Business Context and Reporting Period
This Form 8-K Current Report, dated October 13, 2020, details the closing of a merger between Insurance Acquisition Corp. (INSU) and Shift Technologies, Inc. (Shift). Cohen & Company Inc. (the "Company") manages the Sponsor Entities (Insurance Acquisition Sponsor, LLC and Dioptra Advisors, LLC) that sponsored INSU. Upon closing, INSU changed its name to Shift Technologies, Inc. and its NASDAQ trading symbol changed to "SFT" on October 15, 2020.
Key Financial Metrics and Transaction Details
The filing does not provide standard financial metrics such as revenue, profit, cash flow, or debt levels for the Company. Instead, it focuses on the valuation and accounting treatment of the merger transaction:
- Accounting Change: The Company reclassified its investment in INSU from an equity method investment to "other investments" at fair value, adopting fair value accounting for the investment in SFT.
- Revenue Recognition: The Company expects to recognize principal transaction revenue based on the final amount of Sponsor Shares retained, the trading share price of SFT Class A Common Stock and Warrants, and fair value discounts related to share sale restrictions.
- Expense Recognition: The Company will record non-controlling interest expense or compensation expense related to Sponsor Shares distributable to non-controlling interest holders.
- Share Holdings:
- Sponsor Entities held 375,000 Placement Shares and 187,500 Warrants.
- Sponsor Entities held 4,497,525 Founder Shares.
- A subsidiary of the Company purchased 600,000 shares of SFT Class A Common Stock at $10.00 per share.
Material Changes Versus Prior Period
The primary material change is the completion of the business combination, transforming the SPAC (INSU) into a public operating company (SFT). Consequently, the Company's investment accounting methodology shifted from the equity method to fair value accounting. Additionally, the Company's executive officers (Daniel G. Cohen, Lester R. Brafman, and Joseph W. Pooler, Jr.) received allocations of SFT Class A Common Stock based on their ownership interests in Dioptra.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- The Company expects to distribute specific portions of Placement Securities and Founder Shares to non-controlling interest holders upon registration.
- Following distributions, the Company expects to retain 122,665 Placement Shares, 61,332 Warrants, and 2,019,722 Founder Shares.
- The Sponsor Entities secured board observer rights as long as they hold at least 2% of SFT's voting power.
- Placement Securities are generally non-transferable for 30 days post-closing.
- Founder Shares are subject to tiered lock-up periods based on SFT's stock price exceeding $12.00, $13.50, $15.00, and $17.00 for 20 out of 30 consecutive trading days.
- Forward-looking statements are subject to risks including economic declines, liquidity issues, litigation, and the inability to generate incremental income.
- There is a risk that intended distributions to minority interest holders may not occur.
- The filing explicitly states that actual results may differ materially from projections.
Important Facts for Investor Verification
- Verify the final trading price of SFT Class A Common Stock and Warrants to calculate the actual principal transaction revenue recognized by the Company.
- Confirm the exact number of shares distributed to non-controlling interest holders versus those retained by the Company.
- Monitor the lock-up expiration dates for Founder Shares, which are contingent on SFT's stock price performance.
- Review the Company's subsequent financial statements to see the impact of the fair value accounting reclassification on the balance sheet and income statement.
- Check for the filing of the resale shelf registration statement as required by the Amended and Restated Registration Rights Agreement.