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Unpacking a SPAC Investment — Shift Technologies, Inc.

In December 2018, Insurance Acquisition Sponsor LLC formed with the goal of sponsoring a special purpose acquisition corporation (blank check company). The founders of the firm included Daniel Cohen and John Butler. Daniel Cohen learned about SPACs through his service in multiple SPACs, including: Chief Executive Officer of FinTech III, Director and Chief Executive Officer of FinTech II, and Director, President and Chief Executive Officer of FinTech I. He had previously been Chairman of Bancorp Bank’s Board of Directors and President of Cohen & Company Financial Limited (formerly Euro DeKania Management Ltd.), a wholly owned subsidiary of Cohen & Company, Inc. (NYSE: COHN). John Butler served as Head of U.S. Insurance Debt Strategy and Global ILS Platform for Cohen & Company LLC.

The sponsor LLC purchased 1,000 founder shares for an aggregate purchase price of $25,000. Then the sponsors effected a 3,697.5-for-1 forward stock split in December 2018, and, as a result, the initial stockholders held 3,697,500 founder shares with an average purchase price of approximately $0.0068 per share. That same month the company submitted its initial registration with the SEC as a blank check company.

In February 2019 the sponsors begin registering their securities for Insurance Acquisition Corporation with the SEC. The Registration Statement was for 13 million units for a potential offering of $130M. The units were to consist of one share of their Class A common stock and one-half of one warrant. Each whole warrant would entitle the holder to purchase one whole share of the Class A common stock at a price of $11.50 per share.

By March of 2019 the offering prospectus went into effect. The company’s balance sheet showed $25,000 in cash and ~$100k in deferred offering costs. The company’s ability to operate was contingent on raising funds through its offering. If it raised its funding and commenced operations, the sponsor gave itself 18 months to find another business to merge with.

On March 22, 2019, Insurance Acquisition Corporation (INSU) consummated the sale of 15,065,000 units, an over-subscribed offering of its units. Cantor Fitzgerald purchased 11.1M of the units and BTIG purchased 1.9M. The sponsors agreed to pledge their shares to any business combination. They also gave the SPAC a $750k line of credit for its operations and access to office spaces and administrative support. The company also paid Continental Stock Transfer & Trust Company approximately $15k to hold the proceeds of the offering in a custodial trust pending the future business combination. Through the rest of 2019 the units were sold in hundred thousand and million blocks to other investors.

In its June 2019 quarterly statement, INSU had 15M common shares with 5M outstanding. It had $151M in a trust and cash on hand of $837k. It had pre-paid expenses of $160k and accrued expenses of $100k. Its operating expenses for the quarter were $240k.

By the end of 2019, the corporate leadership consisted of:

Daniel G. Cohen 50 Chairman of the Board
John M. Butler 44 President and Chief Executive Officer
Paul Vernhes 49 Chief Financial Officer
Joseph W. Pooler, Jr. 54 Chief Accounting Officer and Treasurer
John C. Chrystal 61 Director
Stephanie Gould Rabin 48 Director
Sasson Posner 57 Director
INSU’s Corporate Leadership

The sponsor and directors had 5M Class B shares that would convert to Class A when they achieved a business combination for the company. Other shareholders held 13M Class A common shares. The directors had been granted 15,000 shares each as compensation. For end of year 2019 the company had $764k in expenses, and it had $2.5M in interest income and ended the year with $1.3M in net income. The IPO underwriters were owed $6.4M in fees, but they deferred the fees until a business combination.

By June 2020, INSU had identified a business to merge with: Shift Technologies, Inc. The merger consideration included 38M shares of INSU and 6M shares in escrow. Shift would earn these shares if the closing price hit $12 and then $15. The closing would also include a subscription for 18.5M shares at $10 per share consisting of a private investment in public equity (PIPE). The merger valued Shift (an online portal for used car sales) at $400M (1x the estimated 2021 revenues of Shift). Shift would receive $302M after $36M in fees.

In September 2020 INSU held its shareholder meeting to vote on whether to complete the business combination with Shift. Shareholders were asked to approve the addition of 44M shares. The proposal passed on October 13, 2020 and INSU began planning the conclusion of its merger.

In November 2020 Shift issued 24M shares on the Nasdaq and 7.7M shares to cover warrant redemptions. On November 12th its began trading as SFT and SFTTW. In its quarterly report it had $60M in Q3 revenue and was expecting $72-75M in Q4 revenues ($300M annual run rate). Before the merger Shift had $18M in cash and an EBITDA of ($19M) for the quarter. Post merger, Shift would have $320M in cash and 82M shares outstanding.

Upon the closing of the INSU/SFT transaction, the Cohen sponsor LLC held 375,000 shares of SFT’s Class A Common Stock, and 187,500 warrants to purchase an equal number of shares of SFT Class A Common Stock for $11.50 per share as a result of the 375,000 placement units which the LLC had purchased in a private placement that occurred simultaneously with the Insurance SPAC’s initial public offering on March 22, 2019.  Further, upon the Closing, the LLC held an additional 4,497,525 shares of SFT Class A Common Stock as a result of its previous purchase of founder shares of the Insurance SPAC. 

A shareholder who purchased INSU units in July 2020 paid ~$14.50 per unit. That same month INSU common shares traded at $11.50. The cost basis on the common shares generated by the units was $8.10 per share at the time of the merger. A shareholder could purchase the INSU warrants in July 2020 for $3.30 per warrant. The units split into a common share and a warrant. At the merger the warrants from the units had a new cost basis of $16.21 per share. On November 13th the SFT shares traded at $7.29 per share and the warrants traded at $2.77.

Shift also announced an offer to purchase the INSU warrants for 0.25 of an SFT share and $1. Shift also sought to eliminate it public warrants by forcing the conversion of any remaining warrants to be 0.225 of an SFT share and $0.90 (after 60% are tendered).

Cohen and Company announced it was creating INSU II.