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.
