SHIFT TECHNOLOGIES, INC. – 10-K

This discussion contains forward-looking statements about Shift's business,
operations and industry that involve risks and uncertainties, such as statements
regarding Shift's plans, objectives, expectations and intentions. Shift's future
results and financial condition may differ materially from those currently
anticipated by Shift as a result of the factors described in the sections
entitled "Risk Factors" and "Cautionary Note Regarding Forward-Looking
Statements." Throughout this section, unless otherwise noted "we", "us", "our"
and the "Company" refer to Shift and its consolidated subsidiaries.

Insurance Acquisition Corp. Merger

On October 13, 2020, Insurance Acquisition Corp. ("IAC"), an entity listed on
the Nasdaq Capital Market under the trade symbol "INSU", acquired Shift
Platform, Inc., formerly known as Shift Technologies, Inc. ("Legacy Shift"), by
the merger of IAC Merger Sub, Inc., a direct wholly owned subsidiary of IAC,
with and into Legacy Shift, with Legacy Shift continuing as the surviving entity
and a wholly owned subsidiary of IAC (the "Merger"). The public company
resulting from the merger was renamed Shift Technologies, Inc., which we refer
to as Shift, we, us, our, SFT, or the Company. Upon the consummation of the
Merger, Shift received approximately $300.9 million, net of fees and expenses.
See Note 3 - Merger, in the accompanying consolidated financial statements for
additional details regarding this transaction. For financial reporting purposes
IAC was treated as the "acquired" company and Legacy Shift was treated as the
accounting acquirer.

Overview

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

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

• finding the right car,

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

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

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

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

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

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

There are three ways to purchase a car from Shift:

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

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

•Hub test drive: Customers may come to one of Shift's hub locations to see and
test drive multiple cars. When they arrive, customers can scan a QR code on each
car to immediately view all relevant details, including ownership & service
history, inspection reports, vehicle history reports, and most importantly,
dynamic pricing and market price comparisons. This immediate access to all
relevant information - without having to rely on a salesman - puts customers in
control.
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Launched in 2014, Shift operates nine vehicle inventory inspection,
reconditioning and storage centers, with six spanning the West Coast from San
Diego to Seattle and three new facilities in Austin, San Antonio, and Dallas,
Texas launched in 2021. The Company is also acquiring inventory in the Houston
and Las Vegas markets. Once fully launched, each region is supported by one hub
location that acts as the central point for reconditioning and vehicle storage
that also enables customers to browse inventory onsite. For the year ended
December 31, 2021, the Company had $636.9 million in revenue, an increase of
225.4% compared to $195.7 million of revenue for the year ended December 31,
2020. By targeting urban, densely populated markets, Shift has used
direct-to-consumer digital marketing and a responsive ecommerce sales approach
to grow its market penetration. With hub locations in only four states, Shift
has significant runway for continued geographic expansion.

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

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

Shift focuses on unit economics driven by direct vehicle acquisition channels,
optimized inventory mix and ancillary product offerings, combined with
streamlined inventory onboarding, controlled fulfillment costs, and centralized
software. For the year ended December 31, 2021, Shift sourced 94% of its
inventory from consumer-sellers and partners driving improved margins and
customer acquisition cost. Our data-driven vehicle evaluations help ensure
acquisition of the right inventory at the right price to reduce days to sale. We
believe that a differentiated ability to purchase vehicles directly from
consumer-sellers as compared to our competitors, who purchase a higher
percentage through the wholesale market, provides Shift access to a deeper pool
of scarce, highly desirable inventory.

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

Over time, we intend to expand our machine learning-enabled recommendation
engine to better help customers find the cars best suited to them. Customer
response to the Shift experience is extremely positive, resulting in a 70 Net
Promoter Score ("NPS") in 2020, an order of magnitude higher score than
traditional auto retailers. These positive experiences are expected to allow
Shift to serve customers over the entire lifecycle of vehicle ownership and
retain customers for repeat sales and purchases. By continuing to invest in
services that benefit the customer throughout the ownership phase of the
lifecycle (for example, vehicle maintenance plans), we will continue to
establish a long-term customer base that will return for future transactions.
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Revenue Model

Shift's two-sided model generates value from both the purchase and sale of
vehicles along with financing and vehicle protection products. We acquire cars
directly from consumers, partners, and other sources and sell vehicles through
our ecommerce platform directly to consumers in a seamless end-to-end process.
This model captures value from the difference in the price at which the car is
acquired and sold, as well as through fees on the sale of ancillary products
such as financing and vehicle protection products, also referred to as finance
and insurance ("F&I"), and services. If a car that we purchase does not meet our
standards for retail sale, we generate revenue by selling through wholesale
channels. These vehicles are primarily acquired from customers who trade-in
their existing vehicles in connection with a purchase from us. Our revenue for
the years ended December 31, 2021 and 2020 was $636.9 million and $195.7
million, respectively. We expect significant growth going forward as we expand
geographically, increase market penetration, and increase ancillary product
sales.

Inventory Sourcing

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

Proprietary machine learning-enabled software inputs vast quantities of data
across both the supply and demand sides to optimize our vehicle acquisition
strategy. As we grow volumes, we expect to improve the performance of our model
to optimize our vehicle selection and disposal.

Vehicle Reconditioning

All of the cars Shift sells undergo a rigorous 150+ point mechanical inspection
and reconditioning process at one of our nine regional reconditioning facilities
(or at a third-party partner when additional capacity is needed, such as during
the establishment of a new hub location) to help ensure that they're safe,
reliable, up to cosmetic standards, and comfortable. We have created two
classifications of inventory for reconditioning - Value and Certified - to
optimize the level of reconditioning for each vehicle classification. This
allows us to efficiently provide each customer with the greatest value through a
tailored reconditioning approach. Value cars are typically sold at a lower price
point and are sought after by consumers who have different expectations and
tolerances for cosmetic reconditioning standards - therefore, we focus on
mechanical and safety issues for these vehicles, with less emphasis on cosmetic
repair, in order to optimize reconditioning costs. This operational flexibility
in our reconditioning process improves our ability to grow profitably and is a
primary factor in our decision to conduct reconditioning in-house. With a test
drive service radius from our hub to a customer's home averaging two hours of
driving time, each reconditioning facility is able to cover a large geographic
range and service the surrounding metropolitan area. We plan to grow our
reconditioning center network as we expand geographically and launch new
markets.

Logistics Network

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

Financing and Vehicle Protection Products

We generate revenue by earning no obligation referral fees for selling ancillary
products to customers that purchase vehicles through the Shift platform. Since
we earn fees for the F&I products we sell, our gross profit on these items is
equal to the revenue we generate. Our current offering consists of financing
from third-party lenders, guaranteed asset protection ("GAP") waiver, vehicle
protection plans and vehicle service contracts. We plan to offer additional
third-party products to provide a wider product offering to customers and expect
these products to contribute to reaching our revenue and profitability targets.
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Factors Affecting our Business Performance

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

Deeper Market Penetration Within Our Existing Markets

We believe that there remains a substantial opportunity to capture additional
market share within our existing service areas. We've proven our ability to
command a strong market share through effective marketing channels, as
demonstrated by our current market share in our most established cities. We
believe that with effective brand marketing, we will be able to reach similar
market penetration in our other geographic markets.

Expansion into New Markets

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

Improvements in Technology Platform

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

Improvements in Reconditioning Processes

We learned early on from our experience in the used car sales business that to
be a reliable used car resource with desirable inventory for all customer types,
we needed to control our own reconditioning processes. Our reconditioning
program has constantly improved over the course of our history, and we are happy
with what we have achieved. Each unit of our inventory is reconditioned with a
focus on safety first, while optimizing for repairs that will have the highest
return on investment ("ROI"). We believe that our network of reconditioning
centers and connecting logistics routes have excess capacity, which we plan to
utilize as we increase retail sales volumes. Increasing capacity utilization
will positively affect gross profit per unit by reducing per unit overhead
costs. While 2020 and early 2021 were impacted by higher outsourced
reconditioning costs, we continued to increase the efficiency of our
reconditioning operations in the latter half of 2021 by expanding our in-house
reconditioning capabilities and reducing the use of third party reconditioning
in mature markets.

Growth in Other Revenue from Existing Revenue Streams

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

Growth in Other Revenue from Expansion of Product Offerings

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

We expect our quarterly results of operations, including our revenue, gross
profit, profitability, if any, and cash flow to vary significantly in the
future, based in part on, among other things, consumers' car buying patterns. We
have typically experienced higher revenue growth rates in the second and third
quarters of the calendar year than in each of the first or fourth quarters of
the calendar year. We believe these results are due to seasonal buying patterns
driven in part by the timing of income tax refunds, which we believe are an
important source of car buyer down payments on used vehicle purchases. We
believe that continued investments in growth, including effective marketing and
new market entry, will allow us to maintain sales growth through seasonality.
However, we recognize that in the future our revenues may be affected by these
seasonal trends (including any disruptions to normal seasonal trends arising
from the COVID-19 pandemic), as well as cyclical trends affecting the overall
economy, specifically the automotive retail industry.

Impact of COVID-19

In March 2020, the World Health Organization declared a global pandemic related
to the rapidly growing outbreak of a novel strain of coronavirus known as
COVID-19, and in the following weeks, shelter-in-place ordinances were put into
effect in regions where Shift operates. We saw a slowing of vehicle sales
immediately following the shelter-in-place ordinances in March; however, within
five weeks, we were back near our pre-COVID-19 weekly sales volumes. Although
the ultimate impacts of COVID-19 remain uncertain, a 2020 survey found that 46%
of U.S. adults surveyed plan to use their cars more often and public
transportation less often in the future. Additionally, the pandemic has
accelerated trends of online adoption more broadly as consumers seek to avoid
physical retail locations. We believe that this global pandemic will push people
to look to alternative means of personal transportation, and our product is well
suited to provide customers with a safe, clean means of transportation, through
our contactless purchase and delivery processes. Therefore, while it remains
possible that sustained or deepened impact on consumer demand resulting from
COVID-19 or the related economic recession could negatively impact Shift's
performance, we believe that Shift is well positioned to weather the pandemic.
In 2021, pandemic-related economic stimulus and constraints in the supply of new
and used vehicles have increased demand and pricing for our products, while
labor shortages have abated since the initial pandemic lockdowns.

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

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

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

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

• uncertainties related to the impact of COVID-19 variants and government actions
that that may be taken in response;

• uncertainties as to the impact of vaccination campaigns underway in key
markets; and

• potential deterioration of economic conditions in the United Stateswhich
could have an adverse impact on discretionary consumer spending.

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Key Operating Metrics

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

Ecommerce Units Sold

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

Wholesale Units Sold

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

Ecommerce Average Sale Price

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

Wholesale Average Sale Price

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

Gross Profit per Unit

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

Average Monthly Unique Visitors

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

Average Days to Sale

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

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Ecommerce Vehicles Available for Sale

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

Number of Regional Hubs

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

The following table presents our revenue, gross profit, and unit sales
information by channel for the periods indicated:

Years ended December 31, 2021

                                                                        2021                  2020               Change

Revenue:

Ecommerce vehicle revenue, net                                   $       538,387          $ 158,037                 240.7  %
Other revenue, net                                                        22,633              6,390                 254.2  %
Wholesale vehicle revenue                                                 75,849             31,291                 142.4  %
Total revenue                                                    $       636,869          $ 195,718                 225.4  %

Cost of sales:
Ecommerce vehicle cost of sales                                  $       513,124          $ 153,914                 233.4  %
Wholesale vehicle cost of sales                                           74,957             29,623                 153.0  %
Total cost of sales                                              $       588,081          $ 183,537                 220.4  %

Gross profit:
Ecommerce vehicle gross profit                                   $        25,263          $   4,123                 512.7  %
Other gross profit                                                        22,633              6,390                 254.2  %
Wholesale vehicle gross profit                                               892              1,668                 (46.5) %
Total gross profit                                               $        48,788          $  12,181                 300.5  %

Unit sales information:
Ecommerce vehicle unit sales                                                 23,251              9,497              144.8  %
Wholesale vehicle unit sales                                                  7,067              3,638               94.3  %

Average selling prices per unit ("ASP"):
Ecommerce vehicles                                               $        23,155          $  16,641                  39.1  %
Wholesale vehicles                                               $        10,733          $   8,601                  24.8  %

Gross profit per unit(1):
Ecommerce gross profit per unit                                  $         1,087          $     434                 150.5  %
Other gross profit per unit                                                  973                673                  44.6  %
Wholesale gross profit per unit                                               38                176                 (78.4) %
Total gross profit per unit                                      $         2,098          $   1,283                  63.5  %

Non-financial metrics
Average monthly unique visitors                                             659,358         369,292                  78.5  %
Average days to sale                                                             54                 55               (1.8) %
Ecommerce vehicles available for sale, end of period                          4,337           2,378                  82.4  %
Number of regional hubs, end of period                                            9               6                  50.0  %


____________

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


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

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

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

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

                          Year ended December 31, 2021

Ecommerce Vehicle Revenue, Net

Ecommerce vehicle revenue increased by $380.4 million, or 240.7%, to $538.4
million during the year ended December 31, 2021, from $158.0 million in the
comparable period in 2020. This increase was primarily driven by an increase in
ecommerce unit sales, as we sold 23,251 ecommerce vehicles in the year ended
December 31, 2021, compared to 9,497 ecommerce vehicles in the year ended
December 31, 2020. The increase in unit sales was driven by increased investment
in marketing and by increased inventory units available for sale. The increase
in sellable inventory levels was partly due to investments that increased our
reconditioning throughput.

The increase in ecommerce vehicle revenue was also partly due to an increase in
ecommerce ASP, which was $23,155 for the year ended December 31, 2021, compared
to $16,641 for the year ended December 31, 2020. This increase in ecommerce ASP
was primarily a reflection of changes to our inventory mix as well as an
increase in demand for used vehicles coupled with lower than average inventory
levels across the auto market as a whole.

Other Revenue, Net

Other revenue increased by $16.2 million, or 254.2%, to $22.6 million during the
year ended December 31, 2021, from $6.4 million in the comparable period in
2020. This increase was primarily due to strategic investments to enhance our
ancillary products to better monetize our growing unit sales.

Wholesale Vehicle Revenue

Wholesale vehicle revenue increased by $44.6 million, or 142.4%, to $75.8
million during the year ended December 31, 2021, from $31.3 million in the
comparable period in 2020. The increase was primarily due to an increase in
wholesale unit sales as we sold 7,067 wholesale vehicles in the year ended
December 31, 2021, compared to 3,638 wholesale vehicles during the year ended
December 31, 2020. This increase in wholesale vehicle revenue was also partly
due to a 24.8% increase in wholesale ASP.

Cost of Sales

Cost of sales increased by $404.5 million, or 220.4%, to $588.1 million during
the year ended December 31, 2021, from $183.5 million in the comparable period
in 2020. The increase was primarily due to an increase in unit sales as we sold
30,318 total vehicles in the year ended December 31, 2021, compared to 13,135
total vehicles in the year ended December 31, 2020. The remainder of the
increase is due to increased buying and selling prices in the used auto market
as a whole, caused by constrained supplies of new and used vehicles.
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Ecommerce Vehicle Gross Profit

Ecommerce vehicle gross profit increased by $21.1 million, or 512.7%, to $25.3
million during the year ended December 31, 2021, from $4.1 million in the
comparable period in 2020. The increase was primarily driven by an increase in
ecommerce units sold, as described in "Ecommerce Vehicle Revenue, Net" above.
The increase in ecommerce vehicle gross profit was also partly due to an
increase in ecommerce gross profit per unit, which grew to $1,087 per unit for
the year ended December 31, 2021, from $434 per unit in the comparable period in
2020. The increase in ecommerce gross profit per unit was largely driven by
lower reconditioning costs resulting from decreased use of third party services
and increased efficiency of internal reconditioning. Ecommerce vehicle gross
profit also benefited from favorable conditions in the used auto market leading
to favorable pricing.

Other Gross Profit

Other gross profit increased by $16.2 million, or 254.2%, to $22.6 million
during the year ended December 31, 2021, from $6.4 million in the comparable
period in 2020. Other gross profit per unit increased to $973 during the year
ended December 31, 2021, from $673 per unit in the comparable period in 2020.
Other revenue consists of 100% gross margin products for which gross profit
equals revenue. Therefore, changes in other gross profit and the associated
drivers are identical to changes in other revenue and the associated drivers.

Wholesale Vehicle Gross Profit

Wholesale vehicle gross profit decreased by $0.8 million, or 46.5%, to $0.9
million during the year ended December 31, 2021, from $1.7 million in the
comparable period in 2020. The decrease was primarily driven by a decrease in
wholesale gross profit per unit, which shrank to $38 per unit for the year ended
December 31, 2021, from $176 in the comparable period in 2020. During the year
ended December 31, 2020, we sold a fleet of newer vehicles that had been
purchased from a defunct rental car business on favorable terms, which increased
the average wholesale margin in the comparable period.

Components of SG&A

                                                                              Years ended December 31,
                                                                   2021                 2020                Change
                                                                                  ($ in thousands)
Compensation and benefits(1)                                 $    103,871           $  33,565                   209.5  %
as a % of revenue                                                    16.3   %            17.1  %
Marketing expenses                                                 49,807              23,271                   114.0  %
as a % of revenue                                                     7.8   %            11.9  %
Other costs(2)                                                     66,377              27,060                   145.3  %
as a % of revenue                                                    10.4   %            13.8  %
Total selling, general and administrative expenses           $    220,055           $  83,896                   162.3  %
as a % of revenue                                                    34.6   %            42.9  %


____________

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

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

Selling, general and administrative expenses increased by $136.2 million, or
162.3%, to $220.1 million during the year ended December 31, 2021, from $83.9
million in the comparable period in 2020. The increase was partly due to an
increase in compensation costs of $70.3 million, driven by the increase in
average headcount from 569 to 1,037. The increase was also partly due to the
increase in marketing expense of $26.5 million, which resulted from continued
investment in brand marketing and opportunistic discretionary spending to
leverage unusually favorable conditions in the used auto market. Lastly, other
costs increased by $39.3 million due primarily to increased selling costs and
costs associated with being a public company such as increased accounting,
compliance, and legal costs.
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Selling, General, and Administrative expenses have decreased as a percentage of
revenue as the Company increases in scale and begins to achieve operating
leverage. The decrease in marketing expense as percentage of revenue is also due
to investments in increasing brand awareness, which in turn increase the
effectiveness of our other marketing channels.

Liquidity and Capital Resources

Sources of liquidity

Our main source of liquidity is cash generated from financing activities. Cash
generated from financing activities since the Merger primarily includes proceeds
from the Merger and PIPE financing completed in October 2020, issuance of the
Convertible Senior Notes, proceeds from the Flooring Line of Credit ("Ally
FLOC") facility with Ally and proceeds from the Flooring Line of Credit ("FLOC")
facility with U.S. Bank in 2021 and 2020. On October 11, 2021, the FLOC with US
Bank expired and was repaid in full. Refer to Note 7 - Borrowings and Note 10 -
Related Party Transactions in our "Notes to Consolidated Financial Statements"
for additional information.

On October 13, 2020, Insurance Acquisition Corp. ("IAC"), an entity listed on
the Nasdaq Capital Market under the symbol "INSU", acquired Shift Platform,
Inc., formerly known as Shift Technologies, Inc., with Shift Platform, Inc.
continuing as the surviving entity. The public company resulting from the merger
was renamed Shift Technologies, Inc., which we refer to as Shift, we, us, our,
SFT, or the Company. Upon the consummation of the Merger, Shift received
approximately $300.9 million net of fees and expenses. See Note 3 - Merger in
the "Notes to Consolidated Financial Statements" for additional details
regarding this transaction.

On May 27, 2021, the Company completed a private offering of its 4.75%
Convertible Senior Notes due 2026 (the "Notes"). The aggregate principal amount
of the Notes sold in the offering was $150.0 million. The Notes accrue interest
payable semi-annually in arrears on May 15 and November 15 of each year,
beginning on November 15, 2021, at a rate of 4.75% per annum. The Notes will
mature on May 15, 2026, unless earlier converted, redeemed or repurchased by the
Company. See Note 7 - Borrowings in the "Notes to Consolidated Financial
Statements" for additional details regarding the Notes. The Company used
approximately $28.4 million of the net proceeds from the sale of the Notes to
pay the cost of the Capped Call Transactions (see Note 8 - Stockholders'
Equity), and is using the remaining proceeds for working capital and general
corporate purposes.

On December 9, 2021, the Company entered into a new $100.0 million flooring line
of credit facility with Ally Bank to finance its used vehicle inventory.
Borrowings under the Ally FLOC bear interest at the Prime Rate (as defined in
the agreement) plus 1.50%. See Note 7 - Borrowings in the "Notes to Consolidated
Financial Statements" for additional details regarding the Ally FLOC.

Since inception, the Company has generated recurring losses which has resulted
in an accumulated deficit of $440.7 million as of December 31, 2021. During the
year ended December 31, 2021, the Company had negative operating cash flows of
$211.0 million. In the future, we may attempt to raise additional capital
through the sale of equity securities or through equity-linked or debt financing
arrangements. If we raise additional funds by issuing equity or equity-linked
securities, the ownership of our existing stockholders will be diluted. If we
raise additional financing by incurring indebtedness, we will be subject to
increased fixed payment obligations and could also be subject to restrictive
covenants, such as limitations on our ability to incur additional debt, and
other operating restrictions that could adversely impact our ability to conduct
our business. Any future indebtedness we incur may result in terms that could be
unfavorable to equity investors.

Debt obligations

See Note 7 – Borrowings of the “Notes to Consolidated Financial Statements” for
information regarding the Company’s debt obligations.

Cash Flows – Years ended December 31, 2021 and 2020

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

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                                                                               Years ended December 31,
                                                                               2021                    2020
                                                                                   ($ in thousands)
Cash Flow Data:
Net cash, cash equivalents, and restricted cash used in operating
activities                                                             $     (211,046)             $ (85,852)

Net cash, cash equivalents, and restricted cash used in investing
activities

                                                                    (14,143)                (4,879)
Net cash, cash equivalents, and restricted cash provided by financing
activities                                                                    183,989                281,696


Operating Activities

For the year ended December 31, 2021, net cash used in operating activities was
$211.0 million, an increase of $125.2 million from cash used in operating
activities of $85.9 million for the year ended December 31, 2020. The increase
is primarily due to an increase in net loss of $107.1 million, partly offset by
an increase in share based compensation expense of $22.5 million. The increase
was also partly due to an increase in net inventory purchases of $42.8 million.
The impact of net inventory purchases on our liquidity position was offset by a
$71.0 million increase in cash provided by net borrowings on flooring line of
credit facilities, which are included in financing activities on the
accompanying consolidated statements of cash flows.

Investing Activities

For the year ended December 31, 2021net cash used in investing activities of
$ 14.1 million was primarily driven by the capitalization of website and
internal-use software costs and purchases of capital equipment.

For the year ended December 31, 2020net cash used in investing activities of
$ 4.9 million was primarily driven by the capitalization of website and
internal-use software costs and purchases of capital equipment.

Financing Activities

For the year ended December 31, 2021, net cash provided by financing activities
was $184.0 million, primarily due to $143.8 million in net proceeds from
issuance of the Convertible Senior Notes and net proceeds from the flooring line
of credit facilities of $68.8 million, offset by $28.4 million in premiums paid
for the Capped Call Transactions (See Note 7 - Borrowings and Note 8 -
Stockholders' Equity of the "Notes to Consolidated Financial Statements").

For the year ended December 31, 2020, net cash provided by financing activities
was $281.7 million, primarily due to net proceeds from the Merger and PIPE
financing of $300.9 million, offset by net repayment of the Delayed Draw Term
Loan of $12.5 million.

Contractual Obligations

As of December 31, 2021, the Company reported a liability for vehicles acquired
under an OEM program of $3.6 million. The Company records inventory received
under the arrangement with the OEM equal to the amount of the liability due to
the OEM to acquire such vehicles. The liability due to the OEM provider for such
acquired vehicles is equal to the OEM's original acquisition price.

The Company has various operating leases of real estate and equipment. See Note
11 - Commitments and Contingencies to the accompanying consolidated financial
statements for further discussion of the nature and timing of cash obligations
due under these leases.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, including guarantee
contracts, retained or contingent interests, certain derivative instruments and
variable interest entities that either have, or are reasonably likely to have, a
current or future material effect on our consolidated financial statements.
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Critical Accounting Policies and Estimates

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

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

Revenue

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

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

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

Ecommerce Vehicle Revenue

We sell used vehicles to retail customers through our ecommerce platform. The
price for used vehicles is the stand-alone selling price as set forth in the
customer contract. Customers frequently trade-in their existing vehicle to apply
toward the price of a used vehicle, which is included in the transaction price
as non-cash consideration at the stated trade-in value within the contract. We
satisfy our performance obligation and recognize revenue for sales of ecommerce
vehicles at a point in time when the vehicles are delivered to or picked up by
the customer. The revenue recognized by Shift is the amount equal to the
stand-alone selling price, including any service fees, less any discounts and an
estimate for returns. Revenue excludes any sales taxes, title and registration
fees, and other government fees that are collected from customers.

We receive payment for vehicle sales directly from the customer at the time of
sale or, if the customer uses financing, from third-party financial institutions
within a short period of time following the sale. Any payments received prior to
the delivery or pick-up of used vehicles are recorded as deferred revenue within
accrued liabilities on the consolidated balance sheets until delivery or pick-up
occurs.

Our return policy allows customers to initiate a return during the first seven
days or 200 miles after delivery (whichever comes first). Ecommerce vehicle
revenue is recognized net of a reserve for returns, which is estimated using
historical experience and trends. The returns reserve was $1.0 million at
December 31, 2021 and immaterial at December 31, 2020.

Other Revenue

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

In the event that a customer cancels certain finance and insurance products, the
Company may be obligated to return all or part of its commission. Other revenue
is recognized net of a reserve for cancellations, which is estimated using
historical experience and trends. The reserve for estimated cancellations at
December 31, 2021 and 2020 was $2.3 million and $0.8 million, respectively, and
is presented in accrued expenses and other current liabilities on the
consolidated balance sheets.
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Wholesale Vehicle Revenue

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

In December 2018, we agreed to sell cars to Lithia Motors, Inc. under a
one-sided marketplace ("OSM") program whereby we acquire cars primarily from
consumers in the Oxnard, California market and re-sell them to Lithia. We
recognize revenue at the agreed upon purchase price stated in the contract, plus
charges such as repairs. Payment is normally made within two weeks of delivery.

Costs to obtain or fulfill a contract

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

Valuation of Inventory

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

Determination of the Fair Value of Common Stock

A public trading market for our common stock was established in connection with
the completion of the Merger. As such, it is longer necessary for our board of
directors to estimate the fair value of our common stock in connection with our
accounting for granted stock options and other such awards we may grant, as the
fair value of our common stock is now determined based on the quoted market
price of our common stock.

Prior to the Merger, there was no public market for our common stock. The
estimated fair value of our common stock was determined by our board of
directors as of the date of each option grant with input from management,
considering our most recently available third-party valuations of common stock,
and our board of directors' assessment of additional objective and subjective
factors that it believed were relevant and which may have changed from the date
of the most recent valuation through the date of the grant. These third-party
valuations were performed in accordance with the guidance outlined in the
American Institute of Certified Public Accountants' Accounting and Valuation
Guide, Valuation of Privately-Held-Company Equity Securities Issued as
Compensation. The assumptions underlying these valuations were highly complex
and subjective and represented management's best estimates, which involved
inherent uncertainties and the application of management's judgment. As a
result, if we had used significantly different assumptions or estimates, the
fair value of our common stock and our stock-based compensation expense could be
materially different.

Income Taxes

We account for income taxes using the asset and liability method. We recognize
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
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In evaluating the ability to recover our deferred income tax assets, we consider
all available positive and negative evidence, including our operating results,
ongoing tax planning and forecasts of future taxable income on a
jurisdiction-by-jurisdiction basis. In the event that we determine we would be
able to realize our deferred tax assets in the future in excess of their net
recorded amount, we would make an adjustment to the valuation allowance that
would reduce the provision for income taxes. Conversely, in the event that all
or part of the net deferred tax assets are determined not to be realizable in
the future, an adjustment to the valuation allowance would be charged to
earnings in the period when such determination is made. As of December 31, 2021
and December 31, 2020, respectively, we recorded a full valuation allowance on
our deferred tax assets.

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

Stock-Based Compensation Expense

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

Determination of the Fair Value of Financial Instruments

Escrow Shares

The former Legacy Shift stockholders were entitled to receive up to an
additional 6,000,218 shares of the Company's common stock (the "Escrow Shares").
The Escrow Shares were issued to a third-party escrow agent in connection with
the closing of the Merger, with each former Legacy Shift stockholder listed as
beneficiary in proportion to their percentage ownership of Legacy Shift common
shares immediately prior to the Merger. The Escrow Shares will be released to
the beneficiaries if the price of our common stock meets certain thresholds in
the 30 months following the closing of the Merger (see Note 3 - Merger in the
accompanying consolidated financial statements for additional information). The
Escrow shares will be returned to the Company if these thresholds are not
reached. On October 13, 2021, 50% of the Escrow Shares were returned to the
Company as our common stock did not meet the required threshold for release of
the first tranche.

The Escrow Shares meet the accounting definition of a derivative financial
instrument. Prior to October 13, 2021, as the number of Escrow Shares that would
ultimately be released was partially dependent on variables (namely, the
occurrence of a change in control) that were not valuation inputs to a "fixed
for fixed" option or forward contract, the Escrow Shares were not considered to
be indexed to the Company's common stock and were therefore classified as a
liability. The Company's obligation to release the Escrow Shares upon
achievement of the milestones was recorded to financial instruments liability on
the consolidated balance sheet at fair value as of the date of the Merger, with
subsequent changes in fair value recorded in change in fair value of financial
instruments on the consolidated statements of operations and comprehensive loss.

Following the return of the first tranche of the Escrow Shares to the Company on
October 13, 2021, the Escrow Shares met the "fixed for fixed" option or forward
contract criteria for equity classification. As such, changes in fair value of
the Escrow Shares prior to October 13, 2021 were recorded in change in fair
value of financial instruments on the consolidated statements of operations and
comprehensive loss. The fair value of the shares on October 13, 2021 was
reclassified to additional paid-in capital from financial instruments liability
on the consolidated balance sheet.

The fair value of the Escrow Shares was determined using a Monte Carlo valuation
model, which requires significant estimates including the expected volatility of
our common stock.

Convertible Notes

On May 27, 2021, the Company completed a private offering of its 4.75%
Convertible Senior Notes due 2026 (the "Notes"). The aggregate principal amount
of the Notes sold in the offering was $150.0 million. The Notes accrue interest,
payable semi-annually in arrears on May 15 and November 15 of each year,
beginning on November 15, 2021, at a rate of 4.75% per year. The Notes will
mature on May 15, 2026, unless earlier converted, redeemed or repurchased by the
Company. Please see Note 7 - Borrowings to the accompanying consolidated
financial statements for additional information.
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The Notes contain conversion and redemption features that were evaluated for
separate accounting as bifurcated embedded derivatives under applicable GAAP.
The conversion feature was determined to meet the scope exception for embedded
features indexed to the Company's common stock, and therefore was not accounted
for separately from the host debt instrument. The redemption feature was
determined to meet the scope exception for embedded features that are clearly
and closely related to the host instrument, and therefore was not accounted for
separately from the host debt instrument. The Notes are presented on the
consolidated balance sheets at par value, net of unamortized discounts and
issuance costs.

Capped Call Transactions

On May 27, 2021, in connection with the issuance of the Notes (see Note 7 -
Borrowings), the Company consummated privately negotiated capped call
transactions (the "Capped Call Transactions") with certain of the initial
purchasers, their respective affiliates and other counterparties (the "Capped
Call Counterparties"). The Capped Call Transactions initially cover, subject to
anti-dilution adjustments substantially similar to those applicable to the
Notes, the number of the Company's Class A common shares underlying the Notes.
The Capped Call Transactions are expected generally to reduce the potential
dilution to holders of the Company's Class A common stock upon conversion of the
Notes and/or offset the potential cash payments that the Company could be
required to make in excess of the principal amount of any converted Notes upon
conversion thereof, with such reduction and/or offset subject to a cap. The
Capped Call Transactions are settled from time to time upon the conversion of
the Notes, with a final expiration date of May 15, 2026. The Capped Call
Transactions are settled in the same proportion of cash and stock as the
converted Notes. The proportion of cash and stock used to settle the Notes is at
the discretion of the Company.

The Capped Call Transactions are separate transactions entered into by the
Company with the Capped Call Counterparties, are not part of the terms of the
Notes and will not change any holder's rights under the Notes. Holders of the
Notes will not have any rights with respect to the Capped Call Transactions.

The Company used approximately $28.4 million of the net proceeds from the
offering of the Notes to pay the cost of the Capped Call Transactions. The
Capped Call Transactions do not meet the criteria for separate accounting as a
derivative as they are indexed to the Company's stock. The premiums paid for the
Capped Call Transactions have been included as a net reduction to additional
paid-in capital on the consolidated balance sheets.

Recently Issued Accounting Standards

See “Note 2 – Recently Issued Accounting Standards” in Part II, Item 8 of this
Annual Report on Form 10-K for additional information.

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