital under
the ATM is currently constrained by restrictions on the Company's use of shelf registration statements.
CarLotz
Warrants
As
part of the CarLotz Merger, the Company assumed 718,342
public and 428,385
private warrants to purchase the Company's common stock at an exercise price of $163.06
related to CarLotz's prior merger with Acamar Partners.
Additionally,
former CarLotz equity holders at the closing of CarLotz's previous merger are entitled to receive up to an additional 489,841
earnout shares. The earnout period expires on January 21, 2026 (the "Forfeiture Date") and the earnout shares will be issued if any of
the following conditions are achieved:
i.If
at any time prior to the Forfeiture Date, the closing trading price of the common stock is greater than $177.24
over any 20 trading days within any 30 trading day period (the “First Threshold”), the Company will issue 50% of the earnout
shares.
ii.If
at any time prior to the Forfeiture Date, the closing trading price of the common stock is greater than $212.69
over any 20 trading days within any 30 trading day period (the “Second Threshold”), the Company will issue 50% of the earnout
shares.
iii.If
either the First Threshold or the Second Threshold is not met on or before the Forfeiture Date, any unissued earnout shares are forfeited.
All unissued earnout shares will be issued if there is a change of control of the Company that will result in the holders of the common
stock receiving a per share price equal to or in excess of $141.80
(as equitably adjusted for stock splits, stock dividends, special cash dividends, reorganizations, combinations, recapitalizations and
similar transactions affecting the common stock) prior to the Forfeiture Date.
The
liabilities associated with the warrants and earnout shares were immaterial as of March 31, 2023. There was not a material change
in the fair value of the liabilities between the Merger Date and March 31, 2023.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
12.
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”) reviews the Company’s operating results in assessing performance and allocating
resources. The CODM is the Chief Executive Officer. 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 months ended March 31, 2023 and 2022, the Company did not have sales to customers outside the United States. As of March 31,
2023 and December 31, 2022, the Company did not have any assets located outside of the United States.
Information
about the Company’s reportable segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
|
|
|
|
|
2023 |
|
2022 |
| Revenue
from external customers |
|
|
|
|
|
|
|
| Retail |
|
|
|
|
$ |
50,559 |
|
|
$ |
191,793 |
|
| Wholesale |
|
|
|
|
3,549 |
|
|
27,787 |
|
| Consolidated |
|
|
|
|
$ |
54,108 |
|
|
$ |
219,580 |
|
| Segment
gross profit (loss) |
|
|
|
|
|
|
|
| Retail |
|
|
|
|
$ |
3,929 |
|
|
$ |
10,926 |
|
| Wholesale |
|
|
|
|
(765) |
|
|
(138) |
|
| Consolidated |
|
|
|
|
$ |
3,164 |
|
|
$ |
10,788 |
|
The
reconciliation between reportable segment gross profit to loss before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three
Months Ended March 31, |
| |
|
|
|
|
2023 |
|
2022 |
| Segment
gross profit |
|
|
|
|
$ |
3,164 |
|
|
$ |
10,788 |
|
| Selling,
general and administrative expenses |
|
|
|
|
(42,591) |
|
|
(63,537) |
|
| Depreciation
and amortization |
|
|
|
|
(4,399) |
|
|
(1,680) |
|
| Loss
on impairment |
|
|
|
|
(931) |
|
|
— |
|
| Interest
and other expense, net |
|
|
|
|
(2,791) |
|
|
(2,578) |
|
| Loss
before income taxes |
|
|
|
|
$ |
(47,548) |
|
|
$ |
(57,007) |
|
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
13.
STOCK-BASED COMPENSATION PLANS
The
Company’s 2014 Stock Option Plan (the “2014 Plan”) provides for the grant of restricted stock awards and incentive and
non-qualified options and to purchase Class A common stock to officers, employees, directors, and consultants. Options granted to employees
and non-employees generally vest ratably over four to five
years, with a maximum contractual term of ten
years. Outstanding awards under the 2014 Plan continue to be subject to the terms and conditions of the 2014 Plan. The
number of shares authorized for issuance under the 2014 Plan was reduced to the number of shares subject to awards outstanding under the
2014 Plan immediately after the IAC Merger. As a result, no further awards will be made under the 2014 Plan. Shares reserved for awards
that are subsequently expired or forfeited will no longer be returned to the pool of shares authorized for issuance under the 2014 Plan.
At
the Company's special meeting of stockholders held on October 13, 2020, the stockholders approved the 2020 Omnibus Equity Compensation
Plan (the "2020 Plan"). The 2020 Plan provides for the grant of incentive and non-qualified stock option, restricted stock units ("RSUs"),
restricted share awards, stock appreciation awards, and cash-based awards to employees, directors, and consultants of the Company. Awards
under the 2020 Plan expire no more than ten
years from the date of grant. The 2020 Plan became effective immediately upon the closing of the IAC Merger.
In
June 2022, the Company's Compensation Committee adopted the 2022 Employment Inducement Plan and granted at total of 46,165
inducement RSU awards to form Fair employees joining the Company following the acquisition of the Marketplace Assets (see Note 3 - Business
Combinations). The grants of restricted stock units were promised to each of the employees in their employment agreements or offer letters
with the Company as a material inducement to employment in accordance with Nasdaq Listing Rule 5635(c)(4). All awards will vest subject
to continued employment and vest on May 20, 2023.
In
December 2022, the Company assumed various stock plans in connection with the CarLotz Merger (the "CarLotz Plans"). Outstanding awards
under the CarLotz Plans continue to be subject to the terms and conditions of the CarLotz Plans. The number of shares authorized for issuance
under the CarLotz Plans was reduced to the number of shares subject to awards outstanding under the CarLotz Plans immediately after the
CarLotz Merger.
Activity
related to employee and non-employee stock options for all plans is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual Life
(Years) |
|
Aggregate
Intrinsic Value (000’s) |
|
As of December 31,
2022 |
519,323 |
|
|
$ |
26.02 |
|
|
4.95 |
|
$ |
1 |
|
| Granted |
— |
|
|
— |
|
|
|
|
|
| Exercised |
— |
|
|
— |
|
|
|
|
|
| Forfeited |
(4,927) |
|
|
31.99 |
|
|
|
|
|
| Cancelled
(expired) |
(117,025) |
|
|
70.05 |
|
|
|
|
|
|
As of March 31,
2023 |
397,371 |
|
$ |
12.98 |
|
|
5.95 |
|
$ |
— |
|
|
Exercisable
as of March 31, 2023 |
393,867 |
|
$ |
12.84 |
|
|
5.94 |
|
$ |
— |
|
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Activity
related to employee and non-employee RSU awards is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares |
|
Weighted
Average
Grant
Date Fair Value |
|
Weighted
Average
Remaining
Contractual Life
(Years) |
|
Aggregate
Intrinsic Value (000’s) |
|
Unvested as
of December 31, 2022 |
486,054 |
|
|
$ |
29.30 |
|
|
1.01 |
|
$ |
724 |
|
| Granted |
123,688 |
|
|
2.16 |
|
|
|
|
|
| Vested |
(35,796) |
|
|
37.70 |
|
|
|
|
|
| Forfeited |
(89,298) |
|
|
20.69 |
|
|
|
|
|
|
Unvested as
of March 31, 2023 |
484,648 |
|
$ |
23.27 |
|
|
0.81 |
|
$ |
543 |
|
| Vested
and unreleased |
22,673 |
|
|
|
|
|
|
|
Outstanding
as of March 31, 2023 |
507,321 |
|
|
|
|
|
|
Stock-Based
Compensation Expense
For
the three months ended March 31, 2023 and 2022, the Company recorded stock-based compensation expense to selling, general and administrative
expenses on the condensed consolidated statements of operations and comprehensive loss of $1.2
million and $4.2
million, respectively. In addition, the Company capitalized stock-based compensation costs for the three months ended March 31, 2023 and
2022 of $0.2
million and $0.3
million, respectively, to capitalized website and internal use software costs, net.
As
of March 31, 2023, there was $9.0
million of unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average period of 1.21
years.
14.
RELATED PARTY TRANSACTIONS
Sales
to Related Parties
The
Company operated a one-sided marketplace (“OSM”) program whereby the Company acquired cars from various sources in Oxnard,
California and sold them directly and solely to Lithia. The Company invoiced Lithia based on the purchase price of the car plus an agreed
upon margin. During the three months ended March 31, 2023 and 2022, the Company recognized zero and
$4.7
million, respectively, of sales from the OSM agreement with Lithia. The OSM program was terminated in the second quarter of 2022 with
the last sale to Lithia taking place in March 2022.
Accounts
Receivable from Related Party
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 8,666,154
shares of Legacy Shift common stock at an exercise price of $0.10
per share (the “Warrant Shares”). The Warrant Shares were scheduled to vest and become exercisable in six
separate tranches of 1,444,359
shares each. Vesting and exercisability was 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. All Warrant Shares became vested prior to the Vesting Termination Date and were exercised prior to the
IAC Merger.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
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). The estimated fair value of the in substance upfront payment
to AWS was $2.8 million
with an offsetting entry recorded to additional paid-in capital, representing a capital transaction with a related party.
Milestone
5 was met in October 2019 and the Company recorded the 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 $0.4 million
and was recorded to other non-current assets on the condensed consolidated balance sheets. The combined asset recorded of $3.2 million
is subject to amortization over a five-year
period expected period of benefit. During the three months ended March 31, 2023 and 2022 the Company amortized $0.1
million and $0.2
million, respectively of the asset as a reduction to finance and insurance sales, which is recorded within other revenue, net on the condensed
consolidated statements of operations and comprehensive loss. As of March 31, 2023 and December 31, 2022, the remaining asset,
net of amortization, was zero and
$0.6 million,
respectively.
In
February 2023, the contract obtained pursuant to Milestone 5 was terminated, and the remaining $0.5
million of the Milestone 5 asset was expensed to selling, general and administrative expenses on the condensed consolidated statements
of operations and comprehensive loss.
Accounts
Payable Due to Related Party
As
of March 31, 2023 and December 31, 2022 payables and accruals to Lithia consisted of other miscellaneous expenses of $0.2
million and $0.2
million, respectively.
15.
IMPAIRMENT, RESTRUCTURING AND DISCONTINUED OPERATIONS
Impairment
of Long-Lived Assets
During
the fourth fiscal quarter of 2022, management identified indicators of impairment, including declines in our market capitalization, rising
interest rates, and other unfavorable macroeconomic and industry factors, and performed a test for recoverability for each of the Company's
pre-CarLotz Merger asset groups. Assets acquired as part of the CarLotz Merger were recorded at fair value on the acquisition date (see
Note 3 - Business Combinations). Asset groups consisted of one asset group containing all operating assets and liabilities of the Company
(the "Operating Asset Group"), and separate assets groups each containing a single closed facility that is subleased or held for sublease
(the "Sublease Asset Groups"). The Operating Asset Group and certain Sublease Asset Groups were determined not to be recoverable, and
as such management determined the fair value of these asset groups. The Operating Asset Group was valued with the assistance of third-party
valuation specialists using a market approach based on comparison to peer company valuation multiples. The Sublease Asset Groups were
valued using the income approach based on discounted estimated cash flows from subleasing the properties.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
Operating Asset Group and one of the Sublease Asset Groups were determined to have carrying values in excess of their fair values. As
such, the Company measured a loss on impairment equal to the difference between the carrying value and the fair value of each impaired
asset group. The loss on impairment was allocated to the assets within each respective asset group, except that no individual asset was
reduced below its individual fair value. Within the Operating Asset Group, the fair value of individual assets was determined with the
assistance of third party valuation specialists. Right of use assets were valued using the market approach, based on comparison to similar
leased properties. Capitalized internal use software was valued using the relief-from-royalty approach, which involves the estimation
of an amount of hypothetical royalty savings enjoyed by the entity that owns an intangible asset because that entity is relieved from
having to license that intangible asset from another owner. Property and equipment was valued using the cost approach based on secondary
market values of similar assets. Within the impaired Sublease Asset Group, the fair value of the impaired right of use asset was determined
using the income approach based on discounted estimated cash flows from subleasing the properties.
The
Company recognized a loss on impairment of long-lived assets related to various Sublease Asset Groups of $0.9
million for the three months ended March 31, 2023. There was no
loss on impairment of long lived assets for the three months ended March 31, 2022. All impaired asset groups were contained in the Retail
segment.
Facility
Closures and Reduction in Force
During
the three months ended March 31, 2023, the Company reduced its total headcount by approximately 42%
as a result of continued efforts to improve overhead efficiency and elimination of redundancies resulting from the CarLotz Merger. During
the three months ended March 31, 2023, the reduction in force resulted in total new cash charges of approximately $0.9
million, consisting primarily of severance and related personnel reduction costs included in selling, general and administrative expenses
on the condensed consolidated statements of operations and comprehensive loss. In addition, the Company closed its facility in Downers
Grove, Illinois and the former CarLotz headquarters facility in Richmond, Virginia.
Restructuring
Plan
On
July 22, 2022, the Company's Board approved the implementation of the Restructuring Plan designed to position the Company for long-term
profitable growth by prioritizing unit economics, reducing operating expenses and maximizing liquidity. As part of the Restructuring Plan,
the Company consolidated Shift’s physical operations to three West Coast locations in Los Angeles, Oakland, and Portland, closing
seven existing facilities. The Company also restructured its workforce around the reduced physical footprint, eliminating approximately
650
positions or 60%
of its workforce. The restructuring was substantially complete as of September 30, 2022. There were no restructuring charges recognized
for the three months ended March 31, 2023 and 2022.
The
following table is a reconciliation of the beginning and ending severance liability for the three months ended March 31, 2023 related
to the Restructuring Plan:
|
|
|
|
|
|
| Balance
at December 31, 2022 |
$ |
794 |
|
| Accruals
and accrual adjustments |
— |
|
| Cash
payments |
(161) |
|
|
Balance at March 31,
2023 |
$ |
633 |
|
Commutation
of Reinsurance Contracts
During
the three months ended March 31, 2023, the Company commuted all reinsurance contracts issued by the Company's Orange Peel Protection Reinsurance,
Ltd. subsidiary. The commutation resulted in transfer of the Company's reinsurance-related assets and liabilities to the counterparty,
in exchange for net cash consideration of $0.2 million.
In connection with the commutation, the Company recognized a loss on disposal of $0.1 million included in selling, general and administrative
expenses on the condensed consolidated statements of operations and comprehensive loss.
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Assets
and Liabilities Held for Sale and Discontinued Operations
In
connection with the acquisition of CarLotz, the Company acquired several real estate leaseholds. A plan of sale related to several of
these real estate leases as well as certain assets and liabilities of the Orange Grove Fleet Solutions, LLC ("Orange Grove") subsidiary
was adopted in December 2022. Orange Grove and three
retail locations sold during the three months ended March 31, 2023 were determined to meet the criteria for classification as discontinued
operations. The discontinued operations are included in the Retail and Wholesale segments. The impact on net loss of these leases and
subsidiaries held for sale was immaterial
for the year ended December 31, 2022.
Additional
leasehold and related assets were classified as held for sale during the three months ended March 31, 2023. None of the assets and liabilities
initially classified as held for sale during the three months ended March 31, 2023 met the criteria to be classified as discontinued operations.
The Company recognized a loss on disposal of $3.1 million
in connection with assets classified as held for sale during three months ended March 31, 2023. The loss on disposal was recorded in selling,
general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss.
On
February 2, 2023, the Company entered into and closed on an Asset Purchase Agreement with a private dealership group, pursuant to which
the counterparty agreed to purchase the inventory and the lease-related assets and liabilities of the three retail locations for net cash
consideration of $0.4 million.
The
following table presents the loss associated with the sale, presented in the results of our discontinued operations below, in thousands:
|
|
|
|
|
|
|
|
|
| Gross
purchase price |
|
$ |
434 |
|
| Net
assets sold |
|
(820) |
|
| Loss
on disposal |
|
$ |
(386) |
|
The
carrying value of the net assets classified as discontinued operations sold during the period were as follows, in thousands:
|
|
|
|
|
|
|
|
|
| Assets |
|
|
| Inventory |
|
$ |
606 |
|
| Security
deposits |
|
57 |
|
| Property,
plant, and equipment |
|
306 |
|
| Operating
lease assets |
|
1,577 |
|
| Total
assets |
|
$ |
2,546 |
|
| Liabilities |
|
|
| Operating
lease liabilities |
|
$ |
1,726 |
|
| Total
liabilities |
|
$ |
1,726 |
|
|
|
|
| Net
assets sold |
|
$ |
820 |
|
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
following table presents components making up the balance sheets line item consisting of the carrying amount of assets and liabilities
classified as held for sale and the aggregate amounts of the classes of assets and liabilities of the facilities and entities classified
as discontinued operations, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2023 |
|
December
31, 2022 |
| Assets |
|
|
|
| Held
for sale: |
|
|
|
| Operating
lease assets |
$ |
7,813 |
|
|
$ |
5,634 |
|
| Finance
lease assets, net |
— |
|
|
3,960 |
|
| Total
held for sale assets |
7,813 |
|
|
9,594 |
|
| Discontinued
Operations: |
|
|
|
| Accounts
receivable, net |
460 |
|
689 |
| Prepaid
expenses and other current assets |
217 |
|
226 |
| Property
and equipment, net |
2,186 |
|
2,584 |
| Operating
lease assets |
1,893 |
|
3,938 |
| Finance
lease assets, net |
180 |
|
195 |
| Total
discontinued operations assets |
4,936 |
|
7,632 |
| Total
held for sale and discontinued operations assets |
$ |
12,749 |
|
$ |
17,226 |
|
|
|
|
| Liabilities |
|
|
|
| Held
for sale: |
|
|
|
| Operating
lease liabilities |
$ |
13,018 |
|
|
$ |
6,016 |
|
| Finance
lease liabilities |
2,641 |
|
|
4,843 |
|
| Total
held for sale liabilities |
15,659 |
|
|
10,859 |
|
| Discontinued
Operations: |
|
|
|
| Accounts
payable |
65 |
|
70 |
| Accrued
expenses and other current liabilities |
272 |
|
131 |
| Operating
lease liabilities |
1,900 |
|
4,122 |
| Finance
lease liabilities |
183 |
|
193 |
| Other
non-current liabilities |
80 |
|
87 |
| Total
discontinued operations liabilities |
2,500 |
|
4,603 |
| Total
held for sale and discontinued operations liabilities |
$ |
18,159 |
|
$ |
15,462 |
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
following table presents information regarding certain components of loss from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2023 |
| Retail
revenue, net |
|
$ |
2,123 |
|
| Other
revenue, net |
|
270 |
|
| Wholesale
vehicle revenue |
|
1,190 |
|
| Total
revenue |
|
3,584 |
|
| Cost
of sales |
|
3,210 |
|
| Gross
profit |
|
374 |
|
| Selling,
general and administrative expenses |
|
459 |
|
| Loss
on disposal |
|
386 |
|
| Depreciation
and amortization |
|
20 |
|
| Total
Operating Expenses |
|
865 |
|
| Loss
from operations |
|
(491) |
|
| Interest
and other expense, net |
|
(3) |
|
| Loss
from discontinued operations |
|
$ |
(494) |
|
Transaction
costs related to the sale were immaterial for the three months ended March 31, 2023.
The
following table presents non-cash items related to discontinued operations, in thousands:
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2023 |
| Depreciation
and amortization |
|
$ |
20 |
|
16.
INCOME TAXES
The
Company recorded a provision for income taxes of $0.1
million and $41
thousand for the three months ended March 31, 2023 and 2022, respectively. The Company continues to maintain a full valuation allowance
for its net U.S. federal and state deferred tax assets.
17.
NET LOSS PER SHARE
The
following table sets forth the computation of net loss per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
March 31, |
| (in
thousands, except share and per share amounts) |
|
2023 |
|
2022 |
| Net
loss |
|
$ |
(48,097) |
|
|
$ |
(57,048) |
|
| Weighted-average
number of shares outstanding used to compute net loss per share, basic and diluted |
|
16,920,600 |
|
|
8,182,525 |
|
| Net
loss per share, basic and diluted |
|
$ |
(2.84) |
|
|
$ |
(6.97) |
|
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
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 March 31, |
| |
2023 |
|
2022 |
| Escrow
Shares |
300,010 |
|
|
300,010 |
|
| Public
and private warrants |
1,146,727 |
|
|
— |
|
| Earnout
Shares |
489,841 |
|
|
— |
|
| Convertible
Notes |
1,779,834 |
|
|
1,779,834 |
|
| Stock
options |
397,371 |
|
|
156,302 |
|
| Restricted
stock units |
507,321 |
|
|
748,162 |
|
| Contingently
repurchasable early exercise shares |
813 |
|
|
4,800 |
|
| Total |
4,621,917 |
|
|
2,989,108 |
|
SHIFT
TECHNOLOGIES INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
18.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have been
no events that have occurred that would require adjustments to our disclosures in the condensed consolidated financial statements, except
for the following:
Review
of Strategic Alternatives
On
May 11, 2023, we announced that our Board of Directors is exploring and evaluating strategic alternatives to enhance stockholder value,
which may include (but may not be limited to) exploring a potential sale of certain operating businesses, third party investment or partnership
opportunities and/or funding alternatives for our marketplace business, or the continued execution of our business plans. There is no
set timetable for completion of the evaluation process, and we do not intend to provide updates or make any comments regarding the evaluation
of strategic alternatives, unless our Board of Directors has approved a specific transaction or otherwise deems disclosure appropriate.
There
can be no assurance that any such transaction will be pursued or consummated. We may also incur substantial costs in connection with the
pursuit of strategic alternatives which are not ultimately consummated. Also, there are risks inherent with the consummation of any such
transaction, such as the risks that the expected enhancement of shareholder value may not be realized, that unexpected liabilities may
result from such transaction and that the process of consummating or the effects of consummating such a transaction may cause interruption
or slow down the operations of our existing or continuing businesses.
Convertible
Notes
On
May 16, 2023, the Company announced that it is utilizing the contractual 30-day grace period with respect to the interest payment due
on May 15, 2023 on its convertible notes. The Company and its advisors plan to communicate with debt holders to explore restructuring
options.
Nasdaq
Market Capitalization Deficiency Letter
On
April 19, 2023, Nasdaq staff (the "Staff") notified the Company that, for the last 30
consecutive business days, the Company’s Market Value of Listed Securities ("MVLS") was below the minimum of $35
million required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(2) (the “Market Value
Standard”). The Company has a period of 180
calendar days from the date of the notice, or until October 16, 2023 (the “Compliance Date”), to regain compliance with
the Market Value Standard. During this period, Class A common stock will continue to trade on the Nasdaq Capital Market. If at any time
before the Compliance Date the Company’s MVLS closes at or above $35
million for a minimum of 10
consecutive business days as required under the Market Value Standard, the Staff will notify the Company it has regained compliance and
the matter will be closed. If the Company does not regain compliance with the Market Value Standard by the Compliance Date, the Staff
will provide a written notification to the Company that Class A common stock will be subject to delisting. At that time, the Company may
appeal the Staff’s delisting determination to a Hearings Panel (the “Panel”). However, there can be no assurance that,
if the Company receives a delisting notice and appeals the delisting determination by the Staff to the Panel, such appeal would be successful.
The Company intends to monitor its MVLS between now and the Compliance Date, and may, if appropriate, evaluate available options to resolve
the deficiency under the Market Value Standard and regain compliance with the Market Value Standard.
ITEM
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 condensed consolidated financial statements
and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 8 of our Annual Report on Form
10-K for the year ended December 31, 2022. This discussion 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 sections entitled “Risk Factors” and “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 consumer-centric omnichannel retailer transforming the used car industry by leveraging its end-to-end ecommerce platform and retail
locations to provide a technology-driven, hassle-free customer experience.
Launched
in 2014, Shift started as a pure ecommerce seller and buyer of used cars, aimed at transforming the customer experience within the industry.
Since inception, Shift has invested significantly into its technology platform to create an exceptional customer experience and to support
and leverage the internal operations of the Company.
On
October 13, 2020, Insurance Acquisition Corp. (“IAC”), an entity listed on The Nasdaq Capital Market under the trade symbol
“INSU”, acquired Shift Platform, Inc., formerly known as Shift Technologies, Inc. (“Legacy Shift”), by the merger
of IAC Merger Sub, Inc., a direct wholly owned subsidiary of IAC, with and into Legacy Shift, with Legacy Shift continuing as the surviving
entity and a wholly owned subsidiary of IAC (the “IAC Merger”). The public company resulting from the merger was renamed Shift
Technologies, Inc.
In
August 2022, Shift announced both a strategic and operational restructuring and a merger with CarLotz (the "CarLotz Merger"), a consignment-to-retail
used vehicle marketplace that operated a technology-enabled buying, sourcing, and selling model with an omnichannel experience. With the
implementation of the restructuring and the close of the merger, Shift evolved into an omnichannel experience and established a plan to
position the Company for long-term profitable growth by prioritizing unit economics, reducing operating expenses and maximizing liquidity.
The
Company has three markets in California and Oregon, where customers can test drive vehicles and work with sales associates during any
point of the sale process. Each market has Shift-managed reconditioning centers to prepare each vehicle for sale using a 150+ point inspection
process. In-house reconditioning provides better control of timing and greater efficiency within our operations. In addition to performing
the 150+ point inspection, we offer customers a seven-day, 200-mile return policy, to ensure consumer confidence in their purchase from
Shift.
Recent
Events
Review
of Strategic Alternatives
On
May 11, 2023, we announced that our Board of Directors is exploring and evaluating strategic alternatives to enhance stockholder value,
which may include (but may not be limited to) exploring a potential sale of certain operating businesses, third party investment or partnership
opportunities and/or funding alternatives for our marketplace business, or the continued execution of our business plans. There is no
set timetable for completion of the evaluation process, and we do not intend to provide updates or make any comments regarding the evaluation
of strategic alternatives, unless our Board of Directors has approved a specific transaction or otherwise deems disclosure appropriate.
There
can be no assurance that any such transaction will be pursued or consummated. We may also incur substantial costs in connection with the
pursuit of strategic alternatives which are not ultimately consummated. Also, there are risks inherent with the consummation of any such
transaction, such as the risks that the expected enhancement of shareholder value may not be realized, that unexpected liabilities may
result from such transaction and that the process of consummating or the effects of consummating such a transaction may cause interruption
or slow down the operations of our existing or continuing businesses.
Convertible
Notes
On
May 16, 2023, the Company announced that it is utilizing the contractual 30-day grace period with respect to the interest payment due
on May 15, 2023 on its convertible notes. The Company and its advisors plan to communicate with debt holders to explore restructuring
options.
Nasdaq
Market Capitalization Deficiency Letter
On
April 19, 2023, Nasdaq staff (the "Staff") notified the Company that, for the last 30 consecutive business days, the Company’s
Market Value of Listed Securities ("MVLS") was below the minimum of $35 million required for continued listing on The Nasdaq Capital Market
pursuant to Nasdaq Listing Rule 5550(b)(2) (the “Market Value Standard”). The Company has a period of 180 calendar days from
the date of the notice, or until October 16, 2023 (the “Compliance Date”), to regain compliance with the Market Value
Standard. During this period, Class A common stock will continue to trade on The Nasdaq Capital Market. If at any time before the Compliance
Date the Company’s MVLS closes at or above $35 million for a minimum of 10 consecutive business days as required under the Market
Value Standard, the Staff will notify the Company it has regained compliance and the matter will be closed. If the Company does not regain
compliance with the Market Value Standard by the Compliance Date, the Staff will provide a written notification to the Company that Class
A common stock will be subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Hearings
Panel (the “Panel”). However, there can be no assurance that, if the Company receives a delisting notice and appeals the delisting
determination by the Staff to the Panel, such appeal would be successful. The Company intends to monitor its MVLS between now and the
Compliance Date, and may, if appropriate, evaluate available options to resolve the deficiency under the Market Value Standard and regain
compliance with the Market Value Standard.
Nasdaq
Deficiency Letter and Reverse Stock Split
On
October 4, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock
Market LLC (“Nasdaq”) notifying us that, for the last 30 consecutive business days, the bid price for our Class A common stock
had closed below the $1.00 per share minimum bid price requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq
Listing Rule 5450(a)(1) (the "Bid Price Requirement"). Under Nasdaq Listing Rule 5810(c)(3)(A) (the "Compliance Period Rule"), we have
a 180-calendar day grace period, or until April 3, 2023 (the “Compliance Date”), to regain compliance with the Bid Price Requirement.
During this period, our Class A common stock will continue to trade on The Nasdaq Capital Market. If at any time before the Compliance
Date the bid price of Class A common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days as required
under the Compliance Period Rule, the Staff will provide written notification to the Company that it has regained compliance with the
Bid Price Requirement (unless the Staff exercises its discretion to extend this 10 business day period pursuant to Nasdaq Listing Rule
5810(c)(3)(H)).
At
the Company’s Special Meeting of Stockholders held on December 7, 2022, the Company’s stockholders approved a proposal to
authorize a reverse stock split of the Company’s Class A common stock, at a ratio within the range of 1-for-5 to 1-for-10. The Board
approved a 1-for-10 reverse split ratio, and on March 7, 2023, the Company filed a Certificate of Amendment to its Second Amended and
Restated Certificate of Incorporation (the “Charter Amendment”) to effect the reverse split effective March 8, 2023.
On March 22, 2023, the Company was notified by Nasdaq that the Company has regained compliance with the Bid Price Requirement.
CarLotz
Merger
The
Company closed its acquisition of CarLotz, Inc. in December 2022. At the date of this filing, the Company has closed all former CarLotz
locations except those serving our current major markets. The workforce of the combined company has also been reduced in accordance with
our smaller geographic footprint and to eliminate redundancies arising from the CarLotz Merger.
Business
Description
Shift
is an omnichannel retailer buying and selling used cars, operating an end-to-end ecommerce platform and three markets located in California
and Oregon. Each market provides vehicle inventory inspection, reconditioning and storage to prepare cars for sale. For the three months
ended March 31, 2023, the Company had $54.1 million in revenue, a decrease of 75% compared to $219.6 million of revenue for the three
months ended March 31, 2022.
Shift's
focus on improving unit economics is driven by direct vehicle acquisition channels, optimized inventory mix and ancillary product offerings,
combined with streamlined inventory onboarding, controlled fulfillment costs, and centralized software. Shift’s differentiated consumer
sourcing 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. For the three months ended March 31, 2023, Shift sourced
79% of its inventory from consumer-sellers and partners driving improved 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 provides Shift with access to a deep pool of scarce, highly desirable inventory.
Over time, we intend to expand our machine learning-enabled recommendation engine to better help customers find the cars best suited to
them.
Shift
offers a full suite of options to consumers to finance and protect their vehicle through our mobile point-of-sale solution or in our locations.
These products include vehicle service contracts, guaranteed asset protection, and tire coverage.
Since
inception, Shift has invested significantly in its technology to provide a highly-rated customer experience, to support the operations
of the business, and to allow the Company to scale over time. Our ecommerce platform has significant functionality that includes discover
and search functionality for potential car buyers, the ability to connect customers to various lending partners for financing and service
products, online prequalification form that filters inventory that meets their budget and financing requirements, ability to prequalify
for financing, and the ability to get an instant online quote for car sellers. We will continue to develop our technology to improve the
overall operations of the business and especially the customer experience.
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 to consumers at one of our markets, directly, through our
ecommerce platform in a seamless end-to-end process, or through a combination of online and in-person. 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
and vehicle protection products, also referred to as finance and insurance (“F&I”), 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 March
31, 2023 and 2022 was $54.1 million and $219.6 million, respectively.
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 accumulate data, we expect to improve the performance of our model to optimize our vehicle selection and disposal.
Vehicle
Reconditioning
All
of the cars that Shift sells undergo a rigorous 150+ point mechanical inspection and reconditioning process in one of our markets (or
at a third-party partner when additional capacity is needed) to help ensure that they are 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 operational flexibility in our reconditioning
process improves our ability to grow profitably and is a primary factor in our decision to conduct reconditioning in-house.
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 F&I products we sell, our gross profit on these items is equal to the revenue we generate.
Our current offering consists of financing from third-party lenders, guaranteed asset protection (“GAP”), vehicle protection
plans and vehicle service contracts. We plan to offer additional third-party products to provide a wider product offering to customers
and expect these products to contribute to reaching our revenue and profitability targets.
Shift
Marketplace
We
are developing an online marketplace that will enable third party dealers to reach customers through our marketplace platform, making
a wide selection of used vehicles available to customers online. The Company currently anticipates that the online marketplace will launch
in the third quarter of 2023.
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:
Market
Penetration Within Our Existing Markets
We
believe that there remains an opportunity to capture additional market share within our existing markets.
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 improved pricing. Simultaneously, customers become more likely to purchase a car on our website, driving higher demand and sales
volume.
Reconditioning
Processes
We
learned early on from our experience in the used car sales business that in order 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”).
Other
Revenue from Existing Revenue Streams
We
have prioritized development of our “other revenue” streams, which comprise the financing and vehicle protection products
as well as other ancillary products. We have invested in the technology and sales capabilities needed 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 from further expansion of our attach rates for our financing and vehicle protection product suite.
Other
Revenue from Expansion of Product Offerings
We
see an 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. We intend to continue to grow this
business segment to service every addressable 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.
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 recognize that in the future, our revenues may be affected
by these seasonal trends (including any disruptions to normal seasonal trends arising from the COVID-19 pandemic), as well as cyclical
trends affecting the overall economy, and specifically the automotive retail industry.
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 performance, increasing our brand awareness through unique site visitors
and continuing to offer a full spectrum of used vehicles to service all types of customers.
Retail
Units Sold
We
define retail 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 retail units sold is the primary driver of our revenues and, indirectly, gross profit, since retail
unit sales enable multiple complementary revenue streams, including all financing and protection products. We view retail 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 meets our retail standards.
Retail
Average Sale Price
We
define retail average sale price (“ASP”) as the average price paid by a customer for a retail vehicle, calculated as retail
revenue divided by retail units. Retail 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. We believe this metric provides
transparency and is comparable to our peers.
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 retail, other, and wholesale, each of which is divided by the total number of retail
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 primarily driven by retail 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 Retail gross profit per unit, Wholesale gross profit per unit and Other gross
profit per unit.
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 any given
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 retail units sold in a period. We view average days to sale as a useful metric in understanding the health of our
inventory.
Retail
Vehicles Available for Sale
We
define retail vehicles available for sale as the number of retail vehicles in inventory on the last day of a given reporting period. Until
we reach an optimal pooled inventory level, we view retail vehicles available for sale as a key measure of our growth. Growth in retail
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 retail vehicles available for sale is an indicator of our ability to scale our vehicle
purchasing, inspection and reconditioning operations.
Results
of Operations
The
following table presents our revenue, gross profit, and unit sales information by channel for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
| |
|
|
|
|
|
|
2023 |
|
2022 |
|
Change |
| |
|
|
|
|
|
|
($
in thousands, except per unit metrics) |
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| Retail
vehicle revenue, net |
|
|
|
|
|
|
$ |
48,907 |
|
|
$ |
183,081 |
|
|
(73.3) |
% |
| Other
revenue, net |
|
|
|
|
|
|
1,652 |
|
|
8,712 |
|
|
(81.0) |
% |
| Wholesale
vehicle revenue |
|
|
|
|
|
|
3,549 |
|
|
27,787 |
|
|
(87.2) |
% |
| Total
revenue |
|
|
|
|
|
|
$ |
54,108 |
|
|
$ |
219,580 |
|
|
(75.4) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| Cost
of sales: |
|
|
|
|
|
|
|
|
|
|
|
| Retail
vehicle cost of sales |
|
|
|
|
|
|
$ |
46,630 |
|
|
$ |
180,867 |
|
|
(74.2) |
% |
| Wholesale
vehicle cost of sales |
|
|
|
|
|
|
4,314 |
|
|
27,925 |
|
|
(84.6) |
% |
| Total
cost of sales |
|
|
|
|
|
|
$ |
50,944 |
|
|
$ |
208,792 |
|
|
(75.6) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross
profit: |
|
|
|
|
|
|
|
|
|
|
|
| Retail
vehicle gross profit |
|
|
|
|
|
|
$ |
2,277 |
|
|
$ |
2,214 |
|
|
2.8 |
% |
| Other
gross profit |
|
|
|
|
|
|
1,652 |
|
|
8,712 |
|
|
(81.0) |
% |
| Wholesale
vehicle gross loss |
|
|
|
|
|
|
(765) |
|
|
(138) |
|
|
454.3 |
% |
| Total
gross profit |
|
|
|
|
|
|
$ |
3,164 |
|
|
$ |
10,788 |
|
|
(70.7) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| Unit
sales information: |
|
|
|
|
|
|
|
|
|
|
|
| Retail
vehicle unit sales |
|
|
|
|
|
|
2,292 |
|
|
6,714 |
|
|
(65.9) |
% |
| Wholesale
vehicle unit sales |
|
|
|
|
|
|
252 |
|
|
1,975 |
|
|
(87.2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| Average
selling prices per unit (“ASP”): |
|
|
|
|
|
|
|
|
|
|
|
| Retail
vehicles |
|
|
|
|
|
|
$ |
21,338 |
|
|
$ |
27,269 |
|
|
(21.7) |
% |
| Wholesale
vehicles |
|
|
|
|
|
|
$ |
14,083 |
|
|
$ |
14,069 |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross
profit per unit: |
|
|
|
|
|
|
|
|
|
|
|
| Retail
gross profit per unit |
|
|
|
|
|
|
$ |
993 |
|
|
$ |
330 |
|
|
200.9 |
% |
| Other
gross profit per unit |
|
|
|
|
|
|
721 |
|
|
1,298 |
|
|
(44.5) |
% |
| Wholesale
gross loss per unit |
|
|
|
|
|
|
(334) |
|
|
(21) |
|
|
1,490.5 |
% |
| Total
gross profit per unit |
|
|
|
|
|
|
$ |
1,380 |
|
|
$ |
1,607 |
|
|
(14.1) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| Non-financial
metrics |
|
|
|
|
|
|
|
|
|
|
|
| Average
monthly unique visitors |
|
|
|
|
|
|
543,911 |
|
|
822,856 |
|
|
(33.9) |
% |
| Average
days to sale |
|
|
|
|
|
|
78 |
|
|
56 |
|
|
39.3 |
% |
| Retail
vehicles available for sale |
|
|
|
|
|
|
1,650 |
|
|
5,464 |
|
|
(69.8) |
% |
We
present operating results down to gross profit from three distinct revenue channels:
Retail
Vehicles, Net:
The retail channel within our Retail segment represents sales of used vehicles directly to our customers through our website.
Other,
Net:
The other
channel within our Retail segment represents fees earned on sales of value-added products associated with the sale of retail 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 March 31, 2023
Retail
Vehicle Revenue, Net
Retail
vehicle revenue decreased by $134.2 million, or 73.3%, to $48.9 million during the three months ended March 31, 2023, from $183.1 million
in the comparable period in 2022. The decrease in retail vehicle revenue was partly due to a decrease in retail ASP, which was $21,338
for the three months ended March 31, 2023, compared to $27,269 for the three months ended March 31, 2022. This decrease in retail ASP
was primarily a reflection of a return to a more traditional seasonality in the used vehicle market (as market supply increased) combined
with a shift in our product mix towards older "value" vehicles compared to the prior period.
This
decrease was also partly due to a decrease in retail unit sales, as we sold 2,292 retail vehicles in the three months ended March 31,
2023, compared to 6,714 retail vehicles in the three months ended March 31, 2022. The decrease in unit sales was associated with the closure
in 2022 of inventory storage and reconditioning centers in California, Washington, and Texas and the associated reduction in inventory
available for sale.
Following
2022's shift in strategy, retail revenue and unit sales are expected to stabilize during the remainder of 2023.
Other
Revenue, Net
Other
revenue decreased by $7.1 million, or 81.0%, to $1.7 million during the three months ended March 31, 2023, from $8.7 million in the comparable
period in 2022. This decrease was primarily due to the decrease in unit sales as we sold 2,292 total vehicles in the three months ended
March 31, 2023, compared to 6,714 total vehicles in the three months ended March 31, 2022.
Wholesale
Vehicle Revenue
Wholesale
vehicle revenue decreased by $24.2 million, or 87.2%, to $3.5 million during the three months ended March 31, 2023, from $27.8 million
in the comparable period in 2022. This decrease in wholesale vehicle revenue was primarily due to a 87.2% decrease in wholesale vehicle
unit sales to 252 during the three months ended March 31, 2023, compared to 1,975 wholesale vehicles sold in the three months ended March
31, 2022.
Cost
of Sales
Cost
of sales decreased by $157.8 million, or 75.6%, to $50.9 million during the three months ended March 31, 2023, from $208.8 million in
the comparable period in 2022. The decrease was primarily due to decreased total unit sales as we sold 2,544 total vehicles in the three
months ended March 31, 2023, compared to 8,689 total vehicles in the three months ended March 31, 2022.
Retail
Vehicle Gross Profit
Retail
vehicle gross profit increased by $0.1 million, or 2.8%, to $2.3 million during the three months ended March 31, 2023, from $2.2 million
in the comparable period in 2022. The increase was primarily driven by an increase in retail gross profit per unit, which grew to $993
per unit for the three months ended March 31, 2023, from $330 per unit in the comparable period in 2022. This was due to higher margins
driven by improved inventory aging compared to the same period last year. Retail GPU for the comparable period in 2022 was abnormally
low due to the sell-through of inventory acquired during periods of abnormally high used vehicle pricing.
Other
Gross Profit
Other
gross profit decreased by $7.1 million, or 81.0%, to $1.7 million during the three months ended March 31, 2023, from $8.7 million in the
comparable period in 2022. The decrease in other gross profit was partly due to the decrease in other gross profit per unit to $721 during
the three months ended March 31, 2023, from $1,298 per unit in the comparable period in 2022. 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 Loss
Wholesale
vehicle gross loss increased by $0.6 million, or 454.3%, to $0.8 million during the three months ended March 31, 2023, from a loss of
$0.1 million in the comparable period in 2022. The increase was primarily due to the increase in wholesale gross loss per unit, which
grew to $334 per unit for the three months ended March 31, 2023, from a loss of $21 in the comparable period in 2022. The increase was
primarily due to the liquidation of vehicles through the Wholesale channel as we continue to adjust to a smaller geographic footprint
the higher cost of sales on a per unit basis than the same period in 2022.
Components
of SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
| |
2023 |
|
2022 |
|
Change |
| |
($
in thousands) |
|
Compensation
and benefits |
$ |
14,634 |
|
|
$ |
30,514 |
|
|
(52.0) |
% |
| as
a % of revenue |
27.0 |
% |
|
13.9 |
% |
|
|
| Marketing
expenses |
4,530 |
|
|
11,909 |
|
|
(62.0) |
% |
| as
a % of revenue |
8.4 |
% |
|
5.4 |
% |
|
|
|
Other costs(1) |
23,427 |
|
|
21,114 |
|
|
11.0 |
% |
| as
a % of revenue |
43.3 |
% |
|
9.6 |
% |
|
|
| Total
selling, general and administrative expenses |
$ |
42,591 |
|
|
$ |
63,537 |
|
|
(33.0) |
% |
| as
a % of revenue |
78.7 |
% |
|
28.9 |
% |
|
|
____________
(1)Other
costs include all other selling, general and administrative expenses such as facility operating costs, vehicle shipping costs for internal
purposes, corporate occupancy, professional services, registration and licensing, and IT expenses, and M&A transaction costs.
Selling,
general and administrative expenses decreased by $20.9 million, or 33.0%, to $42.6 million during the three months ended March 31, 2023,
from $63.5 million in the comparable period in 2022. The decrease was partly due to the decrease in compensation costs of $15.9 million,
driven by the decrease in average headcount to 459 from 1,299. The decrease was also partly due to a decrease in marketing expense of
$7.4 million, as marketing spend was adjusted to fit our smaller geographic footprint.
Lastly, other costs increased by $2.3 million primarily due to costs related to closing facilities and integrating Carlotz, partly offset
by reduced selling and logistics costs.
Selling,
general and administrative expenses increased as a percentage of revenue from 28.9% to 78.7% as the Company committed to exiting locations
and reducing its real estate presence to the West coast after the CarLotz merger. The increase as a percentage of revenue is caused by
the fact that revenue from a location decreases quickly when it is closed, whereas occupancy and other costs continue to be incurred as
the facility is wound down.
Liquidity
and Capital Resources
Sources
of liquidity
Our
main source of liquidity is cash generated from financing activities. Cash generated from financing activities through March 31,
2023 primarily includes proceeds from the IAC Merger and PIPE financing completed in October 2020, issuance of convertible notes and senior
unsecured notes, and proceeds from the Flooring Line of Credit facility with Ally (the "Ally FLOC"). Refer to Note 9 - Borrowings and
Note 14 - Related Party Transactions of the “Notes
to Condensed Consolidated Financial Statements”
for additional information. In addition, we obtained $95.7 million in cash from the CarLotz Merger (see Note 3 - Business Combinations
of the “Notes
to Condensed Consolidated Financial Statements”
for additional information).
On
May 27, 2021, the Company completed a private offering of its 4.75% Convertible Senior Notes due 2026 (the “Notes”).
The aggregate principal amount of the Notes sold in the offering was $150.0 million. The Notes accrue interest payable semi-annually in
arrears at a rate of 4.75% per year. The Notes will mature on May 15, 2026, unless earlier converted, redeemed or repurchased by
the Company. See Note 9 - Borrowings in the “Notes
to Condensed Consolidated Financial Statements”
for additional details regarding the Notes. The Company used approximately $28.4 million of the net proceeds from the sale of the
Notes to pay the cost of the Capped Call Transactions (see Note 11 - Stockholders' Deficit of the “Notes
to Condensed Consolidated Financial Statements”),
and is using the remaining proceeds for working capital and general corporate purposes. On May 16, 2023, the Company announced that it
is utilizing the contractual 30-day grace period with respect to the interest payment due on May 15, 2023 on the Notes. The Company and
its advisors plan to communicate with debt holders to explore restructuring options.
On
May 11, 2022, in conjunction with the acquisition of Fair (see Note 3 - Business Combinations of the “Notes
to Condensed Consolidated Financial Statements”),
the Company entered into an agreement with SB LL Holdco, Inc. ("SB LL Holdco") to a sale of $20.0 million aggregate principal amount
of 6.00% Senior Unsecured Notes due May 11, 2025 ("Senior Unsecured Notes").
Since
inception, the Company has generated recurring losses which has resulted in an accumulated deficit of $660.9 million as of March 31,
2023. During the three months ended March 31, 2023, the Company had negative operating cash flows of $36.3 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.
Liquidity
and Management's Plan
For
the three months ended March 31, 2023 and 2022, the Company generated negative cash flows from operations of approximately $36.3 million
and $98.4 million, respectively, and generated net losses of approximately $48.1 million and $57.0 million, respectively. As of March 31,
2023, the Company had unrestricted cash and cash equivalents of $58.8 million and total working capital of $40.8 million. Since inception,
the Company has had negative cash flows and losses from operations which it has funded primarily through issuances of common and preferred
stock and through a reverse recapitalization via the IAC Merger in October 2020. The Company has historically funded vehicle inventory
purchases through its vehicle floorplan facilities (see Note 9 - Borrowings to the accompanying condensed consolidated financial statements).
The Company's current floorplan facility expires on December 9, 2023. The Company also continually assesses other opportunities to raise
debt or equity capital.
The
Company's plan is to raise capital to provide the liquidity necessary to satisfy its obligations over the next twelve months, and to secure
a new or amended floorplan financing arrangement to provide continuity when the current floorplan expires. The Company may also pursue
other strategic alternatives. The Company's ability to raise capital may be constrained by the price of and demand for the Company's Class
A common stock. There can be no assurance that the Company will be able to raise sufficient additional capital or obtain financing that
will provide it with sufficient liquidity to satisfy its obligations over the next twelve months.
The
Company continues to focus its strategy on improving unit economics and reducing selling, general, and administrative expenses and seeks
to achieve these goals by eliminating less profitable fulfillment channels, consolidating operations into fewer physical locations, and
reducing headcount accordingly. See Note 15 - Impairment, Restructuring and Discontinued Operations to the accompanying condensed consolidated
financial statements for additional information.
In
accordance with Accounting Standards Update No. 2014-15, Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial
doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated
financial statements are issued. Management determined as a result of this evaluation, the Company’s losses and negative cash flows
from operations since inception, combined with its current cash, working capital position, and expiration of the current floorplan financing
arrangement on December 9, 2023, raise substantial doubt about the Company’s ability to continue as a going concern.
The
condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern which
contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. Accordingly,
the accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Debt
obligations
See
Note 9 - Borrowings of the “Notes
to Condensed Consolidated Financial Statements”
for information regarding the Company’s debt obligations.
Cash
Flows — Three Months Ended March 31, 2023 and 2022
The
following table summarizes our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
| |
2023 |
|
2022 |
| |
($
in thousands) |
| Cash
Flow Data: |
|
|
|
| Net
cash, cash equivalents, and restricted cash used in operating activities |
$ |
(36,314) |
|
|
$ |
(98,370) |
|
| Net
cash, cash equivalents, and restricted cash used in investing activities |
(945) |
|
|
(3,772) |
|
| Net
cash, cash equivalents, and restricted cash provided by (used in) financing activities |
(2,866) |
|
|
14,584 |
|
Operating
Activities
For
the three months ended March 31, 2023, net cash used in operating activities was $36.3 million, a decrease of $62.1 million from net cash
used in operating activities of $98.4 million for the three months ended March 31, 2022. The change is primarily due to a decrease in
net loss of $9.0 million and an increase in cash provided by net sales of inventory of $44.1 million.
Investing
Activities
For
the three months ended March 31, 2023, net cash used in investing activities of $0.9 million was primarily driven by capitalization of
website and internal-use software costs of $2.0 million, offset by proceeds from the sale of marketable securities of $0.8 million.
Financing
Activities
For
the three months ended March 31, 2023, net cash used in financing activities was $2.9 million, primarily due to net repayments on the
Flooring Line of Credit of $2.7 million.
Contractual
Obligations
The
Company has various operating leases of real estate and equipment. See Note 5 - Leases to the accompanying condensed consolidated financial
statements for further discussion of the nature and timing of cash obligations due under these leases.
Off-Balance
Sheet Arrangements
We
are a party to an off-balance sheet arrangement, as the Company guaranteed the lease obligation of two closed locations assigned to a
third-party (see Note 5 - Leases to the accompanying condensed consolidated financial statements for additional information). We are not
a party to any other 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 consolidated financial statements.
Critical
Accounting Policies and Estimates
See
Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2022.
There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year
ended December 31, 2022 except as described in Note 2 - Summary of Significant Accounting Policies to the accompanying condensed
consolidated financial statements under the heading "Recently Adopted Accounting Standards."
Available
Information
Our
website is www.shift.com. The Company files annual, quarterly and current reports, proxy statements and other information with the SEC
under the Exchange Act. The Company makes available, free of charge, on its website its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company's
reports filed with, or furnished to, the SEC are also available on the SEC's website at www.sec.gov.
In
addition, we have posted on our website the charters for our (i) Audit Committee and (ii) Leadership Development, Compensation and Governance
Committee, as well as our Code of Ethics and Business Conduct and Corporate Governance Guidelines. We will provide a copy of these documents
without charge to stockholders upon written request to Investor Relations, Shift Technologies, Inc., 290 Division Street, Fourth Floor
San Francisco, California 94103-4234. Our website and information included in or linked to our website are not part of this Form 10-Q.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable to Smaller Reporting Companies.
ITEM
4. CONTROLS AND PROCEDURES
1.
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (the "Disclosure Controls") within the meaning of Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Our Disclosure Controls are designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms. Our Disclosure Controls are also designed to ensure
that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management
recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily applied its judgment in evaluating and implementing possible controls and procedures.
As
of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of
our Disclosure Controls, which was done under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer. Based on the evaluation of our Disclosure Controls, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of March 31, 2023, our Disclosure Controls were not effective due to material weaknesses in the Company's
internal control over financial reporting as disclosed below.
2.
Material Weaknesses
As
previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, we identified material weaknesses in our
internal control over financial reporting. The first material weakness relates to lack of a process to demonstrate commitment to attracting,
developing, and retaining competent individuals in alignment with objectives. This material weakness impacted the effectiveness of our
control environment and our entity level controls. It resulted in the Company not maintaining a complement of personnel with an appropriate
level of accounting knowledge, experience and training in the application of U.S. GAAP commensurate with its financial reporting requirements
and the complexity of the Company’s operations and transactions. The second material weakness relates to insufficient selection
and development of Information Technology General Controls ("ITGCs") to support the achievement of objectives.
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis. These material weaknesses could result in a misstatement of account balances or disclosures that would result in a
material misstatement of our annual or interim consolidated financial statements that may not be detected.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or prevent or detect all
error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions, and can provide only
reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company
have been detected. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
3.
Plan to Remediate Material Weaknesses
The
Company is devoting significant time, attention, and resources to remediating the above material weaknesses. The Company has executed
or continues to execute the following steps intended to remediate the material weaknesses described above and strengthen our internal
control:
•The
Company hired experienced finance and accounting executives in the positions of Chief Financial Officer, Chief Accounting Officer, Corporate
Controller, Director of SEC Reporting, and Director of Information Technology.
•The
Company continues to train and develop experienced accounting personnel with a level of accounting knowledge and experience in the application
of U.S. GAAP commensurate with our financial reporting requirements and the complexity of our operations and transactions.
•The
Company has engaged external specialists as needed to provide assistance in accounting for significant, non-routine or complex transactions.
•The
Company engaged external consultants to assist the Company in designing, implementing, and monitoring an appropriate system of internal
control, including ITGCs.
•The
Company is executing several initiatives to strengthen our ITGC environment, including but not limited to:
◦Implementing
additional training to ensure a clear understanding of risk assessment, controls and monitoring activities related to automated processes
and systems and ITGCs related to financial reporting;
◦Implementing
improved IT policies, procedures and control activities for key systems which impact our financial reporting; and
◦Dedicating
an appropriate amount of resources to monitoring ITGCs related to financial reporting, including a sufficient complement of personnel
with the appropriate level of knowledge, experience and training to ensure compliance with policies and procedures.
The
Company has made significant progress in addressing the previously identified material weaknesses, and the results of management’s
testing indicate that the Company’s control environment has improved since the material weaknesses were first identified. However,
remediation efforts in the second half of 2022 were negatively impacted by factors including employee turnover in relevant roles and changes
in business processes resulting from restructuring activities, as well as the business acquisitions completed during the period. As a
result, management was unable to conclude that the material weaknesses were fully remediated as of March 31, 2023. The material weaknesses
will not be considered fully remediated until we have concluded, through testing, that applicable controls have been designed and operating
effectively for a sufficient period of time.
We
plan to continue to devote significant time and attention to remediate the above material weaknesses as soon as reasonably practicable.
As we continue to evaluate our controls, we will make the changes described above as well as any others determined to be needed to enhance
our control environment and remediate the material weaknesses. We believe these actions will be sufficient to remediate the identified
material weaknesses and strengthen our internal control over financial reporting; however, there can be no guarantee that such remediation
will be sufficient. We will continue to evaluate the effectiveness of our controls and will make any further changes management determines
appropriate.
4.
Changes in Internal Control over Financial Reporting
Except
as described above, there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31,
2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part
II - Other Information
ITEM
1. LEGAL PROCEEDINGS
The
Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Other than the matters discussed
below, 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.
Stifel
matter
On
May 7, 2021, we were named in a lawsuit filed in the U.S. District Court for the Southern District of New York (Stifel, Nicolaus &
Company, Inc. v. Shift Technologies, Inc. 21-cv-04135) by a former financial advisor, Stifel, Nicolaus & Company, Inc. (“Stifel”),
claiming that we are required to pay the former financial advisor certain compensation as a result of the IAC Merger. In addition, the
complaint seeks punitive damages as a result of alleged unjust enrichment for the amount of the benefits allegedly conferred on Shift
by Stifel. On August 24, 2022, Stifel's suit was dismissed with prejudice. On September 16, 2022, Stifel filed a Notice of Appeal with
the U.S. Court of Appeals for the Second Circuit and formally filed its appeal with the Second Circuit on January 20, 2023. Shift filed
its responsive pleading on April 20, 2023. Following the dismissal of Stifel's initial suit, the probable incurred losses related to the
claim are immaterial as of March 31, 2023. Based on such information as is available to us, the range of additional reasonably possible
losses related to the claim does not exceed $4.0 million, excluding any punitive damages which the Company cannot currently estimate.
The Company believes the claim is without merit and intends to defend itself vigorously; however, there can be no assurances that the
Company will be successful in its defense.
CarLotz
stockholder matters
On
November 4, 2022, a lawsuit entitled Derek Dorrien v. CarLotz, Inc. et al., Case No. 1:22-cv-09463, was filed in the United States District
Court for the Southern District of New York against CarLotz and the members of the CarLotz board of directors (the “Dorrien Action”).
On November 4, 2022, a lawsuit entitled Sholom D. Keller v. CarLotz, Inc. et al., Case No. 2022-1006-NAC, was filed in the Court of Chancery
of the State of Delaware against CarLotz and the members of the CarLotz board of directors (the “Keller Action” and together
with the Dorrien Action, the “Actions”). The Dorrien Action alleges that the defendants violated Sections 14(a) (and Rule
14a-9 promulgated thereunder) and 20(a) of the Exchange Act by, among other things, omitting certain allegedly material information with
respect to the transactions contemplated by the Merger Agreement (the “Transactions”) in the registration statement on Form
S-4 (the “Registration Statement”) filed by us with the Securities and Exchange Commission on September 26, 2022. The Keller
Action alleges that the members of the CarLotz board of directors and Lev Peker, in his capacity as an officer of CarLotz, breached their
fiduciary duties in connection with the Transactions. The Actions seek, among other things, injunctive relief, money damages and the costs
of the Actions, including reasonable attorneys’ and experts’ fees. We believe that the plaintiffs’ allegations in the
Actions are without merit; however, litigation is inherently uncertain and there can be no assurance that CarLotz’s or our defense
of the action will be successful.
In
addition, on October 3, 2022, a purported stockholder of CarLotz sent a demand to CarLotz and us regarding the Registration Statement
(the “CarLotz Stockholder Demand”). The CarLotz Stockholder Demand alleges the Registration Statement omits material information
with respect to the Transactions and demands that CarLotz, the CarLotz board of directors, and Shift provide corrective disclosures. Shift
disagrees with and intends to vigorously defend against any claim, if asserted, arising from the CarLotz Stockholder Demand.
Delaware
Section 205 Petition
On
March 6, 2023, Shift filed a petition in the Delaware Court of Chancery under Section 205 of the Delaware General Corporation Law (the
“DGCL”) to resolve potential uncertainty with respect to the Company’s share capital. Such uncertainty was introduced
by a recent decision in Garfield v. Boxed, Inc., 2022 WL 17959766 (Del. Ch. Dec. 27, 2022) that potentially affects the Company and many
other similarly situated companies that were formed and became publicly traded as a special purpose acquisition company (“SPAC”).
Out of an abundance of caution, the Company elected to pursue the remedial actions described below. Concurrently with the filing of the
Petition, the Company filed a motion to expedite the hearing on the Petition, which was subsequently granted on March 6, 2023.
In
October 2020, the Company, which was then a SPAC named Insurance Acquisition Corp. (“IAC”), held a special meeting of stockholders
(the “IAC Special Meeting”) to approve certain matters relating to the merger between IAC and a privately held company then
called Shift Technologies, Inc. One of these matters was a proposal to amend and restate IAC’s Amended and Restated Certificate
of Incorporation (the “SPAC Charter”) in order to, among other things, increase the number of authorized shares of Class A
common stock from 50,000,000 to 500,000,000 (such proposal, the “Share Increase Proposal” and, together with such other amendments
to the SPAC Charter, the “Charter Proposals”). At the IAC Special Meeting, the Charter Proposals were approved by a majority
of the outstanding shares of Class A common stock and a majority of the outstanding shares of Class B common stock of IAC as of the record
date for the IAC Special Meeting, voting together as a single class. After the IAC Special Meeting, IAC and Shift Technologies, Inc. closed
the merger pursuant to which the Company became the parent of Shift Technologies, Inc. (now named Shift Platform, Inc.), and the Company’s
certificate of incorporation, as amended to give effect to the Charter Proposals and to change the Company’s name to Shift Technologies,
Inc., became effective.
The
recent ruling by the Delaware Court of Chancery in the Boxed case introduced uncertainty as to whether Section 242(b)(2) of the DGCL would
have required the Share Increase Proposal to be approved by the vote of the majority of IAC’s then-outstanding shares of Class A
common stock, voting as a separate class. The Company had been operating with the understanding that the Charter Proposals were validly
approved at the IAC Special Meeting. In light of this recent ruling, however, to resolve potential uncertainty with respect to the Company’s
share capital, the Company filed a petition in the Delaware Court of Chancery under Section 205 of the DGCL to seek validation of the
Charter Proposals. Section 205 of the DGCL permits the Court of Chancery, in its discretion, to ratify and validate potentially defective
corporate acts.
On
March 6, 2023, the Court of Chancery granted the motion to expedite and set a hearing date for the Petition to be heard. On March 17,
2023, the hearing took place and the Court of Chancery approved the Company’s request for relief. The Court of Chancery then entered
an order under Section 205 of the DGCL on March 17, 2023, declaring (i) the increase in aggregate number of authorized shares of Class
A common stock, par value $0.0001, of the Company from 50,000,000 to 500,000,000 under the Company’s Second Amended and Restated
Certificate of Incorporation (the “Certificate of Incorporation”) and the Certificate of Incorporation, including the filing
and effectiveness thereof, are validated and declared effective retroactive to the date of its filing with the Secretary of State of the
State of Delaware on October 13, 2020 and (2) all shares of capital stock of the Company issued in reliance on the effectiveness of the
Certificate of Incorporation are validated and declared effective as of the date and time of the original issuance of such shares.
ITEM
1A. RISK FACTORS
There have been
no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, except
as follows:
There
are uncertainties introduced by our announcement of our exploration and evaluation of strategic alternatives to enhance stockholder value.
On May 11, 2023,
we announced that our Board of Directors is exploring and evaluating strategic alternatives to enhance stockholder value, which may include
(but may not be limited to) exploring a potential sale of certain operating businesses, third party investment or partnership opportunities
and/or funding alternatives for our marketplace business, or the continued execution of our business plans. There is no set timetable
for completion of the evaluation process, and we do not intend to provide updates or make any comments regarding the evaluation of strategic
alternatives, unless our Board of Directors has approved a specific transaction or otherwise deems disclosure appropriate.
There can be
no assurance that any such transaction will be pursued or consummated. We may also incur substantial costs in connection with the pursuit
of strategic alternatives which are not ultimately consummated. Also, there are risks inherent with the consummation of any such transaction,
such as the risks that the expected enhancement of shareholder value may not be realized, that unexpected liabilities may result from
such transaction and that the process of consummating or the effects of consummating such a transaction may cause interruption or slow
down the operations of our existing or continuing businesses.
Our
level of indebtedness could have a material adverse effect on our ability to generate sufficient cash to fulfill our obligations under
such indebtedness, to react to changes in our business and to incur additional indebtedness to fund future needs.
As of March
31, 2023, we had outstanding $150.0 million in principal amount under our Senior Convertible Notes (the “Notes”) which mature
on May 15, 2026, as well as $20.0 million in principal amount under Senior Unsecured Notes due May 11, 2025. Additionally, we had $22.2
million aggregate principal amount of borrowings under our Flooring Line of Credit with Ally Bank (as defined in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”) as of March 31, 2023,
which expires on December 9, 2023 (the "Ally FLOC"). Our interest expense resulting from indebtedness outstanding from time to time during
the three months ended March 31, 2023 was $3.2 million.
If our cash
flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and
capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness or utilize any available
grace period with respect to interest payments. Our ability to restructure, refinance or replace our current or future debt will depend
on the condition of the capital markets and our financial condition at such time. Any refinancing or replacement of our existing debt
could be at higher interest rates and may require it to comply with more onerous covenants, which could further restrict our business
operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. Any failure to
make payments of interest and principal on our outstanding indebtedness on a timely basis or failure to comply with certain restrictions
in its debt instruments, including the maintenance of certain liquidity requirements that further restrict its cash usage, would result
in a default under its debt instruments. In the event of a default under any of our current or future debt instruments, the lenders could
elect to declare all amounts outstanding under such debt instruments to be due and payable. Furthermore, our flooring line of credit is
secured by substantially all of our assets and contains customary restrictive covenants which, among other things, restrict our ability
to dispose of assets and/or use the proceeds from the disposition. We may not be able to consummate any such dispositions or to obtain
the proceeds that it could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
In addition,
our indebtedness under our flooring line of credit bears interest at variable rates. Because we have variable rate debt, fluctuations
in interest rates may affect its cash flows or business, financial condition and results of operations. We may attempt to minimize interest
rate risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps.
Further, the
indenture for our Notes permits a 30-day grace period for the nonpayment of interest before such nonpayment constitutes an event of default.
We have notified the holders of our Senior Convertible Notes of our intent to utilize this grace period with respect to the interest payment
due on May 15, 2023. If we are unable to pay such interest payment by the expiration of such grace period and such default in payment
is not waived in accordance with the terms of the indenture, then the trustee for the Senior Convertible Notes or the holders of at least
25% of the aggregate principal amount of Senior Convertible Notes may declare the principal amount of, and all accrued and unpaid interest
on, all of the Senior Convertible Notes then outstanding to become due and payable immediately.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
EXHIBIT
INDEX
|
|
|
|
|
|
|
|
|
| Exhibit
No. |
|
Description |
| 3.1 |
|
|
| 10.1 |
|
Amendment
to Inventory Financing and Security Agreement, dated as of February 7, 2023, by and among Shift Technologies, Inc., CarLotz, Inc., a Delaware
corporation, CarLotz Group, Inc., CarLotz, Inc., an Illinois corporation, CarLotz California, LLC, Shift Operations LLC, Ally Bank and
Ally Financial Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February 10, 2023). |
| 31.1 |
|
|
| 31.2 |
|
|
| 32.1 |
|
|
| 32.2 |
|
|
| 99.1 |
|
|
| 101.INS |
|
Inline
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within
the Inline XBRL document |
| 101.SCH |
|
Inline
XBRL Taxonomy Extension Schema Document |
| 101.CAL |
|
Inline
XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
|
Inline
XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
|
Inline
XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE |
|
Inline
XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 |
|
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
|
|
|
† |
Schedules and
similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Shift agrees to furnish a supplemental copy of any
omitted schedule or attachment to the SEC upon request. |
| * |
Indicates management
contract or compensatory plan or arrangement. |
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 thereunto duly authorized.
|
|
|
|
|
|
|
SHIFT
TECHNOLOGIES, INC. |
|
/s/
Oded Shein |
|
Oded
Shein |
|
Chief
Financial Officer |
|
June
29, 2023 |
56
