Lemonade, Inc 8-K/A, filed Oct 11, 2022
Lemonade, Inc. (LMND)
8-K/A
2022-10-11
For: 2022-07-28
View Original
Added on
April 08, 2026
About this 8-K/A
Lemonade, Inc filed this 8-K/A on October 11, 2022, reporting on events of July 28, 2022.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): October 7, 2022 (July 28, 2022 )
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||||||||||||
(Address of principal executive offices) (Zip Code)
(844 ) 733-8666
(Registrant’s telephone number, include area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |||||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
This Amendment No. 1 to Current Report on Form 8-K/A is being filed with the Securities and Exchange Commission solely to amend and supplement Item 9.01 of the Current Report on Form 8-K (the “Original 8-K”) filed by Lemonade, Inc. (“Lemonade”) on July 28, 2022, reporting under Item 2.01 the completion of its previously announced acquisition of Metromile, Inc. (“Metromile”). Under Item 9.01 of the Original 8-K, Lemonade stated that (i) the financial statements of the business acquired and (ii) the pro forma financial statements would be filed by amendment no later than 71 days following the date that the Original 8-K was required to be filed. No other changes have been made to the Original 8-K.
Item 9.01 Financial Statements and Other Exhibits
(a) Financial statement of business acquired
The audited consolidated balance sheets of Metromile as of December 31, 2021 and 2020, the related audited consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of Metromile for the years ended December 31, 2021 and 2020, the notes related thereto and the Independent Auditor’s Report, are attached hereto as Exhibit 99.1 and incorporated herein by reference.
The unaudited consolidated financial statements of Metromile as of and for the three months ended March 31, 2022 and 2021, are attached hereto as Exhibit 99.2 and incorporated herein by reference.
(b) Pro forma financial information
The unaudited pro forma combined condensed consolidated balance sheet of Lemonade and Metromile as of March 31, 2022 and the unaudited pro forma combined condensed consolidated statements of income for the three months ended March 31, 2022 and the year ended December 31, 2021, and the notes related thereto are attached hereto as Exhibit 99.2 and incorporated herein by reference.
(d) Exhibits
Exhibit No. | Description | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| LEMONADE, INC. | ||||||||||||||
| Date: October 7, 2022 | By: | /s/ Tim Bixby | ||||||||||||
| Tim Bixby | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-266362, No. 333-239656 and No. 333-254011) of Lemonade, Inc., of our report dated February 28, 2022, relating to the consolidated financial statements of Metromile, Inc. (the “Company”), appearing in this Current Report on Form 8-K/A of Lemonade, Inc.
/s/ Moss Adams LLP
San Francisco, California
October 7, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Metromile, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Metromile, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ (deficit) equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Reserves for Loss and Loss Adjustment Expenses
As described in Notes 1 and 9 to the consolidated financial statements, the amount of the Company’s liability for loss and loss adjustment expenses (“LAE”) reserves was $73.4 million at December 31, 2021. The Company establishes reserves for claims on reported and unreported claims of insured losses. As disclosed by management, unpaid losses and LAE reserves are estimated using individual case-basis valuation and statistical analysis based on (i) claims reported, (ii) claims incurred but not reported, and (iii) estimates of the ultimate claim costs. The anticipated effect of inflation is considered when estimating liabilities for losses and LAE. Estimating the ultimate cost of claims and claims expenses is an inherently complex process that involves a high degree of management judgment.
The principal considerations for our determination that performing procedures related to the liability for unpaid losses and LAE reserves is a critical audit matter include: (1) the subjectivity of estimating claims incurred but not reported and the projection of future claim payments and (2) auditing management’s judgments regarding the historical claims paid data serving as an indicator of future payments, potential trends in loss severity and frequency, along with inflation involved a high degree of auditor judgment and subjectivity.
The primary procedures we performed to address this critical audit matter included:
•We evaluated the methods and assumptions used by the Company to estimate the unpaid losses and LAE reserves by:
•Obtaining a copy of the actuary report for December 31, 2021, to evaluate the significant assumptions used in developing the estimate and evaluating whether the Company’s estimate is within the range of potential estimates identified by the actuary.
•Testing the completeness and accuracy of underlying data provided by the Company that served as the basis for the actuarial analysis, including historical claims paid.
•Developing an independent estimate for unpaid losses and LAE reserves, utilizing historic payment and loss data as well as subsequent payment information and comparing this independent estimate to management’s estimate.
•Comparing the Company’s prior year estimate of unpaid losses and LAE reserves to actual payments made during 2021, including consideration of potential bias, to assess the reasonableness of the assumptions used by management in their estimate.
Premium Revenue
The Company’s insurance revenue consists in part, of premiums based on mileage driven by policy holders. This mileage is sourced from telematics devices and several information technology systems and databases. The Company’s information technology (IT) environment is complex and includes multiple IT systems that are used to process revenue-related data and the Company relies on the output from these systems to process and record insurance revenue. Given that the Company’s systems to process and record revenue are highly automated, there are potential risks from the capture, processing and transfer of data accurately and completely from the telematics devices and the IT systems. Additionally, due to the material weakness identified by management as described in the “Basis for Opinions” section there was a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence associated with auditing revenue.
The primary procedures we performed to address this critical audit matter included:
•Developing independent expectations for base and mileage premium revenues by state for the year ended December 31, 2021 by utilizing information including policies in force by state and industry information on changes in miles driven from prior years and comparing to revenue recognized.
•Performing tests of details of revenue using original source documents for audit evidence, including testing cash receipts from customers.
Internally Developed Software – Website and Software Development Costs
As described in Note 1, the Company invests in research and development for purposes of developing new functionality for their website, apps and gathering and analyzing data received from the driving habits of policy holders. Software development costs for internal use software are capitalized during the application development phase for projects that are probable of being completed. Costs incurred during the preliminary project phase and post-implementation/operating phase are expensed. Upgrades and/or enhancements of existing software are capitalized to the extent such upgrades and/or enhancements result in additional functionality. Payroll costs capitalized during the application development phase are based on management estimates of the amount of time spent on each individual project.
We identified the capitalization of development costs as a critical audit matter as management’s determination of which projects and activities qualify for capitalization requires significant judgment, as only those costs incurred in certain stages of development can be capitalized in accordance with the applicable accounting standards. Additionally, measuring the appropriate amounts of payroll costs to capitalize requires significant judgment and estimation by management resulting in a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management judgment related to the amount of time incurred by developers on projects in the application development phase.
The primary procedures we performed to address this critical audit matter included:
•Testing a sample of third-party costs capitalized, evaluating whether the related costs were eligible for capitalization, including agreeing information to supporting invoices from third-party providers, including cash paid to the provider.
•Testing a sample of individuals for whom payroll costs were capitalized to evaluate whether the time and related costs were eligible for capitalization. For each selection:
•Performed inquiries directly with the individual or their direct supervisor as to the nature of the projects they worked on and the percentage of time spent working on projects in the application development phase by quarter and compared to the percentage capitalized.
•Traced salary rates to offer letters or approved pay rate changes, as applicable.
•Recalculated total amount to be capitalized and compared to actual.
•Developing an independent estimate of total capitalized fringe benefits for the year ended December 31, 2021 and compared to the amount capitalized.
/s/ Moss Adams LLP
San Francisco, California
February 28, 2022
We served as the Company’s auditor from 2016 to 2022.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements combine the separate historical financial information of Lemonade, Inc. ("Lemonade") and Metromile, Inc. ("Metromile") after giving effect to the Mergers (as described in Note 1 below), and the pro forma effects of certain assumptions and adjustments described in “Notes to the Unaudited Pro Forma Condensed Combined Financial Statements” below. The unaudited pro forma condensed combined financial statements give effect to the Mergers, as if they had been completed as of March 31, 2022 for purposes of the unaudited pro forma condensed combined balance sheet, and as of January 1, 2021 for the purposes of the unaudited pro forma condensed and combined statements of operations and comprehensive loss.
The preparation of the unaudited pro forma condensed combined financial statements and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma condensed combined financial statements should be read together with:
•the accompanying notes to the unaudited pro forma condensed combined financial statements;
•Lemonade’s separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021, included in Lemonade’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022;
•Metromile’s separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021, included herein;
•Lemonade’s separate unaudited historical consolidated financial statements and accompanying notes as of and for three months ended March 31, 2022, included in Lemonade’s Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31, 2022 filed with the SEC on May 10, 2022; and
•Metromile’s separate unaudited historical condensed consolidated financial statements and accompanying notes as of and for the three months ended March 31, 2022 included herein.
In connection with the plan to integrate the operations of Lemonade and Metromile following the completion of the mergers, Lemonade anticipates that nonrecurring charges will be incurred. Lemonade is not able to determine the timing, nature, and amount of these charges as of the date of this Form 8-K/A. However, these charges will affect the results of operations of Lemonade and Metromile, as well as those of the combined company following the completion of the mergers, in the period in which they are incurred. The unaudited pro forma condensed combined financial statements do not include the effects of costs associated with any restructuring or integration activities resulting from the transaction, as such costs cannot be determined at this time.
The pro forma financial information reflects adjustments that management believes are necessary to present fairly, the combined pro forma financial position and results of operations following the closing of the transaction as of and for the periods indicated. The adjustments are based on currently available information and assumptions that management believes are, under the circumstances and given the information available at this time, reasonable. These adjustments are based on preliminary estimates and will be finalized within the measurement period that will not extend beyond 12 months from the close of the transaction. Differences between these preliminary estimates and the final acquisition accounting may arise, and these differences could have a material impact on the accompanying unaudited pro forma condensed combined consolidated financial information and the combined entity’s future results of operations and financial position.
1
The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Mergers. It has been prepared for informational purposes only and is subject to a number of uncertainties and assumptions. The pro forma financial information has been prepared by Lemonade in accordance with Regulation S-X Article 11, Pro Forma Financial information (“Article 11”). Additionally, the unaudited pro forma condensed combined financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future.
2
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2022
(in millions, except for per share amounts)
As of March 31, 2022
(in millions, except for per share amounts)
| Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||||||||||
| Lemonade Historical | Metromile Historical | Reclassification Adjustments (Note 3) | Pro Forma Adjustments (Note 6) | |||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
Fixed maturities available-for-sale, at fair value | $ | 694.7 | $ | 67.1 | $ | — | $ | — | $ | 761.8 | ||||||||||||||||||||||
Short-term investments | 83.2 | — | — | — | 83.2 | |||||||||||||||||||||||||||
Total investments | 777.9 | 67.1 | — | — | 845.0 | |||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash | 235.0 | 122.9 | — | — | 357.9 | |||||||||||||||||||||||||||
Premium receivable, net | 135.6 | 18.5 | — | — | 154.1 | |||||||||||||||||||||||||||
Reinsurance recoverable | 112.5 | 7.1 | — | — | 119.6 | |||||||||||||||||||||||||||
Prepaid reinsurance premium | 156.7 | 0.4 | — | — | 157.1 | |||||||||||||||||||||||||||
Prepaid expenses and other assets | — | 27.3 | (27.3) | — | — | |||||||||||||||||||||||||||
Deferred acquisition costs | 6.7 | 1.2 | — | (1.2) | (B) | 6.7 | ||||||||||||||||||||||||||
Property and equipment, net | 13.0 | 12.2 | — | — | 25.2 | |||||||||||||||||||||||||||
Intangible assets | 0.6 | 29.5 | — | 6.5 | (A) | 36.6 | ||||||||||||||||||||||||||
Value of business acquired | — | — | — | 1.6 | (B) | 1.6 | ||||||||||||||||||||||||||
Other assets | 57.4 | — | 27.3 | (5.4) | (C) | 79.3 | ||||||||||||||||||||||||||
Assets held for sale | — | 9.3 | — | — | 9.3 | |||||||||||||||||||||||||||
Total Assets | $ | 1,495.4 | $ | 295.5 | $ | — | $ | 1.5 | $ | 1,792.4 | ||||||||||||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||||||||||||||||||
Unpaid loss and loss adjustment expense | $ | 107.6 | $ | 76.9 | $ | — | $ | 4.9 | (D) | $ | 189.4 | |||||||||||||||||||||
Unearned premium | 222.4 | 16.9 | — | — | 239.3 | |||||||||||||||||||||||||||
Funds held for reinsurance treaties | 108.2 | — | — | — | 108.2 | |||||||||||||||||||||||||||
Deferred ceding commission | 38.8 | — | — | — | 38.8 | |||||||||||||||||||||||||||
Ceded premium payable | 34.8 | — | — | — | 34.8 | |||||||||||||||||||||||||||
Trade payables | 2.6 | 8.4 | — | — | 11.0 | |||||||||||||||||||||||||||
Deferred revenue | — | — | — | — | — | |||||||||||||||||||||||||||
Warrant liability | — | 1.0 | — | (0.5) | (E) | 0.5 | ||||||||||||||||||||||||||
Other liabilities and accrued expenses | 68.3 | 28.5 | — | (2.1) | (C) | 109.9 | ||||||||||||||||||||||||||
| 15.2 | (F) | |||||||||||||||||||||||||||||||
Liabilities held for sale | — | 6.2 | — | — | 6.2 | |||||||||||||||||||||||||||
Total Liabilities | 582.7 | 137.9 | — | 17.5 | 738.1 | |||||||||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||||||||||
Stockholders' equity | ||||||||||||||||||||||||||||||||
Common stock | — | — | — | — | (G) | — | ||||||||||||||||||||||||||
Additional paid-in capital | 1,568.2 | 775.5 | — | 137.7 | (G) | 1,705.9 | ||||||||||||||||||||||||||
| (775.5) | (G) | |||||||||||||||||||||||||||||||
Accumulated deficit | (636.7) | (617.4) | — | 617.4 | (G) | (632.8) | ||||||||||||||||||||||||||
| (15.2) | (F) | |||||||||||||||||||||||||||||||
| 19.1 | (H) | |||||||||||||||||||||||||||||||
Accumulated other comprehensive income | (18.8) | (0.5) | — | 0.5 | (G) | (18.8) | ||||||||||||||||||||||||||
Total Stockholders' Equity | 912.7 | 157.6 | — | (16.0) | 1,054.3 | |||||||||||||||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 1,495.4 | $ | 295.5 | $ | — | $ | 1.5 | $ | 1,792.4 | ||||||||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
3
Unaudited Pro Forma Condensed Combined Statement of Operations and Comprehensive Loss
For the Three Months Ended March 31, 2022
(in millions, except per share data)
For the Three Months Ended March 31, 2022
(in millions, except per share data)
| Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||||||||||
| Lemonade Historical | Metromile Historical | Reclassification Adjustments - Note 3 | Pro Forma Adjustments - Note 7 | |||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||
Net earned premium | $ | 27.4 | $ | 19.2 | $ | — | $ | — | $ | 46.6 | ||||||||||||||||||||||
Ceding commission income | 14.0 | — | 0.1 | — | 14.1 | |||||||||||||||||||||||||||
Net investment income | 0.9 | — | — | — | 0.9 | |||||||||||||||||||||||||||
Commission and other income | 2.0 | — | 1.4 | — | 3.4 | |||||||||||||||||||||||||||
Other revenue | — | 1.5 | (1.5) | — | — | |||||||||||||||||||||||||||
| Total revenue | 44.3 | 20.7 | — | — | 65.0 | |||||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||||||
Loss and loss adjustment expense, net | 24.4 | 22.1 | — | — | 46.5 | |||||||||||||||||||||||||||
Other insurance expense | 9.1 | 5.3 | 1.7 | (0.3) | (B) | 15.5 | ||||||||||||||||||||||||||
| (0.3) | (A) | |||||||||||||||||||||||||||||||
Sales and marketing | 38.3 | — | 6.1 | — | 44.4 | |||||||||||||||||||||||||||
Sales, marketing and other acquisition costs | — | 6.5 | (6.5) | — | — | |||||||||||||||||||||||||||
Technology development | 16.9 | 4.3 | — | — | 21.2 | |||||||||||||||||||||||||||
Amortization of capitalized software | — | 3.4 | (3.4) | — | — | |||||||||||||||||||||||||||
Other operating expenses | — | 13.6 | (13.6) | — | — | |||||||||||||||||||||||||||
General and administrative | 28.2 | — | 15.7 | (1.1) | (C) | 42.8 | ||||||||||||||||||||||||||
Decrease in fair value of stock warrant liability | — | (0.1) | — | — | (0.1) | |||||||||||||||||||||||||||
| Total expense | 116.9 | 55.1 | — | (1.7) | 170.3 | |||||||||||||||||||||||||||
| Loss before income taxes | (72.6) | (34.4) | — | 1.7 | (105.3) | |||||||||||||||||||||||||||
Income tax expense | 2.2 | — | — | — | (E) | 2.2 | ||||||||||||||||||||||||||
| Net loss | $ | (74.8) | $ | (34.4) | $ | — | $ | 1.7 | $ | (107.5) | ||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||||||||||
Unrealized loss on investments | (14.3) | (0.3) | — | — | (14.6) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | (1.1) | — | — | — | (1.1) | |||||||||||||||||||||||||||
| Comprehensive loss | $ | (90.2) | $ | (34.7) | — | $ | 1.7 | $ | (123.2) | |||||||||||||||||||||||
| Per share data: | ||||||||||||||||||||||||||||||||
Net loss per share attributable to common stockholders - basic and diluted | $ | (1.21) | $ | (0.27) | (G) | $ | (1.57) | |||||||||||||||||||||||||
Weighted average common shares outstanding-basic and diluted | 61,698,568 | 128,715,031 | (G) | 68,523,814 | ||||||||||||||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
4
Unaudited Pro Forma Condensed Combined Statement of Operations and Comprehensive Loss
For the Year Ended December 31, 2021
(in millions, except per share data)
For the Year Ended December 31, 2021
(in millions, except per share data)
| Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||||||||||
| Lemonade Historical | Metromile Historical | Reclassification Adjustments - Note 3 | Pro Forma Adjustments - Note 7 | |||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||
Net earned premium | $ | 77.0 | $ | 75.6 | $ | — | $ | — | $ | 152.6 | ||||||||||||||||||||||
Ceding commission income | 44.9 | — | 24.4 | — | 69.3 | |||||||||||||||||||||||||||
Net investment income | 1.9 | 0.1 | — | — | 2.0 | |||||||||||||||||||||||||||
Commission and other income | 4.6 | — | 4.8 | — | 9.4 | |||||||||||||||||||||||||||
Other revenue | — | 29.2 | (29.2) | — | — | |||||||||||||||||||||||||||
| Total revenue | 128.4 | 104.9 | — | — | 233.3 | |||||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||||||||||
Loss and loss adjustment expense, net | 71.9 | 88.5 | — | — | 160.4 | |||||||||||||||||||||||||||
Other insurance expense | 24.1 | 20.3 | 64.3 | 0.3 | (B) | 106.5 | ||||||||||||||||||||||||||
| (2.5) | (A) | |||||||||||||||||||||||||||||||
Sales and marketing | 141.6 | — | 43.4 | — | 185.0 | |||||||||||||||||||||||||||
Sales, marketing and other acquisition costs | — | 103.0 | (103.0) | — | — | |||||||||||||||||||||||||||
Technology development | 51.8 | 16.0 | — | — | 67.8 | |||||||||||||||||||||||||||
Amortization of capitalized software | — | 11.3 | (11.3) | — | — | |||||||||||||||||||||||||||
Other operating expenses | — | 63.5 | (63.5) | — | — | |||||||||||||||||||||||||||
General and administrative | 72.6 | — | 70.1 | (2.0) | (C) | 154.3 | ||||||||||||||||||||||||||
| 13.6 | (D) | |||||||||||||||||||||||||||||||
Interest expense | — | 16.0 | — | — | 16.0 | |||||||||||||||||||||||||||
Impairment on digital assets | — | 0.2 | — | — | 0.2 | |||||||||||||||||||||||||||
Increase in fair value of stock warrant liability | — | 2.6 | — | — | 2.6 | |||||||||||||||||||||||||||
| Total expense | 362.0 | 321.4 | — | 9.4 | 692.8 | |||||||||||||||||||||||||||
| Gain on bargain purchase | — | — | — | 19.1 | (E) | 19.1 | ||||||||||||||||||||||||||
| Loss before income taxes | (233.6) | (216.5) | — | 9.7 | (440.4) | |||||||||||||||||||||||||||
Income tax expense | 7.7 | — | — | — | (F) | 7.7 | ||||||||||||||||||||||||||
| Net loss | $ | (241.3) | $ | (216.5) | $ | — | $ | 9.7 | $ | (448.1) | ||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||||||||||
Unrealized loss on investments | (5.7) | (0.1) | — | — | (5.8) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | 0.5 | — | — | — | 0.5 | |||||||||||||||||||||||||||
| Comprehensive loss | $ | (246.5) | $ | (216.6) | $ | — | $ | 9.7 | $ | (453.4) | ||||||||||||||||||||||
| Per share data: | ||||||||||||||||||||||||||||||||
Net loss per share attributable to common stockholders - basic and diluted | $ | (3.94) | $ | (1.89) | (G) | $ | (6.58) | |||||||||||||||||||||||||
Weighted average common shares outstanding-basic and diluted | 61,224,433 | 114,609,563 | (G) | 68,107,457 | ||||||||||||||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
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Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1.Description of Transaction
On July 28, 2022, Lemonade, Inc., a Delaware corporation (the “Company,”) completed the acquisition of Metromile, Inc. (“Metromile”), a Delaware corporation (“Metromile”) pursuant to the Agreement and Plan of Merger, dated as of November 8, 2021 (the “Merger Agreement”), by and among the Company, Citrus Merger Sub A, Inc., a Delaware corporation and a direct, wholly owned subsidiary of the Company (“Acquisition Sub I”), Citrus Merger Sub B, LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of the Company (“Acquisition Sub II”) and Metromile. Pursuant to the Merger Agreement, Acquisition Sub I merged with and into Metromile, with Metromile surviving as a wholly owned subsidiary of the Company (the “First Merger”) and following the First Merger, Metromile merged with and into Acquisition Sub II, with Acquisition Sub II surviving as “Metromile, LLC” (the “Second Merger,” and together with the First Merger, the “Mergers”). Pursuant to the Merger Agreement, on the closing date, the former shareholders of Metromile exchanged all of the issued and outstanding shares for a total of 6,901,934 shares of Lemonade common stock. On July 28, 2022, Metromile delisted the Metromile common stock and warrants from Nasdaq.
2. Basis of Presentation
The above unaudited pro forma condensed combined balance sheet as of March 31, 2022 and the unaudited pro forma condensed combined statements of operations and comprehensive loss for the three months ended March 31, 2022 and for the year ended December 31, 2021 are derived from the historical financial statements of Lemonade and Metromile after giving effect to the Mergers. The unaudited pro forma condensed combined balance sheet as of March 31, 2022 gives pro forma effect to these transactions as if they had been completed on March 31, 2022. The unaudited pro forma condensed combined statements operations and comprehensive loss for the three months ended March 31, 2022 and the year ended December 31, 2021 give pro forma effect to these transactions as if they had been completed on January 1, 2021. Certain amounts may not foot due to rounding to millions.
The transaction is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), with Lemonade considered the acquirer for accounting purposes. In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the merger consideration is based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more evident and, thus more reliably measurable.
Under ASC 805, all of the Metromile assets acquired and liabilities assumed in this business combination are recognized at their acquisition-date fair value, while transaction costs and integration costs associated with the business combination are expensed as incurred. The excess of estimated fair value of assets acquired and liabilities assumed over the the purchase price is recorded as bargain purchase gain. Subsequent to the completion of the Mergers, Lemonade and Metromile implemented an integration plan, which may affect how the assets acquired, including intangible assets, will be utilized by the combined company.
The purchase price consideration and estimated fair values of assets acquired and liabilities assumed from Metromile will be updated and finalized within the measurement period that will not extend beyond 12 months from the close of the transaction. Estimated fair value adjustments could change significantly from those allocations used in the unaudited pro forma condensed combined financial statements as presented below.
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The estimated identifiable finite lived intangible assets include internally developed technology and value of business acquired ("VOBA"). The weighted average useful life of the internally developed technology intangible is estimated to be 3 years. VOBA is expected to be fully amortized in less than a year. Identifiable intangible assets also include insurance licenses which are estimated to have an indefinite life, and are therefore not amortized, but will be subject to periodic impairment testing and are subject to the same risks and uncertainties noted for the identifiable finite lived assets.
Management has recorded reclassifications of Metromile’s financial information to conform to Lemonade’s financial statement presentation. In addition, Lemonade management reviewed Metromile’s accounting policies and determined that no significant differences in accounting policies require adjustment to conform to Lemonade’s accounting policies. Management however, may identify further differences that, when conformed, could have a material impact on these unaudited pro forma condensed combined financial statements.
3. Reclassification Adjustments
The Pro Forma Financial Statements have been adjusted to reflect reclassifications of Metromile’s historical financial statements to conform to Lemonade’s financial statement presentation, which is summarized below ($ amounts in millions).
Pro Forma Balance Sheet as of March 31, 2022:
•Reclassification of $27.3 million from Prepaid expenses and other assets to Other assets.
Pro Forma Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022:
•Reclassification of $1.5 million from Other revenue to Ceding commission income and Commission and other income;
•Reclassification of $6.5 million from Sales, marketing and other acquisition costs to Sales and marketing and Other insurance expense;
•Reclassification of $13.6 million from Other operating expenses to General and administrative and Other insurance expense; and
•Reclassification of $3.4 million from Amortization of capitalized software to General and administrative.
Pro Forma Statement of Operations and Comprehensive Loss for the year ended December 31, 2021:
•Reclassification of $29.2 million of Other revenue to Ceding commission income and Commission and other income;
•Reclassification of $103.0 million from Sales, marketing and other acquisition costs to Sales and marketing and Other insurance expense;
•Reclassification of $63.5 million from Other operating expenses to General and administrative and Other insurance expense; and
•Reclassification of $11.3 million from Amortization of capitalized software to General and administrative.
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4. Merger Consideration
Merger Consideration
The fair value of merger consideration, or the purchase price, in the unaudited pro forma financial information is approximately $137.7 million. This amount was derived based on the 131,140,667 issued and outstanding common stock of Metromile on July 28, 2022, and applying the exchange ratio of 0.05263 and closing price of Lemonade common stock of $19.84 per share as of closing date.
Replacement Equity Awards
The fair value of assumed Metromile equity awards which includes stock options and and restricted stock units which are attributable to pre combination service amounted to $0.8 million at the completion of the Merger, and is considered part of the purchase price.
Additional Shares
Additional Shares are considered to be contingent consideration which requires recognition of this consideration at fair value under ASC 805. Management has determined that the Additional Shares are equity-classified instruments. Given that the contingencies are not probable of being met within the contingency period, the fair value was assessed to be zero for these Additional Shares.
For purposes of the pro forma financial information, the following table presents the components of the merger consideration (in millions, except for number of shares and per share amount):
| Lemonade common stock issued to existing Metromile common stockholders | 6,901,934 | |||||||
Lemonade common stock closing price at July 28, 2022 | $ | 19.84 | ||||||
| Merger consideration exchange of Metromile common stock to Lemonade common stock | $ | 136.9 | ||||||
| Fair value of Metromile assumed equity awards | 0.8 | |||||||
| Total Merger Consideration | $ | 137.7 | ||||||
5. Preliminary Fair Value Estimate of Assets Acquired and Liabilities Assumed
The table below represents an initial allocation of the merger consideration to Metromile’s tangible and intangible assets acquired and liabilities assumed based on Lemonade’s initial estimate of their respective fair values and the working capital balances that existed as of March 31, 2022. The pro forma financial information do not give effect to normal course changes in our cash and other working capital balances through the closing date. Due to the pro forma financial statements being prepared based on preliminary estimates of fair value of the net assets acquired as of closing date, the final purchase allocation and the effect on our financial position and results of operations may differ significantly from the pro forma amounts included herein.
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| Preliminary Purchase Price Allocation | ||||||||
| (in millions) | ||||||||
| Assets Acquired | ||||||||
| Fixed maturities available for sale, at fair value | $ | 67.1 | ||||||
| Cash, cash equivalents and restricted cash | 122.9 | |||||||
| Premiums receivable | 18.5 | |||||||
| Reinsurance recoverable | 7.1 | |||||||
| Prepaid reinsurance premium | 0.4 | |||||||
| Value of business acquired | 1.6 | |||||||
| Property and equipment, net | 12.2 | |||||||
| Intangible assets | 36.0 | |||||||
| Other assets | 21.9 | |||||||
| Assets held for sale | 9.3 | |||||||
| Total Assets Acquired | $ | 297.0 | ||||||
| Liabilities Assumed | ||||||||
| Unpaid loss and loss adjustment expenses | $ | 81.8 | ||||||
| Ceded premium payable | 8.8 | |||||||
| Unearned premium | 16.9 | |||||||
| Deferred revenue | — | |||||||
| Trade payable | 8.4 | |||||||
| Warrant liability | 0.5 | |||||||
| Other liabilities and accrued expenses | 17.6 | |||||||
| Liabilities held for sale | 6.2 | |||||||
| Total Liabilities Assumed | $ | 140.2 | ||||||
| Net Assets Acquired | $ | 156.8 | ||||||
| Merger Consideration | $ | 137.7 | ||||||
| Bargain Purchase Gain | $ | 19.1 | ||||||
The preliminary purchase price allocation has been used to prepare the pro forma adjustments in the pro forma condensed combined financial information. Final purchase price allocation is subject to change as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed from Metromile becomes available, and finalized within the measurement period that will not extend beyond 12 months from the close of the transaction. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments which may include changes in valuation of assets acquired and liabilities assumed, including but not limited to intangible assets, fixed assets, and the residual goodwill or bargain purchase gain.
In addition, as discussed above, the preliminary purchase price allocation for pro forma purposes does not give effect to changes in working capital balances subsequent to March 31, 2022. Accordingly, the calculation of goodwill or a bargain purchase gain will be impacted by the final working capital balances. Based on the preliminary working capital balances as of the closing date, the Company currently estimates that the fair value of the identifiable assets and liabilities may exceed the merger consideration and would be reflected as goodwill due to a significant net increase in working capital. However, as the pro forma assumes a March 31, 2022 closing date, the calculated bargain purchase gain of $19.1 million is reflected.
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6. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
Explanations of the adjustments to the unaudited pro forma condensed combined balance sheet are as follows:
A. Represents the estimated fair value of acquired identifiable intangibles (i.e., technology asset and insurance licenses) that were previously not carried at fair value.
B. Represents the removal of unamortized historical deferred policy acquisition costs (DAC) and the establishment of VOBA based on the preliminary fair value.
C. Represents the adjustment to the carrying value of the right-of-use assets and lease liabilities to account for acquired leases as new leases under purchase accounting pursuant to US GAAP.
D. Represents the adjustment to estimated fair value of unpaid loss and loss adjustment expense.
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E. Represents the adjustment to estimated fair value of warrant liability assumed.
F. Represents the accrual of the estimated severance payment of $3.1 million, and the estimated transaction costs of $10.5 million, of which $1.1 million is attributable to Lemonade and $9.4 million attributable to Metromile. The transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. As of March 31, 2022, accrued transactions costs amounted to $1.8 million for Lemonade and $2.0 million for Metromile.
G. Represents the removal of historical equity and the establishment of the preliminary merger consideration.
H. Represents the estimated gain of $19.1 million recognized in Accumulated Deficit as the difference between the purchase price of $137.7 million (refer to Note 4) and the fair value of net assets acquired of $156.8 million (refer to Note 5). As discussed in Note 5, the preliminary purchase price allocation for pro forma purposes does not give effect to changes in working capital balances subsequent to March 31, 2022. Accordingly, the calculation of goodwill or a bargain purchase gain will be impacted by the final working capital balances.
7. Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations and Comprehensive Loss
Explanations of the adjustments to the unaudited pro forma condensed combined statement of operations and comprehensive loss are as follows:
A. Represents the amortization on the adjustment of the reserves to fair value.
B. Represents the removal of historical DAC amortization, offset by the amortization related to the newly established VOBA asset.
C. Represents the amortization of newly established intangible assets. Subsequent to the Mergers, the expected amortization expense relating to the preliminary fair value of the acquired intangible assets (excluding VOBA) is reflected in the table below. The pro forma amortization adjustment is $2.3 million and $9.3 million for the three months ended March 31, 2022 and the year ended December 31, 2021, respectively. The pro forma amortization adjustments include the removal of historical amortization expense of $3.4 million and $11.3 million for the three months ended March 31, 2022 and the year ended December 31, 2021, respectively.
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| Estimated fair value ($ in millions) | Estimated average useful life (in years) | Estimated Annual Amortization Expense ($ in millions) | ||||||||||||||||||
| Technology Assets | $ | 28.0 | 3 | $ | 9.3 | |||||||||||||||
| Insurance Licenses | 8.0 | Indefinite | — | |||||||||||||||||
| Total | $ | 36.0 | $ | 9.3 | ||||||||||||||||
D. Reflects the impact of the estimated severance payment and transaction costs of $15.2 million. These costs are not expected to recur beyond 12 months following the close of the transaction.
E. Represents an estimated gain of $19.1 million as a result of non-recurring bargain purchase gain (refer to (H) in Note 6).
F. After the acquisition, Lemonade will file a consolidated tax return that will include Metromile. Lemonade is expected to continue maintaining a full valuation allowance against net deferred tax assets. Metromile is also expected to have net deferred tax assets offset by a full valuation at acquisition. As such, there were no pro forma adjustments related to taxes as tax effects of pro forma adjustments are fully offset by the valuation allowance.
G. The pro forma basic and diluted net loss per share amounts presented in the unaudited pro forma condensed combined statements of operations are based upon the number of Lemonade’s shares outstanding as if the Transactions occurred on January 1, 2021. The calculation of weighted average shares outstanding for pro forma basic and diluted net loss per share assumes that the shares issuable in connection with the Transactions have been outstanding for the entirety of the period presented. Since Lemonade has a net loss position in both the historical and pro forma results of operations, any dilutive shares that were identified in calculating the historical EPS would stay as anti-dilutive for the pro forma calculations. The following table sets forth the calculation of basic and diluted loss per share (in millions, except for number of shares and per share amounts):.
| Three Months Ended March 31, 2022 | Year Ended December 31, 2021 | |||||||||||||
| Numerator: | ||||||||||||||
| Net loss attributable to common shareholders - Lemonade | $ | (74.8) | $ | (241.3) | ||||||||||
| Net loss attributable to common shareholders - Metromile | (34.4) | (216.5) | ||||||||||||
| Pro forma transaction adjustments | 1.7 | 9.7 | ||||||||||||
| Pro forma net loss attributable to common shareholders | $ | (107.5) | $ | (448.1) | ||||||||||
| Denominator: | ||||||||||||||
| Pro forma weighted average common shares - basic and diluted | 68,523,814 | 68,107,457 | ||||||||||||
| Pro forma loss per share - basic and diluted | $ | (1.57) | $ | (6.58) | ||||||||||
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