SHIFT TECHNOLOGIES, INC. 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. 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.Insurance Acquisition Corp. Merger OnOctober 13, 2020 ,Insurance Acquisition Corp. ("IAC"), an entity listed on the Nasdaq Capital Market under the trade symbol "INSU", acquiredShift Platform, Inc. , formerly known asShift Technologies, Inc. ("Legacy Shift"), by the merger ofIAC 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 "Merger"). The public company resulting from the merger was renamedShift Technologies, Inc. , which we refer to as Shift, we, us, our, SFT, or the Company. Upon the consummation of the Merger, Shift received approximately$300.9 million , net of fees and expenses. See Note 2 - Merger, in the accompanying condensed consolidated financial statements for additional details regarding this transaction. For financial reporting purposes IAC was treated as the "acquired" company and Legacy Shift was treated as the accounting acquirer. Overview Shift is a leading end-to-end ecommerce platform transforming the used car industry with a technology-driven, hassle-free customer experience. Shift's mission is to make car purchase and ownership simple - to make buying or selling a used car fun, fair, and accessible to everyone. Shift provides comprehensive, technology-driven solutions throughout the car ownership lifecycle: •finding the right car, •having a test drive brought to you before buying the car, •a seamless digitally-driven purchase transaction including financing and vehicle protection products, •an efficient, fully-digital trade-in/sale transaction, •and a vision to provide high-value support services during car ownership. Each of these steps is powered by Shift's software solutions, mobile transactions platform, and scalable logistics, combined with the Company's eight centralized inspection, reconditioning & storage centers, called hubs. Shift's vision is to provide a comprehensive experience for car owners, driven by technology at every step of the consumer lifecycle. Our continued investments in our research and discovery functionality create a platform that draws customers to engage with the Shift website and provide a seamless search experience. There are three ways to purchase a car from Shift: •On-demand test drive: Shift conveniently brings the customer's desired car to the customer's desired location for a no-obligation, contactless test drive, usually at their home or work. If the customer chooses to purchase the vehicle, a Shift concierge staff can process the transaction on-the-spot via a mobile app. •Buy online: Customers can buy a car sight-unseen without a test drive and have it delivered to their home quickly with the same seven-day return policy as is offered on cars bought in person. •Hub test drive: Customers may come to one of Shift's hub locations to see and test drive multiple cars. When they arrive, customers can scan a QR code on each car to immediately view all relevant details, including ownership & service history, inspection reports, vehicle history reports, and most importantly, dynamic pricing and market price comparisons. This immediate access to all relevant information - without having to rely on a salesman - puts customers in control. 24 -------------------------------------------------------------------------------- Table of Contents Launched in 2014, Shift operates eight vehicle inventory storage and reconditioning facilities, with six spanning theWest Coast fromSan Diego toSeattle and two new facilities inAustin -San Antonio andDallas, Texas launched in 2021. The Company is also acquiring inventory in theHouston andLas Vegas markets. Once fully launched, each region is supported by one hub location that acts as the central point for reconditioning and vehicle storage that also enables customers to browse inventory onsite. For the three months endedSeptember 30, 2021 , the Company had$179.8 million in revenue, an increase of 200% compared to$59.9 million of revenue for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the Company had$440.7 million in revenue, an increase of 260.3% compared to$122.3 million of revenue for the nine months endedSeptember 30, 2020 . By targeting urban, densely populated markets, Shift has used direct-to-consumer digital marketing and a responsive ecommerce sales approach to grow its market penetration. With hub locations in only four states, Shift has significant runway for continued geographic expansion. Shift's differentiated strategy offers a wide variety of vehicles across the entire spectrum of model, price, age, and mileage to ensure that Shift has the right car for buyers regardless of interest, need, budget, or credit. Shift offers a fully omni-channel fulfillment model, led by Shift's patented system for managing on-demand test drives brought to customers at their preferred location, such as their home. Regardless of the approach chosen by the customer, they will be supported by friendly Shift Concierge and Advisor team members. For all ecommerce buyers, Shift offers a full suite of options to consumers to finance and protect their vehicle through our mobile point-of-sale solution. Through our platform, we connect customers to various lending partners for a completely digital end-to-end process for financing and service products. A customer can also complete a short online prequalification form and immediately see a filtered view of cars that meet their budget based on the financing options for which they are 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. Shift focuses on unit economics driven by direct vehicle acquisition channels, optimized inventory mix and ancillary product offerings, combined with streamlined inventory onboarding, controlled fulfillment costs, and centralized software. For the three months endedSeptember 30, 2021 , 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 as compared to our competitors,who purchase a higher percentage through the wholesale market, provides Shift access to a deeper pool of scarce, highly desirable inventory. Sellers are able to go to Shift.com, submit information on their car, and get a quote instantly. Shift uses a proprietary algorithm for pricing that utilizes current market information about market conditions, demand and supply, and car option data, among other factors. Using proprietary pricing and Shift-built mobile diagnostic tools, Shift provides an immediate quote for a customer's trade-in vehicle, and will schedule an on-demand evaluation at the customer's location by a member of Shift's concierge staff. Shift provides selling customers with information on market rates and, when a customer is ready to sell their car, we can digitally initiate e-contracting and an ACH transfer and conveniently take the car on the seller's behalf so the seller doesn't even have to leave his or her home to sell their car. Over time, we intend to expand our machine learning-enabled recommendation engine to better help customers find the cars best suited to them. Customer response to the Shift experience is extremely positive, resulting in a 70 Net Promoter Score ("NPS") in 2020, an order of magnitude higher score than traditional auto retailers. 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 (for example, vehicle maintenance plans), we will continue to establish a long-term customer base that will return for future transactions. 25 -------------------------------------------------------------------------------- Table of Contents Revenue Model Shift's two-sided model generates value from both the purchase and sale of vehicles along with financing and vehicle protection products. We acquire cars directly from consumers, partners, and other sources and sell vehicles through our ecommerce platform directly to consumers in a seamless end-to-end process. This model captures value from the difference in the price at which the car is acquired and sold, as well as through fees on the sale of ancillary products such as financing 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 customerswho trade-in their existing vehicles in connection with a purchase from us. Our revenue for the three months endedSeptember 30, 2021 and 2020, was$179.8 million and$59.9 million , respectively. Our revenue for the nine months endedSeptember 30, 2021 and 2020, was$440.7 million and$122.3 million , respectively. We expect significant growth going forward as we expand geographically, increase market penetration, and increase ancillary product sales. Inventory Sourcing We source the majority of our vehicles directly from consumers and partnerswho use the Shift platform to resell trade-in and other vehicles. These channels provide scarce and desirable local inventory of used cars of greater quality than those typically found at auction. In addition to those primary channels, we supplement our vehicle acquisitions with purchases from auto auctions, as well as some vehicles sourced locally through the trade-in program of an original equipment manufacturer ("OEM"). Proprietary machine learning-enabled software inputs vast quantities of data across both the supply and demand sides to optimize our vehicle acquisition strategy. As we grow volumes, we expect to improve the performance of our model to optimize our vehicle selection and disposal. Vehicle Reconditioning All of the cars Shift sells undergo a rigorous 150+ point mechanical inspection and reconditioning process at one of our six regional reconditioning facilities (or at a third-party partner when additional capacity is needed, such as during the establishment of a new hub location) to help ensure that they're safe, reliable, up to cosmetic standards, and comfortable. We have created two classifications of inventory for reconditioning - Value and Certified - to optimize the level of reconditioning for each vehicle classification. This allows us to efficiently provide each customer with the greatest value through a tailored reconditioning approach. Value cars are typically sold at a lower price point and are sought after by consumerswho 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. With a 60-plus mile test drive service radius from our hub to a customer's home, each reconditioning facility is able to cover a large geographic range and service the surrounding metropolitan area. We plan to grow our reconditioning center network as we expand geographically and launch new markets. Logistics Network The primary component of our logistics network consists of intra-city concierge personnel and inter-city third-party carriers. Shift concierges are able to transport vehicles to and from customers, while providing a customer friendly white glove experience, including delivery, disposal, and at-home test drives. This provides the benefit of a seamless experience as well as an on-site sales support agent to guide the customer through the process. Our agreements with long distance haulers allow us to combine the nodes in our network and deliver vehicles between cities. Strategically, this provides customers with a broad set of inventory and a great speed of delivery. Financing and Vehicle Protection Products We generate revenue by earning 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 for the sale of those. Our current offering consists of financing from third-party lenders, guaranteed asset protection ("GAP") waiver, 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. 26 -------------------------------------------------------------------------------- Table of Contents 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've proven our ability to command a strong market share through effective marketing channels, as demonstrated by our current market share in our most established cities. We believe that with effective brand marketing, we will be able to reach similar market penetration in our other geographic markets. Expansion into New Markets We believe that a phased, capital efficient expansion model results in the most cost-effective new market launch strategy in the industry. Our approach to market expansion is to implement controlled launches to expand our existing service territory. This approach both bolsters our existing markets (with new inventory being acquired in nearby cities), while simultaneously providing the new market with the local talent and resources required for a successful launch. Improvements in Technology Platform We are constantly investing in our technology platform to improve both customer experience and our business performance. We regularly implement changes to our software to help customers find the right car for them, while the machine learning component of our inventory and pricing model ensures we get the right cars at the right price. As our algorithms evolve, we are able to better monetize our inventory of vehicles through better pricing, while simultaneously customers are much more likely to purchase a car on our website, thus driving higher demand and sales volume. Improvements in Reconditioning Processes We learned early on from our experience in the used car sales business that to be a reliable used car resource with desirable inventory for all customer types, we needed to control our own reconditioning processes. Our reconditioning program has constantly improved over the course of our history, and we are happy with what we have achieved. Each unit of our inventory is reconditioned with a focus on safety first, while optimizing for repairs that will have the highest return on investment ("ROI"). We believe that our network of reconditioning centers and connecting logistics routes have excess capacity, which we plan to utilize as we increase retail sales volumes. Increasing capacity utilization will positively affect gross profit per unit by reducing per unit overhead costs. While 2020 and early 2021 were impacted by higher outsourced reconditioning costs, we have continued to increase the efficiency of our reconditioning operations and lower costs per unit in the latter half of 2021 by expanding our in-house reconditioning capabilities and reducing the use of third party reconditioning in mature markets. 27 -------------------------------------------------------------------------------- Table of Contents Growth in Other Revenue from Existing Revenue Streams We have made great strides over the past two years developing our "other revenue" streams, which comprise the financing and vehicle protection products that we can offer on our digital financing platform, and other ancillary products. We have invested in the technology, as well as the sales team, to increase the likelihood that consumers will purchase ancillary products in connection with the sale of a vehicle, and we see more opportunity for additional revenue within our existing channels purely from further expansion of our attach rates for our entire financing and vehicle protection product suite. 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 believe that continued investments in growth, including effective marketing and new market entry, will allow us to maintain sales growth through seasonality. However, we recognize that in the future our revenues may be affected by these seasonal trends (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. 28 -------------------------------------------------------------------------------- Table of Contents Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus known as COVID-19, and in the following weeks, shelter-in-place ordinances were put into effect in regions where Shift operates. We saw a slowing of vehicle sales immediately following the shelter-in-place ordinances in March; however, within five weeks, we were back near our pre-COVID-19 weekly sales volumes. Although the ultimate impacts of COVID-19 remain uncertain, and will depend on many factors outside our control, including the severity and duration of the COVID-19 pandemic and the effectiveness of actions taken to contain the spread of COVID-19 or treat its impact, a 2020 survey found that 46% ofU.S. adults surveyed plan to use their cars more often and public transportation less often in the future. Additionally, the pandemic has accelerated trends of online adoption more broadly as consumers seek to avoid physical retail locations. We believe that this global pandemic will push people to look to alternative means of personal transportation, and our product is well suited to provide customers with a safe, clean means of transportation, through our contactless purchase and delivery processes. Therefore, while it remains possible that sustained or deepened impact on consumer demand resulting from COVID-19 or the related economic recession could negatively impact Shift's performance, we believe that Shift is well positioned to weather the pandemic. In 2021, pandemic-related economic stimulus and constraints in the supply of new and used vehicles have increased demand and pricing for our products, while labor shortages have abated since the initial pandemic lockdowns. All actions will be taken in accordance with updated state and local health and safety guidance and requirements for in-office work. Nevertheless, the unpredictable nature of the virus may reduce the effectiveness of efforts aimed at improving employee retention; there can be no assurance that there will not be future material disruptions in our workforce. The various workforce health and safety measures we have taken have led to increased operating expenses and future health and safety measures may lead to further increases. Ultimately, the magnitude and duration of the impact to Shift's operations is impossible to predict due to: •uncertainties regarding the duration of the COVID-19 pandemic and how long related disruptions will continue; •the impact of governmental orders and regulations that have been, and may in the future be, imposed; •the impact of COVID-19 on wholesale auctions, state DMV titling and registration services and other third parties on which we rely; uncertainties related to the impact of COVID-19 variants and government actions that that may be taken in response; uncertainties as to the impact of vaccination campaigns underway in key markets; and potential deterioration of economic conditions inthe United States , which could have an adverse impact on discretionary consumer spending. We will continue to monitor and assess the impact of the COVID-19 pandemic on our business and our results of operations and financial condition as the pandemic continues to evolve. See Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading "Risk Factors" for more information. Key Operating Metrics We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our progress and make strategic decisions. Our key operating metrics measure the key drivers of our growth, including opening new hubs, increasing our brand awareness through unique site visitors and continuing to offer a full spectrum of used vehicles to service all types of customers. Ecommerce Units Sold We define ecommerce units sold as the number of vehicles sold to customers in a given period, net of returns. We currently have a seven-day, 200 mile return policy. The number of ecommerce units sold is the primary driver of our revenues and, indirectly, gross profit, since ecommerce unit sales enable multiple complementary revenue streams, including all financing and protection products. We view ecommerce units sold as a key measure of our growth, as growth in this metric is an indicator of our ability to successfully scale our operations while maintaining product integrity and customer satisfaction. Wholesale Units Sold 29 -------------------------------------------------------------------------------- Table of Contents We define wholesale units sold as the number of vehicles sold through wholesale channels in a given period. While wholesale units are not the primary driver of revenue or gross profit, wholesale is a valuable channel as it allows us to be able to purchase vehicles regardless of condition, which is important for the purpose of accepting a trade-in from a customer making a vehicle purchase from us, and as an online destination for consumers to sell their cars even if not selling us a car that meetings our retail standards. Ecommerce Average Sale Price We define ecommerce average sale price ("ASP") as the average price paid by a customer for an ecommerce vehicle, calculated as ecommerce revenue divided by ecommerce units. Ecommerce average sale price helps us gauge market demand in real-time and allows us to maintain a range of inventory that most accurately reflects the overall price spectrum of used vehicle sales in the market. Wholesale Average Sale Price We define wholesale average sale price as the average price paid by a customer for a wholesale vehicle, calculated as wholesale revenue divided by wholesale units. We believe this metric provides transparency and is comparable to our peers. Gross Profit per Unit We define gross profit per unit as the gross profit for ecommerce, other, and wholesale, each of which divided by the total number of ecommerce units sold in the period. We calculate gross profit as the revenue from vehicle sales and services less the costs associated with acquiring and reconditioning the vehicle prior to sale. Gross profit per unit is driven by ecommerce vehicle revenue, which generates additional revenue through attachment of our financing and protection products, and gross profit generated from wholesale vehicle sales. We present gross profit per unit from our three revenues streams, as Ecommerce gross profit per unit, Wholesale gross profit per unit and Other gross profit per unit. Average Monthly Unique Visitors We define a monthly unique visitor as an individualwho 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 individualswho visit our website multiple times within a month. We view average monthly unique visitors as a key indicator of the strength of our brand, the effectiveness of our advertising and merchandising campaigns and consumer awareness. Average Days to Sale We define average days to sale as the number of days between Shift's acquisition of a vehicle and sale of that vehicle to a customer, averaged across all ecommerce units sold in a period. We view average days to sale as a useful metric in understanding the health of our inventory. Ecommerce Vehicles Available for Sale We define ecommerce vehicles available for sale as the number of ecommerce vehicles in inventory on the last day of a given reporting period. Until we reach an optimal pooled inventory level, we view ecommerce vehicles available for sale as a key measure of our growth. Growth in ecommerce vehicles available for sale increases the selection of vehicles available to consumers, which we believe will allow us to increase the number of vehicles we sell. Moreover, growth in ecommerce vehicles available for sale is an indicator of our ability to scale our vehicle purchasing, inspection and reconditioning operations. Number of Regional Hubs We define a hub as a physical location at which we recondition and store units bought and sold within a market. Because of our omni-channel fulfillment model with our on-demand delivery test drive offering, we are able to service super-regional areas covering approximately a 60-plus mile radius from a single hub location. This is a key metric as each hub expands our service area as our service area, reconditioning and storage capacity. 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table presents our revenue, gross profit, and unit sales information by channel for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2021 2020 Change 2021 2020 Change ($ in thousands, except per unit metrics) Revenue: Ecommerce vehicle revenue, net$ 156,248 $ 48,486 222.3 %$ 374,889 $ 97,870 283.0 % Other revenue, net 6,215 2,036 205.3 % 15,309 3,933 289.2 % Wholesale vehicle revenue 17,337 9,392 84.6 % 50,455 20,504 146.1 % Total revenue$ 179,800 $ 59,914 200.1 %$ 440,653 $ 122,307 260.3 % Cost of sales: Ecommerce vehicle cost of sales$ 148,790 $ 46,880 217.4 %$ 353,310 $ 93,352 278.5 % Wholesale vehicle cost of sales 18,058 9,308 94.0 % 50,696 18,314 176.8 % Total cost of sales$ 166,848 $ 56,188 196.9 %$ 404,006 $ 111,666 261.8 % Gross profit: Ecommerce vehicle gross profit$ 7,458 $ 1,606 364.4 %$ 21,579 $ 4,518 377.6 % Other gross profit 6,215 2,036 205.3 % 15,309 3,933 289.2 % Wholesale vehicle gross profit (loss) (721) 84 (958.3) % (241) 2,190 (111.0) % Total gross profit$ 12,952 $ 3,726 247.6 %$ 36,647 $ 10,641 244.4 % Unit sales information: Ecommerce vehicle unit sales 6,487 2,946 120.2 % 16,810 6,189 171.6 % Wholesale vehicle unit sales 1,624 1,100 47.6 % 5,095 2,280 123.5 % Average selling prices per unit ("ASP"): Ecommerce vehicles$ 24,086 $ 16,458 46.3 %$ 22,302 $ 15,814 41.0 % Wholesale vehicles$ 10,675 $ 8,539 25.0 %$ 9,903 $ 8,993 10.1 % Gross profit per unit(1): Ecommerce gross profit per unit$ 1,150 $ 545 111.0 %$ 1,284 $ 730 75.9 % Other gross profit per unit$ 958 $ 691 38.6 % 911 635 43.5 % Wholesale gross profit (loss) per unit$ (111) $ 29 (482.8) % (14) 354 (104.0) % Total gross profit per unit$ 1,997 $ 1,265 57.9 %$ 2,181 $ 1,719 26.9 % Non-financial metrics Average monthly unique visitors 534,681 379,604 40.9 % 602,529 288,194 109.1 % Average days to sale 60 37 62.2 % 53 71 (25.4) % Ecommerce vehicles available for sale 3,593 1,840 95.3 % 3,593 1,840 95.3 % # of regional hubs(2) 8 5 60.0 % 8 5 60.0 % ____________ (1)Gross profit per unit is calculated as gross profit for ecommerce, other and wholesale, each of which divided by the total number of ecommerce units sold in the period. (2)As ofSeptember 30, 2021 , theDallas and Austin-San Antonio Hubs were active for vehicle storage and sales but had not yet commenced vehicle reconditioning operations. 31
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We present operating results down to gross profit from three distinct revenue
channels:
Ecommerce Vehicles: The ecommerce channel within our Retail segment represents
sales of used vehicles directly to our customers through our website.
Other: The other channel within our Retail segment represents fees earned on
sales of value-added products associated with the sale of ecommerce vehicles.
Wholesale Vehicles: The Wholesale channel is the only component of our Wholesale
segment and represents sales of used vehicles through wholesale auctions.
Three Months Ended September 30, 2021
Ecommerce Vehicle Revenue, Net
Ecommerce vehicle revenue increased by $107.8 million , or 222.3%, to $156.2
million during the three months ended September 30, 2021 , from $48.5 million in
the comparable period in 2020. This increase was primarily driven by an increase
in ecommerce unit sales, as we sold 6,487 ecommerce vehicles in the three months
ended September 30, 2021 , compared to 2,946 ecommerce vehicles in the three
months ended September 30, 2020 . The increase in unit sales was driven by
increased investment in marketing and by increased inventory units available for
sale. The increase in sellable inventory levels was partly due to investments
that increased our reconditioning throughput. Substantially all of our sales
growth resulted from increased market penetration in our five most mature West
Coast regions ranging from San Diego to Portland , with the more recent Seattle ,
Austin -San Antonio , and Dallas locations expected to contribute to sales growth
in future periods as their operations mature.
The increase in ecommerce vehicle revenue was also partly due to an increase in
ecommerce ASP, which was $24,086 for the three months ended September 30, 2021 ,
compared to $16,458 for the three months ended September 30, 2020 . This increase
in ecommerce ASP was primarily a reflection of changes to our inventory mix as
well as an increase in demand for used vehicles coupled with lower than average
inventory levels across the auto market as a whole.
Other Revenue, Net
Other revenue increased by $4.2 million , or 205.3%, to $6.2 million during the
three months ended September 30, 2021 , from $2.0 million in the comparable
period in 2020. This increase was primarily due to strategic investments to
enhance and expand our ancillary product offerings to better monetize our
growing unit sales.
Wholesale Vehicle Revenue
Wholesale vehicle revenue increased by $7.9 million , or 84.6%, to $17.3 million
during the three months ended September 30, 2021 , from $9.4 million in the
comparable period in 2020. The increase was primarily due to an increase in
wholesale unit sales as we sold 1,624 wholesale vehicles in the three months
ended September 30, 2021 , compared to 1,100 wholesale vehicles in the three
months ended September 30, 2020 . This increase in wholesale vehicle revenue was
also partly due to a 25.0% increase in ASP driven by favorable conditions in the
wholesale auto market.
Cost of Sales
Cost of sales increased by $110.7 million , or 196.9%, to $166.8 million during
the three months ended September 30, 2021 , from $56.2 million in the comparable
period in 2020. The increase was primarily due to an increase in unit sales as
we sold 8,111 total vehicles in the three months ended September 30, 2021 ,
compared to 4,046 total vehicles in the three months ended September 30, 2020 .
The remainder of the increase is due to increased buying and selling prices in
the used auto market as a whole, caused by constrained supplies of new and used
vehicles.
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Ecommerce Vehicle Gross Profit
Ecommerce vehicle gross profit increased by $5.9 million , or 364.4%, to $7.5
million during the three months ended September 30, 2021 , from $1.6 million in
the comparable period in 2020. The increase was primarily driven by an increase
in ecommerce units sold, as described in "Ecommerce Vehicle Revenue, Net" above.
The increase in ecommerce vehicle gross profit was also partly due to an
increase in ecommerce gross profit per unit, which grew to $1,150 per unit for
the three months ended September 30, 2021 , from $545 per unit in the comparable
period in 2020. This increase in ecommerce gross profit per unit was largely
driven by lower reconditioning costs. Reconditioning costs for vehicles acquired
during the previous fiscal quarter decreased due to proportionally lower
reliance on third party services and increased efficiency of internal
reconditioning facilities, which benefited gross profit as the vehicles were
sold during the three months ended September 30, 2021 . Ecommerce vehicle gross
profit also benefited from favorable conditions in the used auto market.
Other Gross Profit
Other gross profit increased by $4.2 million , or 205.3%, to $6.2 million during
the three months ended September 30, 2021 , from $2.0 million in the comparable
period in 2020. The increase was primarily driven by an increase in ecommerce
units sold, as described in "Ecommerce Vehicle Revenue, Net" above. The increase
in other gross profit was also partly due to increase in other gross profit per
unit to $958 during the three months ended September 30, 2021 , from $691 per
unit in the comparable period in 2020. Other revenue consists of 100% gross
margin products for which gross profit equals revenue. Therefore, changes in
other gross profit and the associated drivers are identical to changes in other
revenue and the associated drivers.
Wholesale Vehicle Gross Profit
Wholesale vehicle gross profit decreased by $0.8 million , or 958.3%, to $(0.7)
million during the three months ended September 30, 2021 , from $0.1 million in
the comparable period in 2020. The decrease was primarily driven by a decrease
in wholesale gross profit per unit, which shrank to $(111) per unit for the
three months ended September 30, 2021 , from $29 in the comparable period in
2020. The decrease was primarily due to write-downs of inventory disposed of or
expected to be disposed of through wholesale channels.
Components of SG&A
Three Months Ended
2021 2020 Change
($ in thousands)
Compensation and benefits(1) $ 24,784 $ 8,700 184.9 %
as a % of revenue 13.8 % 14.5 %
Marketing expenses 10,760 7,666 40.4 %
as a % of revenue 6.0 % 12.8 %
Other costs(2) 22,342 7,664 191.5 %
as a % of revenue 12.4 % 12.8 %
Total selling, general and administrative expenses $ 57,886 $ 24,030 140.9 %
as a % of revenue 32.2 % 40.1 %
____________
(1)Compensation and benefits includes all payroll and related costs, including
benefits, payroll taxes and equity-based compensation, except those related to
preparing vehicles for sale, which are included in cost of sales, and those
related to the development of software products for internal use, which are
capitalized to software and amortized over the estimated useful lives of the
related assets.
(2)Other costs include all other selling, general and administrative expenses
such as hub operating costs, vehicle shipping costs for internal purposes,
corporate occupancy, professional services, registration and licensing, and IT
expenses.
Selling, general and administrative expenses increased by $33.9 million , or
140.9%, to $57.9 million during the three months ended September 30, 2021 , from
$24.0 million in the comparable period in 2020. The increase was partly due to
an increase in compensation costs of $16.1 million , driven by the increase in
average headcount from 495 to 1,039. The increase was also partly due to the
increase in marketing expense of $3.1 million , which resulted from continued
investment in brand marketing and opportunistic discretionary spending to
leverage favorable conditions in the used auto market. Lastly, other costs
increased by $14.7 million due primarily to increased selling costs and costs
associated with being a public company such as increased accounting, compliance,
and legal costs.
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Selling, general and administrative expenses have decreased as a percentage of
revenue from 40.1% to 32.2% as the Company increases in scale and begins to
achieve operating leverage. The decrease in marketing expense as percentage of
revenue is also due to investments in brand marketing increasing the efficiency
of our marketing spend.
Nine Months Ended September 30, 2021
Ecommerce Vehicle Revenue, Net
Ecommerce vehicle revenue increased by $277.0 million , or 283.0%, to $374.9
million during the nine months ended September 30, 2021 , from $97.9 million in
the comparable period in 2020. This increase was primarily driven by an increase
in ecommerce unit sales, as we sold 16,810 ecommerce vehicles in the nine months
ended September 30, 2021 , compared to 6,189 ecommerce vehicles in the nine
months ended September 30, 2020 . The increase in unit sales was driven by
increased investment in marketing and by increased inventory units available for
sale. The increase in sellable inventory levels was partly due to investments
that increased our reconditioning throughput.
The increase in ecommerce vehicle revenue was also partly due to an increase in
ecommerce ASP, which was $22,302 for the nine months ended September 30, 2021 ,
compared to $15,814 for the nine months ended September 30, 2020 . This increase
in ecommerce ASP was primarily a reflection of changes to our inventory mix as
well as an increase in demand for used vehicles coupled with lower than average
inventory levels across the auto market as a whole.
Other Revenue, Net
Other revenue increased by $11.4 million , or 289.2%, to $15.3 million during the
nine months ended September 30, 2021 , from $3.9 million in the comparable period
in 2020. This increase was primarily due to strategic investments to enhance our
ancillary products to better monetize our growing unit sales.
Wholesale Vehicle Revenue
Wholesale vehicle revenue increased by $30.0 million , or 146.1%, to $50.5
million during the nine months ended September 30, 2021 , from $20.5 million in
the comparable period in 2020. The increase was primarily due to an increase in
wholesale unit sales as we sold 5,095 wholesale vehicles in the nine months
ended September 30, 2021 , compared to 2,280 wholesale vehicles during the nine
months ended September 30, 2020 . This increase in wholesale vehicle revenue was
also partly due to a 10.1% increase in ASP.
Cost of Sales
Cost of sales increased by $292.3 million , or 261.8%, to $404.0 million during
the nine months ended September 30, 2021 , from $111.7 million in the comparable
period in 2020. The increase was primarily due to an increase in unit sales as
we sold 21,905 total vehicles in the nine months ended September 30, 2021 ,
compared to 8,469 total vehicles in the nine months ended September 30, 2020 .
The remainder of the increase is due to increased buying and selling prices in
the used auto market as a whole, caused by constrained supplies of new and used
vehicles.
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Ecommerce Vehicle Gross Profit
Ecommerce vehicle gross profit increased by $17.1 million , or 377.6%, to $21.6
million during the nine months ended September 30, 2021 , from $4.5 million in
the comparable period in 2020. The increase was primarily driven by an increase
in ecommerce units sold, as described in "Ecommerce Vehicle Revenue, Net" above.
The increase in ecommerce vehicle gross profit was also partly due to an
increase in ecommerce gross profit per unit, which grew to $1,284 per unit for
the nine months ended September 30, 2021 , from $730 per unit in the comparable
period in 2020. This increase in ecommerce gross profit per unit was largely
driven by lower average reconditioning costs for vehicles reconditioned in the
first quarter of 2021 and sold during the three months ended September 30, 2021 .
Reconditioning costs for vehicles acquired during the previous fiscal quarter
decreased due to decreased use of third party services and increased efficiency
of internal reconditioning. The reduction in reconditioning costs benefited the
latter part of the nine months ended September 30, 2020 as the vehicles were
sold. Ecommerce vehicle gross profit also benefited from favorable conditions in
the used auto market.
Other Gross Profit
Other gross profit increased by $11.4 million , or 289.2%, to $15.3 million
during the nine months ended September 30, 2021 , from $3.9 million in the
comparable period in 2020. Other gross profit per unit increased to $911 during
the nine months ended September 30, 2021 , from $635 per unit in the comparable
period in 2020. Other revenue consists of 100% gross margin products for which
gross profit equals revenue. Therefore, changes in other gross profit and the
associated drivers are identical to changes in other revenue and the associated
drivers.
Wholesale Vehicle Gross Profit
Wholesale vehicle gross profit decreased by $2.4 million , or 111.0%, to $(0.2)
million during the nine months ended September 30, 2021 , from $2.2 million in
the comparable period in 2020. The decrease was primarily driven by a decrease
in wholesale gross profit per unit, which shrank to $(14) per unit for the nine
months ended September 30, 2021 , from $354 in the comparable period in 2020.
During the nine months ended September 30, 2020 , we sold a number of newer
vehicles that had been purchased from a defunct rental car business on favorable
terms, which increased the average wholesale margin in the comparable period.
Components of SG&A
Nine
Months Ended
2021 2020 Change
($ in thousands)
Compensation and benefits(1) $ 69,622 $ 22,022 216.1 %
as a % of revenue 15.8 % 18.0 %
Marketing expenses 37,000 12,373 199.0 %
as a % of revenue 8.4 % 10.1 %
Other costs(2) 49,642 17,714 180.2 %
as a % of revenue 11.3 % 14.5 %
Total selling, general and administrative expenses $ 156,264 $ 52,109 199.9 %
as a % of revenue 35.5 % 42.6 %
____________
(1)Compensation and benefits includes all payroll and related costs, including
benefits, payroll taxes and equity-based compensation, except those related to
preparing vehicles for sale, which are included in cost of sales, and those
related to the development of software products for internal use, which are
capitalized to software and depreciated over the estimated useful lives of the
related assets.
(2)Other costs include all other selling, general and administrative expenses
such as hub operating costs, vehicle shipping costs for internal purposes,
corporate occupancy, professional services, registration and licensing, and IT
expenses.
Selling, general and administrative expenses increased by $104.2 million , or
199.9%, to $156.3 million during the nine months ended September 30, 2021 , from
$52.1 million in the comparable period in 2020. The increase was partly due to
an increase in compensation costs of $47.6 million , driven by the increase in
average headcount from 488 to 908. The increase was also partly due to the
increase in marketing expense of $24.6 million , which resulted from continued
investment in brand marketing and opportunistic discretionary spending to
leverage unusually favorable conditions in the used auto market. Lastly, other
costs increased by $31.9 million due primarily to increased selling costs and
costs associated with being a public company such as increased accounting,
compliance, and legal costs.
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Selling, General, and Administrative expenses have decreased as a percentage of
revenue from 42.6% to 35.5% as the Company increases in scale and begins to
achieve operating leverage. The decrease in marketing expense as percentage of
revenue is also due to investments in brand marketing increasing the efficiency
of our marketing spend.
Liquidity and Capital Resources
Sources of liquidity
Our main source of liquidity is cash generated from financing activities. Cash
generated from financing activities through September 30, 2021 primarily
includes proceeds from the Merger and PIPE financing completed in October 2020 ,
issuance of convertible notes, and proceeds from our Flooring Line of Credit
("FLOC") facility with U.S. Bank in 2021 and 2020. Refer to Note 6 - Borrowings
and Note 9 - Related Party Transactions in our "Notes to Condensed Consolidated
Financial Statements" for additional information.
On October 13, 2020 , Insurance Acquisition Corp. ("IAC"), an entity listed on
the Nasdaq Capital Market under the symbol "INSU", acquired Shift Platform,
Inc. , formerly known as Shift Technologies, Inc. , with Shift Platform, Inc.
continuing as the surviving entity. The public company resulting from the merger
was renamed Shift Technologies, Inc. , which we refer to as Shift, we, us, our,
SFT, or the Company. Upon the consummation of the Merger, Shift received
approximately $300.9 million net of fees and expenses. See Note 2 - Merger in
the "Notes to Condensed Consolidated Financial Statements" for additional
details regarding this transaction.
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 will 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. See Note 6 - Borrowings n 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 7 - Stockholders'
Equity), and intends to use the remaining proceeds for working capital and
general corporate purposes.
On October 11, 2021 , the FLOC expired and was repaid in full. The Company is
actively sourcing a replacement inventory financing facility.
Since inception, the Company has generated recurring losses which has resulted
in an accumulated deficit of $386.2 million as of September 30, 2021 . During the
nine months ended September 30, 2021 , the Company had negative operating cash
flows of $128.2 million . In the future, we may attempt to raise additional
capital through the sale of equity securities or through equity-linked or debt
financing arrangements. If we raise additional funds by issuing equity or
equity-linked securities, the ownership of our existing stockholders will be
diluted. If we raise additional financing by incurring indebtedness, we will be
subject to increased fixed payment obligations and could also be subject to
restrictive covenants, such as limitations on our ability to incur additional
debt, and other operating restrictions that could adversely impact our ability
to conduct our business. Any future indebtedness we incur may result in terms
that could be unfavorable to equity investors.
Debt obligations
See Note 6 - Borrowings of the "Notes to Condensed Consolidated Financial
Statements" for information regarding the Company's debt obligations.
Cash Flows - Nine Months Ended September 30, 2021 and 2020
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended
2021 2020
($ in thousands)
Cash Flow Data:
Net cash, cash equivalents, and restricted cash used in operating
activities $
(128,164)
(9,698) (3,264)
Net cash, cash equivalents, and restricted cash provided by financing
activities 151,478 24,599
36-------------------------------------------------------------------------------- Table of Contents Operating Activities For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$128.2 million , an increase of$82.2 million from cash used in operating activities of$45.9 million for the nine months endedSeptember 30, 2020 . The increase is primarily due to an increase in net loss of$57.2 million , offset by an increase in stock based compensation of$17.5 million . The increase in cash used in operations is also partly due to increases in the change in fair value of financial instruments of$23.8 million and net inventory purchases of$24.5 million . The impact of net inventory purchases on our liquidity position was offset by a$32.0 million increase in cash provided by net borrowings on the FLOC, which is included in financing activities on the accompanying condensed consolidated statements of cash flows. Investing Activities For the nine months endedSeptember 30, 2021 , net cash used in investing activities of$9.7 million was primarily driven by the capitalization of website and internal-use software costs and purchases of capital equipment. For the nine months endedSeptember 30, 2020 , net cash used in investing activities of$3.3 million was primarily driven by the capitalization of website and internal-use software costs and purchases of capital equipment. Financing Activities For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$151.5 million , primarily due to the$143.8 million in net proceeds from issuance of the Convertible Notes, offset by$28.4 million in premiums paid or the Capped Call Transactions. In addition, the Company received net proceeds from the Flooring Line of Credit of$36.3 million , (See Note 6 - Borrowings and Note 7 - Stockholders' Equity of the "Notes to Condensed Consolidated Financial Statements"). For the nine months endedSeptember 30, 2020 , net cash provided by financing activities was$24.6 million , primarily due to proceeds from the Delayed Draw Term Loan of$12.5 million , net proceeds from the FLOC of$4.3 million , and proceeds of$6.1 million from the SBA PPP Loan. Contractual Obligations As ofSeptember 30, 2021 andDecember 31, 2020 , the Company reported a liability for vehicles acquired under OEM program of$3.7 million and$11.5 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 10 - Commitments and Contingencies 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 not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, certain derivative instruments and variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our condensed consolidated financial statements. Critical Accounting Policies and Estimates See Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year endedDecember 31, 2020 , except as follows: 37
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Table of Contents Convertible Notes OnMay 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 will accrue interest payable semi-annually in arrears onMay 15 andNovember 15 of each year, beginning onNovember 15, 2021 , at a rate of 4.75% per year. The Notes will mature onMay 15, 2026 , unless earlier converted, redeemed or repurchased by the Company. Please see Note 6 - Borrowings to the accompanying condensed 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 condensed consolidated balance sheets at par value, net of unamortized discounts and issuance costs. Capped Call Transactions OnMay 27, 2021 , in connection with the issuance of the Notes (see Note 6 - 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 ofMay 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 condensed consolidated balance sheets. Available Information Our website is located at www.shift.com, and our investor relations website is located at www.investors.shift.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Proxy Statements, and any amendments to these reports, are available through our investor relations website, free of charge, after we file them with theSEC . We webcast via our investor relations website our earnings calls and certain events we participate in or host with members of the investment community. Our investor relations website also provides notifications of news or announcements regarding our financial performance and other items of interest to our investors, includingSEC filings, investor events, press releases, and earnings releases. Further, corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website. The content of our websites are not incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with theSEC , and any references to our websites are intended to be inactive textual references only.
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