As filed with the U.S. Securities and Exchange Commission on December 14, 2021
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Lemonade, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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4899
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32-0469673
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(Address, including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Daniel Schreiber
Chief Executive Officer
5 Crosby Street, 3rd Floor
New York, NY 10013
(844) 733-8666
(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement is declared effective.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box. ◻
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the “Securities Act”), check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ◻
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ◻ |
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Accelerated filer ◻ |
Non-accelerated filer ⌧ |
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Smaller reporting company ☐ |
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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 7(a)(2)(B) of the Securities Act. ☐
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ◻
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ◻
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered |
Amount to be
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Proposed
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Proposed
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Amount of
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Common Stock, $0.00001 par value per share |
6,748,318 |
N/A |
$314,784,727.68 |
$29,180.54 |
(1) | The number of shares of common stock, $0.00001 par value per share (“Lemonade common stock”), of the registrant, Lemonade, Inc. (“Lemonade”), being registered is based upon the estimated maximum number of shares of Lemonade common stock issuable upon completion of the merger of Citrus Merger Sub A, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Lemonade with and into Metromile, Inc., a Delaware corporation (“Metromile”) with Metromile as the surviving corporation (the “Initial Surviving Corporation”) (the “first merger”) followed by the merger of the Initial Surviving Corporation with and into Citrus Merger Sub B, LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of Lemonade with Citrus Merger Sub B, LLC as the surviving limited liability company (the “second merger” and, together with the first merger, the “mergers”), each as described in the proxy statement/prospectus contained herein, and is calculated based upon (a) 128,221,885 shares of common stock, $0.0001 par value per share (“Metromile common stock”), of Metromile estimated to be outstanding and subject to equity-based awards of Metromile immediately prior to the mergers based on the number of shares presently outstanding and subject to equity-based awards of Metromile, and that may be issued prior to the mergers, multiplied by (b) the exchange ratio in the mergers of 0.05263 shares of Lemonade common stock for each share of Metromile common stock. |
(2) | Estimated solely for purposes of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended (the “Securities Act”), and calculated in accordance with Rules 457(c) and 457(f)(1) promulgated thereunder. The proposed maximum aggregate offering price is solely for the purposes of calculating the registration fee and was calculated based upon the market value of shares of Metromile common stock (the securities to be cancelled in the mergers) in accordance with Rule 457(c) under the Securities Act as follows: the product of (a) $2.455, the average of the high and low prices per share of Metromile common stock on December 8, 2021, as quoted on the Nasdaq Capital Market, and (b) 128,221,885, the estimated maximum number of shares of Metromile common stock that may be exchanged for the shares of Lemonade common stock being registered. |
(3) | Calculated pursuant to Section 6(b) of the Securities Act at a rate equal to $92.70 per $1,000,000 of the proposed maximum aggregate offering price. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the U.S. Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this proxy statement/prospectus is not complete and may be changed. A registration statement relating to the securities described in this proxy statement/prospectus has been filed with the U.S. Securities and Exchange Commission. These securities may not be issued or sold until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This proxy statement/prospectus does not constitute an offer to sell or the solicitation of offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY— SUBJECT TO COMPLETION, DATED DECEMBER 14, 2021
MERGER PROPOSAL— YOUR VOTE IS VERY IMPORTANT
Dear Metromile Stockholder:
You are cordially invited to attend a special meeting (the “Metromile special meeting”) of the stockholders of Metromile, Inc., a Delaware corporation (the “Company,” “Metromile”, “we” or “us”), to be held on , 2022, at , Pacific Time. In light of the continuing public health concerns resulting from the COVID-19 pandemic, the Metromile special meeting will be held as a completely “virtual meeting.” You will be able to attend and vote during the special meeting via a live webcast by visiting www.virtualshareholdermeeting.com/MILE2022SM. Prior to the Metromile special meeting, you will still be able to vote by Internet, by telephone or by mail. Holders of record of common stock, par value $0.0001 per share, of Metromile (“Metromile common stock”) at the close of business on , (the “record date”), will be entitled to vote at the Metromile special meeting or any adjournment thereof. We encourage you to allow ample time for online check-in, which will open at , Pacific Time.
On November 8, 2021, Metromile entered into an Agreement and Plan of Merger (the “merger agreement”), by and among Metromile, Lemonade, Inc. (“Lemonade”), Citrus Merger Sub A, Inc., a wholly owned subsidiary of Lemonade (“Acquisition Sub I”), and Citrus Merger Sub B, LLC, a wholly owned subsidiary of Lemonade (“Acquisition Sub II”) that provides for the acquisition of Metromile by Lemonade. Upon the terms and subject to the conditions set forth in the merger agreement, (i) Acquisition Sub I will merge with and into Metromile, with Metromile continuing as the surviving entity (the “Initial Surviving Corporation”) (the “first merger”) and (ii) the Initial Surviving Corporation will then merge with and into Acquisition Sub II, with Acquisition Sub II continuing as the surviving entity and as a wholly owned subsidiary of Lemonade (the “second merger” and, together with the first merger, the “mergers”).
Upon the successful completion of the first merger, each issued and outstanding share of Metromile common stock outstanding immediately prior to the effective time of the first merger (other than treasury shares and shares held by Lemonade or Acquisition Sub I) will be converted into the right to receive 0.05263 shares of Lemonade common stock (the “exchange ratio”), with cash (without interest and subject to any required tax withholding) being paid in lieu of any fractional shares of Lemonade common stock that Metromile stockholders would otherwise be entitled to receive in the first merger.
Because the exchange ratio is fixed, the market value of the merger consideration to Metromile stockholders may fluctuate with the market price of Lemonade common stock and will not be known at the time that Metromile stockholders vote on the mergers. Based on the Lemonade common stock price of $69.53 per share, which was the closing sale price per share of Lemonade common stock on NYSE on November 5, 2021, the last full trading day prior to public announcement of the mergers, the implied value of the merger consideration to Metromile stockholders was $3.66 per share of Metromile common stock. On December 10, 2021, the latest practicable trading day before the date of the filing of this proxy statement/prospectus, the closing price of Lemonade common stock on NYSE was $43.21 per share, resulting in an implied value of the merger consideration to Metromile stockholders of $2.27 per share of Metromile common stock. We encourage you to obtain current quotes for both the Lemonade and Metromile common stock before voting at the Metromile special meeting.
At the Metromile special meeting, you will be asked to consider and vote on (a) a proposal to adopt the merger agreement (the “merger proposal”) and (b) a proposal to adjourn the Metromile special meeting to another time and place to solicit additional proxies, if necessary or appropriate, if there are insufficient votes to approve the merger proposal (the “adjournment proposal”). The Metromile board of directors unanimously recommends that you vote “FOR” each of the two proposals to be considered at the Metromile special meeting.
Contemporaneously with the execution of the merger agreement, certain stockholders of Metromile holding approximately 11.3% of the outstanding shares of Metromile common stock as of the date thereof, including all members of the Metromile board of directors and certain officers (the “Metromile supporting stockholders”), entered into voting and support agreements (the “voting and support agreements”) with Lemonade, pursuant to which the Metromile supporting stockholders agreed to, among other things, vote all of their shares in Metromile; (i) in favor of the adoption of the merger agreement and approval of the mergers and other transactions contemplated by the merger agreement; (ii) in favor of any adjournment recommended by Metromile with respect to any Metromile stockholders meeting to the extent permitted or required pursuant to the merger agreement; (iii) against any alternative acquisition proposal or transaction; (iv) against any merger, sale of substantial assets or liquidation of Metromile; and (v) against any proposal, action or agreement that would reasonably be expected to impede, interfere with, delay or postpone, prevent or otherwise impair the mergers or the other transactions contemplated by the merger agreement. A copy of the form of voting and support agreement is attached as Annex C hereto.
We cannot complete the mergers unless the merger proposal is approved by Metromile stockholders. Assuming a quorum is present at the Metromile special meeting, approval of the merger proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting on the merger proposal. Your vote on these matters is very important, regardless of the number of shares you own. Whether or not you plan to virtually attend the Metromile special meeting, please vote by proxy over the Internet or telephone using the instructions included with the proxy card accompanying this proxy statement/prospectus, or otherwise follow the voting instructions provided in this proxy statement/prospectus.
This proxy statement/prospectus provides you with important information about the Metromile special meeting, the mergers and each of the proposals. We encourage you to read the entire document carefully, in particular the information under “Risk Factors” for a discussion of risks relevant to the mergers.
We look forward to the successful completion of the transaction.
Sincerely,
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John Butler |
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Chairman of the Board |
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Metromile, Inc. |
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Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the mergers, the adoption of the merger agreement, the Lemonade common stock to be issued in connection with the mergers or any of the other transactions described in this proxy statement/prospectus, or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated as of, and is first being mailed to Metromile stockholders on or about, .
Metromile, Inc.
425 Market Street, Suite 700
San Francisco, California 94105
(888) 242-5204
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2022
To the Stockholders of Metromile, Inc.:
Notice is hereby given that Metromile, Inc. (“Metromile”) will hold a special meeting of its stockholders (the “Metromile special meeting”) virtually via live webcast on , 2022, beginning at , Pacific Time.
In light of ongoing developments related to the COVID-19 pandemic, the Metromile special meeting will be held solely in a virtual meeting format via a live webcast. You will be able to attend the Metromile special meeting by visiting www.virtualshareholdermeeting.com/MILE2022SM. We encourage you to allow ample time for online check-in, which will open at , Pacific Time.
The Metromile special meeting will be held for the purpose of Metromile stockholders considering and voting on the following proposals:
1. | A proposal to adopt the Agreement and Plan of Merger, dated as of November 8, 2021 (as it may be amended from time to time, the “merger agreement”) by and among Metromile, Lemonade, Inc. (“Lemonade”), Citrus Merger Sub A, Inc., a wholly owned subsidiary of Lemonade (“Acquisition Sub I”) and Citrus Merger Sub B, LLC, a wholly owned subsidiary of Lemonade (“Acquisition Sub II”) (such proposal, the “merger proposal”); and |
2. | A proposal to approve the adjournment of the Metromile special meeting to another time and place to solicit additional proxies, if necessary or appropriate, if there are insufficient votes to approve the merger proposal (the “adjournment proposal”). |
Metromile will transact no other business at the Metromile special meeting except such business as may properly be brought before the Metromile special meeting or any adjournment thereof. The accompanying proxy statement/prospectus, including the merger agreement attached as Annex A hereto, contains further information relating to these matters.
Only holders of record of common stock, par value $0.0001 per share, of Metromile (“Metromile common stock”) at the close of business the record date on are entitled to notice of and to vote at the Metromile special meeting and any adjournment thereof.
The Metromile board of directors has unanimously determined that the merger of Acquisition Sub I with and into Metromile (the “first merger”) and the merger of the surviving company from the first merger with and into Acquisition Sub II (the “second merger” and, together with the first merger, the “mergers”) are fair to and in the best interests of Metromile and its stockholders, and approved and declared advisable the execution and delivery of the merger agreement, the performance by Metromile of its covenants and agreements contained in the merger agreement and the transactions contemplated thereby, including the mergers. Accordingly, the Metromile board of directors unanimously recommends that Metromile stockholders vote:
● | “FOR” the merger proposal; and |
● | “FOR” the adjournment proposal. |
Your vote is very important, regardless of the number of shares of Metromile common stock you own. The parties cannot complete the mergers without approval of the merger proposal. Assuming a quorum is present at the Metromile special meeting, approval of the merger proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting on the merger proposal.
Whether or not you plan to virtually attend the Metromile special meeting, please vote by proxy over the Internet or telephone using the instructions included with the accompanying proxy card, or otherwise follow the voting instruction provided in this proxy statement/prospectus. If you hold your shares of Metromile common stock through a broker, bank or other nominee in “street name” (instead of as a registered holder) please follow the instructions on the voting instruction form provided by your bank, broker or nominee to vote your shares. The list of Metromile stockholders entitled to vote at the Metromile special meeting will be available electronically via the Metromile special meeting website for examination by any Metromile stockholder for any purpose germane to the Metromile special meeting beginning ten days prior to the Metromile special meeting up until the conclusion of the Metromile special meeting.
If you have any questions about the mergers, please contact Metromile at (888) 242-5204 or write to legal@metromile.com. Paper communications may be sent to Metromile, Inc., Attn: Corporate Secretary, 425 Market Street, Suite 700, San Francisco, California 94105.
If you have any questions about how to vote or direct a vote in respect of your shares of Metromile common stock, please contact Metromile’s proxy solicitor, Morrow Sodali, by phone at (800) 662-5200 or by email at MILE@investor.morrowsodali.com.
By Order of the Board of Directors,
Dan Preston
Chief Executive Officer
Metromile, Inc.
San Francisco, California
Dated:
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REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and financial information about Lemonade from other documents that Lemonade has filed with the SEC and that are not contained in and are instead incorporated by reference in this proxy statement/prospectus. For a list of documents incorporated by reference in this proxy statement/prospectus, see “Where You Can Find More Information.” This information is available for you, without charge, to review through the SEC’s website at www.sec.gov.
You may request a copy of this proxy statement/prospectus, any of the documents incorporated by reference in this proxy statement/prospectus or other information filed with the SEC by Lemonade or Metromile, without charge, by written request directed to the appropriate company at the following contacts:
For Lemonade stockholders:
Lemonade, Inc.
Attention: Investor Relations
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For Metromile stockholders:
Metromile, Inc.
legal@metromile.com |
In order for you to receive timely delivery of the documents in advance of the Metromile special meeting to be held on , 2022, you must request the information no later than .
If you have any questions about the Metromile special meeting, or need to obtain proxy cards or other information, please contact Metromile’s proxy solicitor at the following contact:
Morrow Sodali LLC
333 Ludlow Street, 5th Floor, South Tower
Stamford, Connecticut 06902
Tel: Toll-Free (800) 622-5200 or (203) 658-9400
Email: MILE@investor.morrowsodali.com
The contents of the websites of the SEC, Lemonade, Metromile or any other entity are not incorporated in this proxy statement/prospectus. The information about how you can obtain certain documents that are incorporated by reference in this proxy statement/prospectus at these websites is being provided only for your convenience.
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ABOUT THIS PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus, which forms part of a registration statement on Form S-4 filed with the SEC by Lemonade (Registration No. 333- ), constitutes a prospectus of Lemonade under Section 5 of the Securities Act with respect to the shares of Lemonade common stock (as defined below) to be issued to Metromile stockholders pursuant to the Agreement and Plan of Merger, dated November 8, 2021, by and among Lemonade, Lemonade’s Acquisition Subs (as defined below) and Metromile (as it may be amended from time to time, the “merger agreement”). This document also constitutes a proxy statement of Metromile under Section 14(a) of the Exchange Act. This proxy statement/prospectus also constitutes a notice of meeting to Metromile stockholders with respect to the Metromile special meeting.
Lemonade has supplied all information contained or incorporated by reference in this proxy statement/prospectus relating to Lemonade and its Acquisition Subs, and Metromile has supplied all such information relating to Metromile. Lemonade and Metromile have both contributed to such information relating to the mergers.
Lemonade and Metromile have not authorized anyone to provide you with information that is different from that contained or incorporated by reference in this proxy statement/prospectus. This proxy statement/prospectus is dated , and you should not assume that the information contained in this proxy statement/ prospectus is accurate as of any date other than such date unless otherwise specifically provided herein.
Further, you should not assume that the information incorporated by reference in this proxy statement/prospectus is accurate as of any date other than the date of the incorporated document. Neither the mailing of this proxy statement/prospectus to Metromile stockholders nor the issuance by Lemonade of shares of Lemonade common stock pursuant to the merger agreement will create any implication to the contrary.
This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.
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TABLE OF CONTENTS
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF METROMILE |
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF METROMILE |
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156 |
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INTERESTS OF LEMONADE DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGERS |
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INTERESTS OF METROMILE DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGERS |
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF LEMONADE |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF METROMILE |
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F-1 |
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QUESTIONS AND ANSWERS
The following are brief answers to certain questions that you, as a Metromile stockholder, may have regarding the mergers and the other matters being considered at the Metromile special meeting. You are urged to carefully read this proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus in their entirety because this section may not provide all the information that is important to you regarding these matters. See “Summary” for a summary of important information regarding the merger agreement, the mergers and the related transactions. Additional important information is contained in the annexes to, and the documents incorporated by reference in, this proxy statement/prospectus. You may obtain the information incorporated by reference in this proxy statement/prospectus, without charge, by following the instructions under “Where You Can Find More Information.”
Why am I receiving this proxy statement/prospectus?
This proxy statement/prospectus serves as a proxy statement for the Metromile special meeting.
You are receiving this proxy statement/prospectus because Metromile has agreed to be acquired by Lemonade through a series of mergers of Lemonade’s Acquisition Subs with and into Metromile, with Metromile continuing as the surviving corporation in the mergers and becoming a wholly owned subsidiary of Lemonade. The merger agreement, which governs the terms and conditions of the mergers, is attached as Annex A hereto.
Your vote is required in connection with the mergers. Metromile is sending these materials to its stockholders to help them decide how to vote their shares with respect to the adoption of the merger agreement and other important matters.
What matters am I being asked to vote on?
In order to complete the mergers, among other things, Metromile stockholders must approve the merger proposal.
Metromile is holding the Metromile special meeting to obtain approval of the merger proposal. Additionally, the Metromile special meeting may be adjourned to another time and place if necessary or appropriate in order to permit the solicitation of additional proxies if there are insufficient votes to approve the merger proposal. Accordingly, Metromile is asking Metromile stockholders to authorize the holder of any proxy solicited by the Metromile board of directors to vote in favor of the merger proposal and the adjournment proposal.
Your vote is very important, regardless of the number of shares that you own. The approval of the merger proposal is a condition to the obligations of Lemonade and Metromile to complete the mergers. However, the approval of the adjournment proposal is not a condition to the obligations of Lemonade or Metromile to complete the mergers.
When and where will the Metromile special meeting take place?
In light of ongoing developments related to the COVID-19 pandemic, the Metromile special meeting will be held solely in a virtual meeting format via live webcast. You will be able to attend and vote during the special meeting via a live webcast by visiting www.virtualshareholdermeeting.com/MILE2022SM. We encourage you to allow ample time for online check-in, which begins at Pacific Time. In order to attend the virtual Special Meeting and vote online, you will need the control number included on your proxy card or on the instructions that accompanied your proxy materials. The control number is designed to verify your identity and allow you to vote your shares at the Metromile special meeting or to vote by proxy prior to the Metromile special meeting. See “The Metromile Special Meeting—Virtually Attending the Metromile Special Meeting.”
Even if you plan to virtually attend the Metromile special meeting, Metromile recommends that you vote by proxy in advance as described below so that your vote will be counted if you later decide not to or become unable to virtually attend the Metromile special meeting.
If you hold your shares of Metromile common stock through a broker, bank or other nominee in “street name” (instead of as a registered holder) please follow the instructions on the voting instruction form provided by your bank, broker or nominee to vote your shares.
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How important is my vote?
Your vote “FOR” each proposal presented at the Metromile special meeting is very important, regardless of the number of shares that you own, and you are encouraged to submit a proxy as soon as possible. The mergers cannot be completed unless the merger proposal is approved by Metromile stockholders.
What will Metromile stockholders receive for their shares of Metromile common stock if the mergers are completed?
If the mergers are completed, each share of Metromile common stock outstanding as of immediately prior to the first effective time will be converted into the right to receive 0.05263 shares of Lemonade common stock (the “exchange ratio”). Each Metromile stockholder will receive cash (without interest and subject to any required tax withholding) in lieu of any fractional shares of Lemonade common stock that such Metromile stockholder would otherwise receive in the mergers. Any cash amounts to be received by a Metromile stockholder in lieu of fractional shares of Lemonade common stock will be rounded to the nearest whole cent.
Because Lemonade will issue a fixed number of shares of Lemonade common stock in exchange for each share of Metromile common stock, the value of the merger consideration that Metromile stockholders will receive in the mergers will depend on the market price of shares of Lemonade common stock at the time the mergers are completed. The market price of shares of Lemonade common stock that Metromile stockholders receive at the time the mergers are completed could be greater than, less than or the same as the market price of shares of Lemonade common stock on the date of this proxy statement/prospectus or at the time of the Metromile special meeting. Accordingly, you should obtain current market quotations for Lemonade common stock and Metromile common stock before deciding how to vote on the merger proposal. Lemonade common stock is traded on the NYSE and Metromile common stock is traded on the Nasdaq Capital Market under the symbols “LMND” and “MILE,” respectively. Metromile warrants are traded on the Nasdaq Capital Market under the symbol “MILEW”. Shares of common stock of the combined company will trade on NYSE under the symbol “LMND” after completion of the mergers.
For more information regarding the merger consideration to be received by Metromile stockholders if the mergers are completed, see “The Merger Agreement—Merger Consideration.”
How does the Metromile board of directors recommend I vote at the Metromile special meeting?
The Metromile board of directors unanimously recommends that you vote “FOR” the merger proposal and “FOR” the adjournment proposal. For more information regarding the recommendation of the Metromile board of directors, please see “The Merger—Recommendation of the Metromile Board of Directors; Metromile’s Reasons for the Merger.”
In considering the recommendations of the Metromile board of directors, Metromile stockholders should be aware that Metromile directors and executive officers have interests in the mergers that are different from, or in addition to, their interests as Metromile stockholders generally. These interests include, among others, the payment of severance benefits and acceleration of outstanding Metromile equity awards upon certain terminations of employment or service, the payment of certain incentive bonuses related to the mergers and the combined company’s agreement to indemnify Metromile directors and executive officers against certain claims and liabilities. For a more complete description of these interests, see “Interests of Metromile Directors and Executive Officers in the Merger.”
Who is entitled to vote at the Metromile special meeting?
All holders of record of shares of Metromile common stock who held shares at the close of business on (the “record date”) are entitled to receive notice of, and to vote at, the Metromile special meeting. Each such holder of Metromile common stock is entitled to cast one vote for each share of Metromile common stock that such holder owned of record as of the record date on each matter properly brought before the Metromile special meeting. Virtual attendance at the Metromile special meeting via the Metromile special meeting website is not required to vote. See below and “The Metromile Special Meeting—Methods of Voting” for instructions on how to vote without virtually attending the Metromile special meeting.
What is a proxy?
A proxy is a stockholder’s legal designation of another person to vote shares owned by such stockholder on their behalf. The document used to designate a proxy to vote your shares of Metromile common stock is referred to as a “proxy card.”
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How many votes do I have at the Metromile special meeting?
Each Metromile stockholder is entitled to one vote for each share of Metromile common stock held of record as of the close of business on the record date for each proposal. As of the close of business on the record date, there were a total of shares of Metromile common stock outstanding.
What constitutes a quorum for the Metromile special meeting?
A quorum is the minimum number of shares required to be represented, either through virtual attendance or through representation by proxy, to hold a valid meeting.
The holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting must be virtually present via the Metromile special meeting website or represented by proxy in order to constitute a quorum.
Where will the Lemonade common stock that I receive in the mergers be publicly traded?
The shares of Lemonade common stock to be issued to Metromile stockholders in the mergers will be listed for trading on NYSE under the symbol “LMND.”
What happens if the mergers are not completed?
If the merger proposal is not approved by Metromile stockholders or if the mergers are not completed for any other reason, Metromile stockholders will not receive the merger consideration or any other consideration in connection with the mergers, and their shares of Metromile common stock will remain outstanding.
If the mergers are not completed, Metromile will remain an independent public company, and the Metromile common stock will continue to be listed and traded on the Nasdaq Capital Market under the symbol “MILE.”
If the merger agreement is terminated under specified circumstances, including if the Metromile board of directors changes its recommendation, Metromile may be required to pay Lemonade a termination fee of $12.5 million (the “termination fee”). See “The Merger Agreement—Termination Fee.”
How can I virtually vote my shares at the Metromile special meeting?
Shares held directly in your name as a Metromile stockholder of record may be virtually voted at the Metromile special meeting via the Metromile special meeting website. We encourage you to allow ample time for online check-in, which begins at Pacific Time.
If you hold your shares of Metromile common stock through a broker, bank or other nominee in “street name” (instead of as a registered holder) please follow the instructions on the voting instruction form provided by your bank, broker or nominee to vote your shares. See “The Metromile Special Meeting—Virtually Attending the Metromile Special Meeting.”
Even if you plan to virtually attend the Metromile special meeting via the Metromile special meeting website, Metromile recommends that you vote by proxy in advance as described below so that your vote will be counted if you later decide not to, or become unable to virtually attend the Metromile special meeting.
For additional information on virtually attending the Metromile special meeting, see “The Metromile Special Meeting.”
How can I vote my shares without virtually attending the Metromile special meeting?
Whether you hold your shares directly as a stockholder of record of Metromile or beneficially in “street name,” you may direct your vote by proxy without virtually attending the Metromile special meeting. If you are a stockholder of record, you can vote by proxy over the Internet, by telephone or by mail by following the instructions provided in the enclosed proxy card. If you hold shares beneficially in “street name,” you should follow the voting instructions provided by your bank, broker or other nominee.
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For additional information on voting procedures, see “The Metromile Special Meeting.”
What is a “broker non-vote”?
Under NYSE rules, banks, brokers and other nominees may use their discretion to vote “uninstructed” shares (i.e., shares of record held by banks, brokers or other nominees, but with respect to which the beneficial owner of such shares has not provided instructions on how to vote on a particular proposal) with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. A “broker non-vote” occurs on an item when (a) a bank, broker or other nominee has discretionary authority to vote on one or more proposals to be voted on at a meeting of stockholders, but is not permitted to vote on other proposals without instructions from the beneficial owner of the shares, and (b) the beneficial owner fails to provide the bank, broker or other nominee with such instructions. Because all of the proposals currently expected to be voted on at the Metromile special meeting are non-routine matters under NYSE rules for which brokers do not have discretionary authority to vote, Metromile does not expect there to be any broker non-votes at the Metromile special meeting.
What stockholder vote is required for the approval of each proposal at the Metromile special meeting? What will happen if I fail to vote or abstain from voting on each proposal at the Metromile special meeting?
Proposal 1: Merger Proposal
Assuming a quorum is present at the Metromile special meeting, approval of the merger proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting on the merger proposal. Accordingly, an abstention on the merger proposal will have the same effect as a vote “AGAINST” the merger proposal. In addition, any shares not virtually present or represented by proxy (including due to the failure of a Metromile stockholder who holds shares in “street name” through a bank, broker or other nominee to provide voting instructions to such bank, broker or other nominee) will have the same effect as a vote “AGAINST” the merger proposal.
Proposal 2: Adjournment Proposal
Whether or not a quorum is present at the Metromile special meeting, approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock that are virtually present via the Metromile special meeting website or represented by proxy and entitled to vote at the Metromile special meeting. Accordingly, any shares not virtually present or represented by proxy (including due to the failure of a Metromile stockholder who holds shares in “street name” through a bank, broker or other nominee to provide voting instructions to such bank, broker or other nominee) will have no effect on the outcome of the adjournment proposal. An abstention on the adjournment proposal will have the same effect as a vote “AGAINST” the adjournment proposal.
Are there any stockholders who have already committed to voting in favor of any of the proposals?
Yes. Contemporaneously with the execution of the merger agreement, Lemonade and certain stockholders of Metromile (the “Metromile supporting stockholders”) entered into the voting and support agreements. Pursuant to the voting and support agreements, the Metromile supporting stockholders agreed to, among other things, vote all of the shares in Metromile that they owned as of the record date at the Metromile special meeting (i) in favor of the adoption of the merger agreement, (ii) against any acquisition proposal, and (iii) against any proposal, action or agreement that would reasonably be expected to impede, interfere with, delay or postpone, prevent or otherwise impair the mergers or the other transactions contemplated by the merger agreement. A copy of the form of voting and support agreement is attached as Annex C to this proxy statement/prospectus. For more information, please see “Voting and Support Agreements.”
What is the difference between holding shares as a stockholder of record and as a beneficial owner of shares held in “street name”?
If your shares of Metromile common stock are registered directly in your name with Metromile’s transfer agent, you are considered the stockholder of record with respect to those shares. As the stockholder of record, you have the right to vote directly at the Metromile special meeting. You may also grant a proxy directly to Metromile or to a third party to vote your shares at the Metromile special meeting.
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If your shares of Metromile common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in “street name.” Your bank, broker or other nominee will send you, as the beneficial owner, a package describing the procedures for voting your shares. You should follow the instructions provided by them to vote your shares.
If my shares of Metromile common stock are held in “street name” by my bank, broker or other nominee, will my bank, broker or other nominee automatically vote those shares for me?
No. Your bank, broker or other nominee will only be permitted to vote your shares of Metromile common stock if you instruct your bank, broker or other nominee how to vote. You should follow the procedures provided by your bank, broker or other nominee regarding the voting of your shares. Under NYSE rules, banks, brokers and other nominees who hold shares of Metromile common stock in “street name” for their customers have authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokers and other nominees are prohibited from exercising their voting discretion with respect to non-routine matters, which include all the proposals currently scheduled to be considered and voted on at the Metromile special meeting. As a result, absent specific instructions from the beneficial owner of such shares, banks, brokers and other nominees are not empowered to vote such shares.
The effect of not instructing your bank, broker or other nominee how you wish to vote your shares of Metromile common stock will be the same as a vote “AGAINST” the merger proposal, but will have no effect on the adjournment proposal.
What should I do if I receive more than one set of voting materials for the Metromile special meeting?
If you hold shares of Metromile common stock in “street name” and also directly in your name as a stockholder of record or otherwise, or if you hold shares of Metromile common stock in more than one brokerage account, you may receive more than one set of voting materials relating to the Metromile special meeting.
Record Holders. For shares held directly, in order to ensure that all of your shares of Metromile common stock are voted, please vote by proxy over the Internet or telephone using the instructions included with the accompanying proxy card, or otherwise follow the voting instruction provided in this proxy statement/prospectus.
Shares in “street name.” For shares held in “street name” through a bank, broker or other nominee, you should follow the procedures provided by your bank, broker or other nominee to submit a proxy or vote your shares.
If a stockholder gives a proxy, how are the shares of Metromile common stock voted?
Regardless of the method you choose to vote, the individuals named on the enclosed proxy card will vote your shares of Metromile common stock in the way that you indicate. For each item before the Metromile special meeting, you may specify whether your shares of Metromile common stock, should be voted for or against, or abstain from voting.
How will my shares of Metromile common stock be voted if I return a blank proxy?
If you sign, date and return your proxy card but do not indicate how you want your shares of Metromile common stock to be voted, then your shares of Metromile common stock will be voted in accordance with the recommendation of the Metromile board of directors: “FOR” the merger proposal and “FOR” the adjournment proposal.
Can I change my vote after I have submitted my proxy?
Any Metromile stockholder giving a proxy has the right to revoke their proxy and change their vote before the proxy is voted at the Metromile special meeting by doing any of the following:
● | subsequently submitting a new proxy (including over the Internet or telephone) for the Metromile special meeting, provided the new proxy is received by the deadline specified on the accompanying proxy card; |
● | giving written notice of your revocation to Metromile’s Corporate Secretary; or |
● | virtually attending and voting at the Metromile special meeting via the Metromile special meeting website. |
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Your attendance at the Metromile special meeting will not revoke your proxy unless you (i) either give written notice of revocation to Metromile’s Corporate Secretary before your proxy is exercised or (ii) virtually attend and vote your shares at the Metromile special meeting.
Execution or revocation of a proxy will not in any way affect your right to virtually attend and vote at the Metromile special meeting via the Metromile special meeting website. Written notices of revocation and other communications relating to the revocation of proxies should be addressed to:
Metromile, Inc.
Attention: Corporate Secretary
425 Market Street, Suite 700
San Francisco, California 94105
See “The Metromile Special Meeting—Revocability of Proxies.”
If I hold my shares in “street name,” can I change my voting instructions after I have submitted voting instructions to my bank, broker or other nominee?
If your shares are held in the name of a bank, broker or other nominee and you previously provided voting instructions to your bank, broker or other nominee, you should follow the instructions provided by your bank, broker or other nominee in order to revoke or change your voting instructions.
Do Metromile stockholders have dissenters’ or appraisal rights?
Metromile stockholders are not entitled to appraisal or dissenters’ rights under the DGCL in connection with the mergers. If Metromile stockholders are not in favor of the mergers, they may vote against the merger proposal or choose to abstain from voting on the merger proposal. See “No Appraisal Rights.” Information about how Metromile stockholders may vote on the proposals being considered in connection with the mergers can be found under “The Metromile Special Meeting.”
Are there any risks that I should consider in deciding whether to vote for the approval of the merger proposal?
Yes. You should read and carefully consider the risk factors set forth under “Risk Factors.” You also should read and carefully consider the risk factors relating to Lemonade that are contained in the documents that are incorporated by reference in this proxy statement/prospectus.
What happens if I sell my shares of Metromile common stock after the record date but before the Metromile special meeting?
The record date is earlier than the date of the Metromile special meeting. If you sell or otherwise transfer your shares of Metromile common stock after the record date but before the Metromile special meeting, you will, unless special arrangements are made, retain your right to vote at the Metromile special meeting.
Who will solicit and pay the cost of soliciting proxies?
Metromile has engaged Morrow Sodali LLC (“Morrow Sodali”) to assist in the solicitation of proxies for the Metromile special meeting. Metromile estimates that it will pay Morrow Sodali a fee of approximately $17,000, plus reimbursement for certain reasonable, documented out-of-pocket expenses. Metromile has agreed to indemnify Morrow Sodali against various liabilities and expenses that relate to or arise out of its solicitation of proxies (subject to certain exceptions).
Metromile also may be required to reimburse banks, brokers and other custodians, nominees and fiduciaries or their respective agents for their expenses in forwarding proxy materials to beneficial owners of Metromile common stock. Metromile directors, officers and employees also may solicit proxies by telephone, by electronic means or in person. They will not be paid any additional amounts for soliciting proxies.
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When are the mergers expected to be completed?
Subject to the satisfaction or waiver of the closing conditions described under “The Merger Agreement— Conditions to the Completion of the Merger,” including approval of the merger proposal, the mergers are currently expected to be completed by mid-calendar year 2022. However, neither Lemonade nor Metromile can predict the actual date on which the mergers will be completed, or if the mergers will be completed at all, because completion of the mergers is subject to conditions and factors beyond the control of both companies, including the receipt of certain required regulatory approvals and consents and approval of the merger proposal by the Metromile stockholders. Lemonade and Metromile hope to complete the mergers as soon as reasonably practicable. Also see “The Merger—Regulatory Approvals.”
What respective equity stakes will current Lemonade and Metromile stockholders hold in Lemonade immediately following the mergers?
Based on the anticipated treatment of equity-based awards and the number of shares of Lemonade and Metromile common stock outstanding on December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, upon completion of the mergers, former Metromile stockholders are expected to own approximately 9.9% of the outstanding shares of Lemonade common stock and Lemonade stockholders immediately prior to the mergers are expected to own approximately 90.1% of the outstanding shares of Lemonade common stock. The relative ownership interests of Lemonade stockholders and former Metromile stockholders in the combined company immediately following the mergers will depend on the number of shares of Lemonade and Metromile common stock issued and outstanding immediately prior to the mergers.
How will I receive the merger consideration to which I am entitled?
If you hold your shares of Metromile common stock in book-entry form, whether through The Depository Trust Company (“DTC”) or otherwise, you will not be required to take any specific actions to exchange your shares of Metromile common stock for shares of Lemonade common stock. Such shares will, following the first effective time, be automatically exchanged for shares of Lemonade common stock (in book-entry form) and cash in lieu of any fractional shares of Metromile common stock to which you are entitled. If you instead hold your shares of Metromile common stock in certificated form, then, after receiving the proper documentation from you following the first effective time, the exchange agent will deliver to you the shares of Lemonade common stock (in book-entry form) and cash in lieu of any fractional shares of Lemonade common stock to which you are entitled. See “The Merger Agreement—Exchange of Shares.”
What should I do now?
You should read this proxy statement/prospectus carefully and in its entirety, including the annexes. Then, you may vote by proxy over the Internet or telephone using the instructions included with the accompanying proxy card, or promptly complete your proxy card and return it in the enclosed postage-paid envelope, so that your shares will be voted in accordance with your instructions.
How can I find more information about Lemonade and Metromile?
You can find more information about Lemonade and Metromile by reading this proxy statement/prospectus and from various sources described under “Where You Can Find More Information.”
What are the U.S. federal income tax consequences of the mergers to U.S. Holders of Metromile common stock?
Metromile and Lemonade intend that the mergers, taken together, should qualify as a “reorganization” within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes (the “Intended Tax Treatment.”) Assuming the mergers so qualify, a U.S. holder (as defined under “Material U.S. Federal Income Tax Consequences of the Mergers”) of Metromile common stock generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of Metromile common stock for Lemonade common stock in the first merger, except with respect to cash received by such U.S. holder in lieu of fractional shares of Lemonade common stock.
However, it is not a condition to Metromile’s obligation or Lemonade’s obligation to consummate the transactions contemplated by the merger agreement that the mergers qualify for the Intended Tax Treatment or that Metromile or Lemonade receive an opinion from counsel to that effect. Whether or not the mergers qualify for the Intended Tax Treatment depends on facts that will not be known until the mergers are completed and on the treatment of the right under the merger agreement of current and former holders of
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Metromile common stock to receive Lemonade Additional Shares in respect of their right to the Metromile Additional Shares (as described in “The Merger Agreement—Treatment of Additional Shares”). Furthermore, neither Metromile nor Lemonade intends to request a ruling from the IRS regarding the U.S. federal income tax consequences of the mergers. Accordingly, no assurance can be given that the mergers will qualify for the Intended Tax Treatment or that the IRS will not challenge the conclusion that the mergers will qualify for the Intended Tax Treatment or that a court would not sustain such a challenge. If, contrary to expectations, the mergers do not qualify for the Intended Tax Treatment, U.S. holders of Metromile stock could be subject to U.S. federal income tax upon the receipt of Lemonade common stock in the first merger.
See “Material U.S. Federal Income Tax Consequences of the Mergers” for a more complete description of material U.S. federal income tax consequences of the mergers. The discussion of the material U.S. federal income tax consequences contained in this proxy statement/prospectus is intended to provide only a general discussion and is not a complete analysis or description of all potential U.S. federal income tax consequences of the mergers that may vary with, or are dependent on, individual circumstances. In addition, it does not address the effects of any foreign, state or local tax laws or any U.S. federal tax laws other than U.S. federal income tax laws. Tax matters are very complicated and the tax consequences of the mergers to each U.S. holder of Metromile common stock may depend on such stockholder’s particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the mergers.
Whom do I call if I have questions about the Metromile special meeting or the mergers?
If you have questions about the Metromile special meeting or the mergers, or desire additional copies of this proxy statement/prospectus or additional proxies, you may contact Metromile’s proxy solicitor:
Morrow Sodali LLC
333 Ludlow Street, 5th Floor, South Tower
Stamford, Connecticut 06902
Tel: Toll-Free (800) 622-5200 or (203) 658-9400
Email: MILE@investor.morrowsodali.com
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SUMMARY
For your convenience, provided below is a brief summary of certain information contained in this proxy statement/prospectus. This summary highlights selected information from this proxy statement/prospectus and does not contain all of the information that may be important to you as a Metromile stockholder. To understand the mergers fully and for a more complete description of the terms of the mergers, you should read carefully this entire proxy statement/prospectus, its annexes and the other documents to which you are referred. Items in this summary include a page reference directing you to a more complete description of those items. You may obtain the information incorporated by reference in this proxy statement/prospectus, without charge, by following the instructions under “Where You Can Find More Information.”
The Parties to the Mergers
Lemonade, Inc.
Lemonade is rebuilding insurance from the ground up on a digital substrate and an innovative business model. By leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics, Lemonade believes it is making insurance more delightful, more affordable, more precise, and more socially impactful. To that end, Lemonade has built a vertically-integrated company with wholly-owned insurance carriers in the United States and Europe, and the full technology stack to power them. Lemonade is headquartered in New York, New York. Lemonade’s principal executive offices are located at 5 Crosby Street, 3rd Floor, New York, New York 10013, and its telephone number is (844) 733-8666.
Metromile, Inc.
Metromile is a leading digital insurance platform in the United States. With data science at its foundation, Metromile offers real-time, personalized auto insurance policies by the mile instead of the industry’s reliance on approximations that have historically made prices unfair. Metromile’s digitally native offering is built around the modern driver’s needs, featuring automated claims, complimentary smart driving features and annual average savings of 47% over what they were paying their previous auto insurer. In addition, through Metromile Enterprise, Metromile licenses its technology platform to insurance companies around the world. Metromile’s cloud-based software as a service enables carriers to operate with greater efficiency, automate claims to expedite resolution, reduce losses associated with fraud, and unlock the productivity of employees. Metromile is headquartered in San Francisco, California. Metromile’s principal executive offices are located at 425 Market Street, Suite 700, San Francisco, California 94105, and its telephone number is (888) 242-5204.
Citrus Merger Sub A, Inc.
Citrus Merger Sub A, Inc. was formed by Lemonade solely in contemplation of the first merger, and has not conducted any business and does not have any assets, liabilities or obligations of any nature other than as set forth in the merger agreement. Upon the terms and subject to the conditions set forth in the merger agreement, Citrus Merger Sub A, Inc. will merge with and into Metromile, with Metromile continuing as the surviving entity (the “Initial Surviving Corporation”). Citrus Merger Sub A, Inc.’s principal executive offices is located at 5 Crosby Street, 3rd Floor, New York, New York 10013, and its telephone number is (844) 733-8666.
Citrus Merger Sub B, LLC
Citrus Merger Sub B, LLC was formed by Lemonade solely in contemplation of the second merger, and has not conducted any business and does not have any assets, liabilities or obligations of any nature other than as set forth in the merger agreement. Upon the terms and subject to the conditions set forth in the merger agreement, following the first merger, the Initial Surviving Corporation will merge with and into Citrus Merger Sub B, LLC, with Citrus Merger Sub B, LLC continuing as the surviving entity and as a wholly owned subsidiary of Lemonade. Citrus Merger Sub B, LLC’s principal executive offices is located at 5 Crosby Street, 3rd Floor, New York, New York 10013, and its telephone number is (844) 733-8666.
The Mergers and the Merger Agreement
The terms and conditions of the mergers are contained in the merger agreement, a copy of which is attached as Annex A hereto. Lemonade and Metromile encourage you to read the merger agreement carefully and in its entirety, as it is the legal document that governs the mergers.
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The merger agreement provides that, subject to the terms and conditions of the merger agreement, (i) Acquisition Sub I will merge with and into Metromile, with Metromile continuing as the Initial Surviving Corporation and (ii) the Initial Surviving Corporation will then merge with and into Acquisition Sub II, with Acquisition Sub II continuing as the surviving entity and as a wholly owned subsidiary of Lemonade.
Merger Consideration
At the first effective time, each share of Metromile common stock (other than shares held in treasury by Metromile or held directly by Lemonade or Acquisition Sub I (which shares will be cancelled)) that was issued and outstanding immediately prior to the first effective time will be converted into the right to receive 0.05263 shares of Lemonade common stock as well as cash (without interest and less any applicable withholding taxes) in lieu of any fractional shares of Lemonade common stock.
The exchange ratio is fixed, which means that it will not change between now and the date of the mergers, regardless of any changes in the market price of Lemonade or Metromile common stock.
Treatment of Metromile Equity Awards
Except as set forth in the immediately following sentence, each Metromile stock option, whether vested or unvested, that is outstanding and unexercised immediately prior to the first effective time will, as of the first effective time, be assumed by Lemonade and automatically converted into a stock option to acquire a number of shares of Lemonade common stock (rounded down to the nearest whole share) equal to the product of (i) the number of shares subject to the Metromile stock option and (ii) the exchange ratio, with an exercise price per share of Lemonade common stock (rounded up to the nearest whole cent) equal to (A) the per share exercise price of the Metromile stock option divided by (B) the exchange ratio. Each outstanding and unexercised Metromile stock option held by any individual who was not employed by or providing services to Metromile as of November 8, 2021, will, as of the effective time, be converted into the right to receive an amount in cash, without interest, equal to the product of (1) the excess, if any, of the product of (x) the average of the volume weighted average trading prices per share of Lemonade common stock on NYSE on each of the 20 consecutive trading days ending on (and including) the trading day that is three trading days prior to the date of effective time and (y) the exchange ratio (which we refer to as the “per Metromile share cash consideration”), over the exercise price per share of such Metromile stock option, multiplied by (2) the total number of shares subject to such Metromile stock option (the “Option Consideration”). Any such Metromile stock option that has an exercise price per share that is greater than or equal to the per Metromile share cash consideration will be cancelled for no consideration.
Except as set forth in the immediately following sentence, each Metromile restricted stock unit award (which we refer to as a “Metromile RSU award”) that is outstanding immediately prior to the first effective time will, as of the first effective time, be assumed by Lemonade and automatically converted into an award of Lemonade restricted stock units (which we refer to as a “Lemonade RSU award”) covering a number of shares of Lemonade common stock equal to (i) the number of shares of Metromile common stock underlying such Metromile RSU award multiplied by (ii) the exchange ratio. Each outstanding Metromile RSU award held by Metromile’s non-employee directors and each Metromile RSU award that is outstanding and vests based on the achievement of one or more performance criteria will be cancelled and converted automatically into the right to receive an amount in cash equal to the per Metromile share cash consideration in respect of each share of common stock underlying such Metromile RSU award (in the case of performance-based Metromile RSU awards, based on actual performance) (the “RSU Consideration”). For purposes of the foregoing, the determination of actual performance with respect to any performance-based Metromile RSU awards and the number of shares underlying the Metromile RSU award that vest as of the effective time as a result of such performance will be made by Metromile prior to the effective time in accordance with the terms and conditions of the applicable award agreement.
Aside from the foregoing adjustments, each Metromile stock option and Metromile RSU Award that is assumed by Lemonade will generally remain subject to the same vesting and other terms and conditions that applied to such award immediately prior to the effective time.
Recommendation of the Metromile Board of Directors; Metromile’s Reasons for the Mergers
The Metromile board of directors unanimously recommends that you vote “FOR” the merger proposal and “FOR” the adjournment proposal. For a description of some of the factors considered by the Metromile board of directors in (a) determining that the mergers are fair to and in the best interests of Metromile and its stockholders; (b) approving and declaring advisable the execution and delivery of the merger agreement, the performance by Metromile of its covenants and agreements contained therein and the transactions contemplated thereby, including the mergers, on the terms and subject to the conditions set forth in the merger agreement;
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and (c) directing that the adoption of the merger agreement be submitted to a vote at a meeting of Metromile stockholders, and additional information on the recommendation of the Metromile board of directors, see “The Merger—Recommendation of the Metromile Board of Directors; Metromile’s Reasons for the Merger.”
Opinion of Metromile’s Financial Advisor
Metromile has engaged Allen & Company LLC (“Allen & Company”) as Metromile’s financial advisor in connection with the mergers. In connection with this engagement, Allen & Company delivered a written opinion, dated November 8, 2021, to the Metromile board of directors as to the fairness, from a financial point of view and as of the date of such opinion, of the exchange ratio provided for in the merger agreement. The full text of Allen & Company’s written opinion, dated November 8, 2021, which describes the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken, is attached to this proxy statement/prospectus as Annex B hereto and is incorporated by reference herein in its entirety. The description of Allen & Company’s opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of Allen & Company’s opinion. Allen & Company’s opinion and advisory services were intended for the benefit and use of the Metromile board of directors (in its capacity as such) in connection with its evaluation of the exchange ratio from a financial point of view and did not address any other terms, aspects or implications of the mergers. Allen & Company’s opinion did not constitute a recommendation as to the course of action that Metromile (or the Metromile board of directors or any committee thereof) should pursue in connection with the mergers or otherwise address the merits of the underlying decision by Metromile to engage in the mergers, including in comparison to other strategies or transactions that might be available to Metromile or which Metromile might engage in or consider. Allen & Company’s opinion does not constitute advice or a recommendation to any securityholder or other person as to how to vote or act on any matter relating to the mergers or otherwise.
The Metromile Special Meeting
The Metromile special meeting is scheduled to be held virtually via live webcast on , 2022, beginning at , Pacific Time, unless adjourned or postponed to a later date.
In light of ongoing developments related to the COVID-19 pandemic, the Metromile special meeting will be held solely in a virtual meeting format via live webcast. We encourage you to allow ample time for online check-in, which begins at , Pacific Time.
The purpose of the Metromile special meeting is to consider and vote on each of the following proposals:
● | Proposal 1: Adoption of the merger agreement. and |
● | Proposal 2: Adjournment of the Metromile special meeting. |
Metromile stockholders must approve the merger proposal as a condition to the completion of the mergers. If Metromile stockholders fail to approve the merger proposal, the mergers will not occur. The vote on the merger proposal is a vote separate and apart from the vote to approve the adjournment proposal. Accordingly, a Metromile stockholder may vote to approve the merger proposal and vote not to approve the adjournment proposal, and vice versa.
Only holders of record of shares of Metromile common stock outstanding as of the close of business on the record date are entitled to notice of, and to vote at, the Metromile special meeting or any adjournment thereof. Metromile stockholders may cast one vote for each share of Metromile common stock that they own of record as of the record date.
A quorum of Metromile stockholders is necessary to conduct the Metromile special meeting. The presence, virtually via the Metromile special meeting website or by proxy, of the holders of a majority of the issued and outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting will constitute a quorum. All shares of Metromile common stock represented by a valid proxy and all abstentions will be counted as present for purposes of establishing a quorum. All of the proposals for consideration at the Metromile special meeting are considered “non-routine” matters under NYSE rules, and, therefore, brokers are not permitted to vote on any of the matters to be considered at the Metromile special meeting unless they have received instructions from the beneficial owners. As a result, no “broker non-votes” are expected at the meeting, and shares held in “street name” will not be counted as present for the purpose of determining the existence of a quorum unless the Metromile stockholder provides their bank, broker or other nominee with voting instructions for at least one of the proposals brought before the Metromile special meeting.
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Assuming a quorum is present at the Metromile special meeting, approval of the merger proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting on the merger proposal. Accordingly, an abstention or other failure to vote on the merger proposal will have the same effect as a vote “AGAINST” the merger proposal.
Whether or not a quorum is present at the Metromile special meeting, approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock that are virtually present via the Metromile special meeting website or represented by proxy and entitled to vote at the Metromile special meeting. Accordingly, any shares not virtually present or represented by proxy (including due to the failure of a Metromile stockholder who holds shares in “street name” through a bank, broker or other nominee to provide voting instructions to such bank, broker or other nominee) will have no effect on the outcome of the adjournment proposal. An abstention or other failure of any shares virtually present or represented by proxy and entitled to vote at the Metromile special meeting on the adjournment proposal to vote on the adjournment proposal will have the same effect as a vote “AGAINST” the adjournment proposal.
Interests of Lemonade Directors and Executive Officers in the Mergers
As of the date of this proxy statement/prospectus, Lemonade directors and executive officers do not have interests in the mergers that are different from, or in addition to, the interests of other Lemonade stockholders generally.
Interests of Metromile Directors and Executive Officers in the Mergers
In considering the recommendations of the Metromile board of directors, Metromile stockholders should be aware that Metromile directors and executive officers have interests in the mergers, including financial interests, which may be different from, or in addition to, the interests of other Metromile stockholders generally. The Metromile board of directors was aware of and considered these interests, among other matters, when it determined that the mergers are fair to and in the best interests of Metromile and its stockholders, approved and declared advisable the merger agreement and the transactions contemplated thereby, including the mergers, and recommended that Metromile stockholders approve the merger proposal. See the section of this proxy statement/prospectus entitled “The Merger — Background of the Merger” and the section of this proxy statement/prospectus entitled “The Merger — Recommendation of the Metromile Board of Directors; Metromile’s Reasons for the Merger.”
These interests include the following:
● | Effective as of the first effective time, each Metromile stock option and Metromile RSU Award that is outstanding immediately prior to the first effective time, including those held by our directors and executive officers, will be assumed by Lemonade or cashed out, in each case, as specified in the merger agreement. |
● | Severance payments and benefits may be payable to Metromile executive officers upon certain qualifying terminations of employment in connection with or following a change of control such as the mergers. |
● | Certain Metromile executive officers are eligible to receive retention awards in connection with or following the mergers. |
● | Metromile executive officers and directors are entitled to continued indemnification and insurance coverage under their respective existing indemnification agreements executed with Metromile (collectively, the “indemnification agreements”) and the merger agreement. |
For a more complete description of these interests, see “The Merger — Interests of Metromile Directors and Executive Officers in the Merger.”
Governance of the Combined Company
Upon consummation of the mergers, the executive management team of Lemonade is expected to remain unchanged and consist of members of the Lemonade executive management team prior to the mergers, including Lemonade’s executive officers set forth below in “Interests of Lemonade Directors and Executive Officers in the Merger.”
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Organizational Documents and Directors and Officers of the Initial Surviving Corporation
At the first effective time, Metromile’s certificate of incorporation as in effect immediately prior to the first effective time will continue as the certificate of incorporation of the Initial Surviving Corporation. At the first effective time, Metromile’s bylaws as in effect immediately prior to the first effective time will continue as the bylaws of the Initial Surviving Corporation.
Organizational Documents and Directors and Officers of the Surviving Company
At the second effective time, Acquisition Sub II (the “Surviving Company”) certificate of formation will be amended and restated in its entirety in substantially the form of the certificate of formation set forth in an exhibit to the merger agreement. At the second effective time, the Surviving Company’s limited liability company agreement will be amended and restated in its entirety in substantially the form of the limited liability company agreement set forth in an exhibit to the merger agreement except that the name of the Surviving Company will be changed to “Metromile, LLC.” Acquisition Sub II’s directors and officers immediately prior to the second effective time will become the initial directors and officers of Metromile, LLC.
Security Ownership of Certain Beneficial Owners and Management of Metromile
At the close of business on December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, Metromile directors and executive officers and their affiliates, as a group, beneficially owned approximately 18,877,706 shares of Metromile common stock, collectively representing approximately 14.3% of the shares of Metromile common stock outstanding on such date. Metromile currently expects that all Metromile directors and executive officers will vote their shares “FOR” the merger proposal and “FOR” the adjournment proposal. For more information regarding the security ownership of Metromile directors and executive officers, see “Security Ownership of Certain Beneficial Owners and Management of Metromile.”
Regulatory Approvals
Lemonade, the Acquisition Subs and Metromile have each agreed to cooperate with each other and to use (and to cause their subsidiaries to use) their respective reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary to cause the conditions to the closing of the mergers to be satisfied as promptly as reasonably practicable (and in any event no later than August 8, 2022 (which, pursuant to the terms of the merger agreement, may be extended to November 8, 2022 in certain circumstances related to the receipt of required regulatory approvals and the absence of restraints under applicable legal requirements) (the “end date”) and to consummate the transactions contemplated by the merger agreement, including to obtain all necessary, proper or advisable regulatory consents and approvals as promptly as reasonably practicable, subject to certain limits. See “The Merger—Regulatory Approvals.”
The obligations of Lemonade and Metromile to consummate the mergers are subject to, among other conditions, the expiration or termination of all waiting periods (and any agreed upon extensions of any waiting period or commitment not to consummate the mergers for any period of time) applicable to the consummation of the mergers under the HSR Act, the absence of any agreement pending or in effect between Lemonade and any governmental entity not to close the mergers, and the receipt of certain required regulatory approvals and consents.
Ownership of the Combined Company
Based on the anticipated treatment of equity-based awards and the number of shares of Lemonade and Metromile common stock outstanding as of December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, upon completion of the mergers, former Metromile stockholders are expected to own approximately 9.9% of the outstanding shares of Lemonade common stock and Lemonade stockholders immediately prior to the mergers are expected to own approximately 90.1% of the outstanding shares of Lemonade common stock. The relative ownership interests of Lemonade stockholders and former Metromile stockholders in the combined company immediately following the mergers will depend on the number of shares of Lemonade and Metromile common stock issued and outstanding immediately prior to the mergers.
No Appraisal Rights
The Metromile stockholders are not entitled to appraisal of their shares or dissenters’ rights with respect to the mergers.
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Conditions to the Completion of the Mergers
The obligations of each of Lemonade and Metromile to complete the mergers are subject to the satisfaction or waiver, in whole or in part (to the extent permitted by applicable law), at or prior to the closing, of each of the following conditions:
● | the SEC having declared effective the registration statement on Form S-4 of which this proxy statement/prospectus forms a part, and the absence of any stop order or pending (or threatened) proceedings by the SEC with respect thereto; |
● | approval by Metromile stockholders of the merger proposal; |
● | the expiration or termination of all waiting periods (and any agreed upon extensions of any waiting period or commitment not to consummate the mergers for any period of time) applicable to the consummation of the mergers under the HSR Act, the absence of any agreement pending or in effect between Lemonade and any governmental entity not to close the mergers, and the receipt of certain required regulatory consents and approvals; |
● | the approval for listing by the NYSE of the shares of Lemonade common stock to be issued to Metromile stockholders in the mergers, including shares of Lemonade common stock to be issued in connection with assumed Metromile equity awards; and |
● | the absence of any law or order by any governmental entity of competent jurisdiction preventing, enjoining or making illegal the consummation of the mergers. |
In addition, each party’s obligation to complete the mergers is subject to, among other things, the accuracy of certain representations and warranties of the other party and the compliance by such other party with certain of its covenants, in each case, subject to the materiality standards set forth in the merger agreement, and the absence of the occurrence of any material adverse effect.
Neither Lemonade nor Metromile can be certain when, or if, the conditions to the mergers will be satisfied or waived, or that the mergers will be completed.
No Solicitation of Acquisition Proposals
As more fully described under “The Merger Agreement—No Solicitation of Acquisition Proposals,” subject to the exceptions summarized below, Metromile has agreed that it will not (a) solicit, initiate, knowingly encourage or knowingly facilitate any inquiries regarding, or the submission or announcement by any person of, any proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal (as defined under “The Merger Agreement—No Solicitation of Acquisition Proposals”), (b) furnish any information regarding such party or its subsidiaries in connection with, or for the purpose of soliciting, initiating, encouraging or facilitating, or in response to, any inquiry, proposal or offer that constitutes or would reasonably be expected to lead to an acquisition proposal, (c) engage in, enter into, continue or otherwise participate in any discussions or negotiations with any person with respect to any acquisition proposal or any inquiry, proposal or offer that would reasonably be expected to lead to an acquisition proposal, (d) approve, adopt, recommend, agree to or enter into, or propose to approve, adopt, recommend, agree to or enter into, any letter of intent, memorandum of understanding or similar document, agreement, commitment or agreement in principle with respect to any acquisition proposal or (e) resolve or agree to do any of the foregoing.
Notwithstanding the restrictions described above, if at any time prior to obtaining approval of the merger proposal, Metromile receives a bona fide, written acquisition proposal after the date of the merger agreement that did not result from a material breach of the non-solicitation provisions in the merger agreement and that the Metromile board of directors determines in good faith (after consultation with its outside legal counsel and financial advisor) constitutes or could reasonably be expected to lead to a superior proposal (as defined under “The Merger Agreement—No Solicitation of Acquisition Proposals”), Metromile may (a) engage in discussions or negotiations with the party making the acquisition proposal and (b) furnish information with respect to Metromile to the party making the acquisition proposal, subject to certain conditions and obligations in the merger agreement. Metromile has also agreed to notify Lemonade promptly following (and in any event, within one business day of the receipt of) any acquisition proposal or any request for information that is reasonably likely to lead to an acquisition proposal and to keep Lemonade reasonably informed on a current basis (and in any event, within one business day) as to the status of any acquisition proposal, including informing Lemonade of any material change to such acquisition proposal’s terms, the status of any negotiations, and any change in its intentions.
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In addition, at any time prior to obtaining approval of the merger proposal, Metromile will be permitted, through its representatives or otherwise, to seek clarification from (but not, unless otherwise allowed pursuant to the merger agreement, to engage in any negotiations with or provide any non-public information to) any person that has made an acquisition proposal solely to clarify and understand the terms and conditions of such proposal to provide adequate information for the Metromile board of directors to make an informed determination with respect to such acquisition proposal.
No Change of Recommendation
The merger agreement provides that, among other restrictions and subject to certain exceptions, the Metromile board of directors will not (a) withhold, withdraw, modify, amend or qualify (or publicly propose to do so), in a manner adverse to Lemonade, the Metromile board of directors’ recommendation to Metromile stockholders to adopt the merger agreement or (b) approve, recommend or declare advisable (or publicly propose to do so) any acquisition proposal.
Notwithstanding the restrictions described above, at any time prior to obtaining the approval by Metromile stockholders of the merger proposal, the Metromile board of directors may make a change of recommendation if it determines in good faith (after consultation with its outside legal counsel and financial advisor) that such acquisition proposal constitutes a superior proposal and that failure to take such action with respect to such acquisition proposal would reasonably be expected to be inconsistent with the Metromile board of directors’ fiduciary duties to Metromile and its stockholders under applicable law (and subject to compliance with certain obligations set forth in the merger agreement, including providing Lemonade with prior notice and the opportunity to negotiate for a period to match the terms of the superior proposal. In addition, such change of recommendation would entitle Lemonade to terminate the merger agreement and collect a termination fee of $12.5 million (the “termination fee”) from Metromile.
In addition, the Metromile board of directors is permitted, under certain circumstances prior to obtaining Metromile stockholder approval of the merger proposal, and subject to compliance with certain obligations set forth in the merger agreement (including providing Lemonade with prior notice and the opportunity to negotiate during such notice period to amend the terms of the merger agreement) to make a change of recommendation in response to an intervening event (unrelated to an acquisition proposal) and as such term is defined in the section "The Merger Agreement -- Change in Recommendation -- Permitted Change of Recommendation — Intervening Event" if the Metromile board of directors determines in good faith (after consultation with its outside legal counsel and financial advisor) that the failure to do so would be reasonably likely to be inconsistent with its fiduciary duties.
Termination of the Merger Agreement
The merger agreement may be terminated and the mergers abandoned:
● | by mutual written consent of Lemonade and Metromile at any time prior to the effective time; |
● | by either Lemonade or Metromile, if the mergers have not been consummated on or prior to the end date, including any automatic extension thereof (however, a party may not terminate the merger agreement if such party’s material breach of any of its obligations under the merger agreement materially contributed to the failure of the closing to have occurred by the end date); |
● | by either Lemonade or Metromile, if a governmental authority of competent jurisdiction issues a final and non-appealable order or adopts or enacts a law that is final and non-appealable that permanently prevents, enjoins or makes illegal the consummation of the mergers (however, a party may not terminate the merger agreement if the material breach by such party (or any affiliate of such party) of any such party’s obligations under the merger agreement shall have been the primary cause of, or primarily resulted in, the issuance or continued existence of such order or law); |
● | by Lemonade, if Metromile has made a change of recommendation, prior to Metromile obtaining its required stockholder approval; |
● | by Lemonade, if Metromile breaches the merger agreement non-solicitation provisions in any material respect; |
● | by either party, if the merger proposal is not approved at the Metromile special meeting, including any adjournment thereof; |
● | by either party, if any representation or warranty of the other party becomes inaccurate or the other party breaches any covenant in the merger agreement and such inaccuracy or breach (a) would result in the failure of certain conditions to |
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closing and (b) is not curable by the end date or, if curable and the other party is using reasonable best efforts to cure, is not cured by the date that is 30 days following written notice describing such breach (however, the terminating party may not exercise this termination right if it is then in breach of any representation, warranty or agreement contained in the merger agreement which breach would give rise to the failure of a condition to the merger agreement regarding accuracy of representations and warranties and compliance with covenants). |
Termination Fee
The termination fee will be payable by Metromile only once and not in duplication even though the termination fee may be payable by Metromile pursuant to multiple circumstances.
Metromile has agreed to pay the termination fee to Lemonade if the merger agreement is terminated. Metromile is also required to pay the termination fee if the merger agreement is terminated in certain circumstances, including if the merger agreement is terminated by Lemonade in the event of a change of recommendation by the Metromile board of directors.
Furthermore, except in the case of “actual, common law fraud or willful breach” with respect to Metromile’s representations and warranties set forth in the merger agreement, if Lemonade receives the termination fee, then the termination fee will be Lemonade’s sole and exclusive remedy against Metromile, its affiliates and its and their respective representatives in connection with the merger agreement.
Voting and Support Agreements
Contemporaneously with the execution of the merger agreement, Lemonade and certain stockholders of Metromile entered into the voting and support agreements. Pursuant to the voting and support agreements, the Metromile supporting stockholders agreed to, among other things, vote all of their shares in Metromile that they own as of the record date at the Metromile special meeting (i) in favor of the adoption of the merger agreement, (ii) against any acquisition proposal, and (iii) against any proposal, action or agreement that would reasonably be expected to impede, interfere with, delay or postpone, prevent or otherwise impair the mergers or the other transactions contemplated by the merger agreement.
A copy of the form of the Voting and Support Agreements is attached as Annex C to this proxy statement/prospectus.
Accounting Treatment
Lemonade prepares its financial statements in accordance with GAAP. The merger will be accounted for using the acquisition method of accounting under the provisions of ASC 805, INSU SPAC transactions. Lemonade’s management has evaluated the guidance contained in ASC 805 with respect to the identification of the acquirer in the merger and concluded, based on a consideration of the pertinent facts and circumstances, that Lemonade will be the acquirer for financial accounting purposes. Accordingly, Lemonade’s cost to acquire Metromile has been allocated to Metromile’s acquired assets and liabilities based upon their estimated fair values. The allocation of the purchase price is estimated and is dependent upon estimates of certain valuations that are subject to change. In addition, the final purchase price of Lemonade’s acquisition of Metromile will not be known until the date of the completion of the merger and could vary materially from the preliminary purchase price. Accordingly, the final acquisition accounting adjustments may be materially different from the preliminary unaudited pro forma adjustments presented.
The financial condition and results of operations of Lemonade after completion of the mergers will include the operating results of Metromile beginning from the closing date of the mergers (the “closing date”), but will not be restated retroactively to reflect the historical financial condition or results of operations of Metromile. The earnings of Lemonade following completion of the mergers will reflect acquisition accounting adjustments, including the effect of changes in the carrying value for assets and liabilities on depreciation expense and amortization expense. Indefinite-lived intangible assets, including goodwill, will not be amortized but will be tested for impairment at least annually, and all tangible and intangible assets including goodwill will be tested for impairment when certain indicators are present. If, in the future, Lemonade determines that tangible or intangible assets (including goodwill) are impaired, Lemonade would record an impairment charge at that time.
Material U.S. Federal Income Tax Consequences of the Mergers
Metromile and Lemonade intend that the mergers, taken together, should qualify as a “reorganization” within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes (the “Intended Tax Treatment”).
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Assuming the mergers, taken together, so qualify, a U.S. holder (as defined under “Material U.S. Federal Income Tax Consequences of the Mergers”) of Metromile common stock generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of Metromile common stock for Lemonade common stock in the first merger, except with respect to cash received by such U.S. holder in lieu of fractional shares of Lemonade common stock.
However, it is not a condition to Metromile’s obligation or Lemonade’s obligation to consummate the transactions contemplated by the merger agreement that the mergers qualify for the Intended Tax Treatment or that Metromile or Lemonade receive an opinion from counsel to that effect. Whether or not the mergers qualify for the Intended Tax Treatment depends on facts that will not be known until the mergers are completed and on the treatment of the right under the merger agreement of current and former holders of Metromile common stock to receive Lemonade Additional Shares in respect of their right to the to Metromile Additional Shares (as described in “The Merger Agreement—Treatment of Additional Shares”). Furthermore, neither Metromile nor Lemonade intends to request a ruling from the IRS regarding the U.S. federal income tax consequences of the mergers. Accordingly, no assurance can be given that the mergers will qualify for the Intended Tax Treatment or that the IRS will not challenge the conclusion that the mergers will qualify for the Intended Tax Treatment or that a court would not sustain such a challenge. If, contrary to expectations, the mergers do not qualify for the Intended Tax Treatment, U.S. holders of Metromile stock could be subject to U.S. federal income tax upon the receipt of Lemonade common stock in the first merger.
See “Material U.S. Federal Income Tax Consequences of the Mergers” for a more complete description of material U.S. federal income tax consequences of the mergers. The discussion of the material U.S. federal income tax consequences contained in this proxy statement/prospectus is intended to provide only a general discussion and is not a complete analysis or description of all potential U.S. federal income tax consequences of the mergers that may vary with, or are dependent on, individual circumstances. In addition, it does not address the effects of any foreign, state or local tax laws or any U.S. federal tax laws other than U.S. federal income tax laws.
Tax matters are very complicated and the tax consequences of the mergers to each U.S. holder of Metromile common stock may depend on such stockholder’s particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the mergers.
Comparison of Stockholders’ Rights
Upon completion of the mergers, Metromile stockholders receiving shares of Lemonade common stock will become Lemonade stockholders. The rights of Lemonade stockholders will be governed by the DGCL and the Lemonade charter and bylaws in effect at the second effective time. As Lemonade and Metromile are both Delaware corporations, the rights of Lemonade and Metromile stockholders are not materially different. However, there are certain differences between the rights of Lemonade stockholders under the Lemonade charter and bylaws and the rights of of Metromile stockholders under the Metromile charter and bylaws. See “Comparison of Stockholders’ Rights.”
Listing of Lemonade Common Stock; Delisting and Deregistration of Metromile Common Stock
It is a condition to the mergers that the shares of Lemonade common stock to be issued to Metromile stockholders in connection with the mergers be approved for listing on the NYSE, subject to official notice of issuance. If the mergers are completed, Metromile common stock will be delisted from the Nasdaq Capital Market and deregistered under the Exchange Act, following which Metromile will no longer be required to file periodic reports with the SEC with respect to Metromile common stock.
Metromile has agreed to cooperate with Lemonade prior to the closing to cause the Metromile common stock to be delisted from the Nasdaq Capital Market and deregistered under the Exchange Act as soon as practicable following the effective time.
Summary of Risk Factors
The mergers, including the possibility that the mergers may not be completed, involves a number of risks. In evaluating the proposals set forth in this proxy statement/prospectus, you should carefully read this proxy statement/prospectus, including the annexes, and especially consider the factors discussed in the section entitled “Risk Factors”. Below is a summary of such risk factors:
Risks Relating to the Mergers
● | The exchange ratio is fixed and will not be adjusted in the event of any change in the price of either Lemonade or Metromile common stock; therefore, the value of the consideration that Metromile stockholders will receive in the mergers is uncertain; |
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● | The market price of Lemonade common stock will continue to fluctuate after the mergers; |
● | The mergers may not be completed and the merger agreement may be terminated in accordance with its terms; |
● | The termination of the merger agreement could negatively impact Lemonade or Metromile and the trading prices of the Lemonade or Metromile common stock; |
● | The market price for shares of Lemonade common stock may be affected by factors different from, or in addition to, those that historically have affected or currently affect the market prices of shares of Lemonade or Metromile common stock; |
● | The shares of common stock of the combined company to be received by Metromile stockholders as a result of the mergers will have rights different from the shares of Metromile common stock; |
● | After the mergers, Metromile stockholders will have a significantly lower ownership and voting interest in Lemonade than they currently have in Metromile and will exercise less influence over management and policies of the combined company; |
● | Until the completion of the mergers or the termination of the merger agreement in accordance with its terms, Lemonade and Metromile are each prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to Lemonade, Metromile and/or their respective stockholders; |
● | Obtaining certain required regulatory consents and approvals and satisfying closing conditions may prevent or delay completion of the mergers; |
● | Lemonade and Metromile must obtain certain regulatory consents and approvals to consummate the mergers, which, if delayed, not granted or granted with burdensome or unacceptable conditions, could prevent, substantially delay or impair consummation of the mergers, result in additional expenditures of money and resources or reduce the anticipated benefits of the mergers; |
● | Failure to attract, motivate and retain executives and other key employees could diminish the anticipated benefits of the mergers; |
● | The mergers, and uncertainty regarding the mergers, may cause customers, strategic partners and others to delay or defer decisions concerning Lemonade or Metromile and adversely affect each company’s ability to effectively manage its respective business; |
● | Whether or not the mergers are completed, the announcement and pendency of the mergers could cause disruptions in the businesses of Lemonade and Metromile, which could have an adverse effect on their respective businesses and financial results; and |
● | The U.S. federal income tax treatment of the right of current and former holders of Metromile common stock to receive Lemonade common stock with respect to the Metromile Additional Shares is unclear. |
Risks Relating to the Combined Company
● | Combining the businesses of Lemonade and Metromile may be more difficult, costly or time-consuming than expected and the combined company may fail to realize the anticipated benefits of the mergers, which may adversely affect the combined company’s business results and negatively affect the value of the combined company’s common stock; |
● | The failure to successfully integrate the businesses and operations of Lemonade and Metromile in the expected time frame may adversely affect the combined company’s future results; |
● | The combined company may not be able to retain customers, which could have an adverse effect on the combined company’s business and operations. Third parties may terminate or alter existing contracts or relationships with Lemonade or Metromile; |
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● | The combined company may be exposed to increased litigation, which could have an adverse effect on the combined company’s business and operations; |
● | Declaration, payment and amounts of dividends, if any, distributed to stockholders of the combined company will be uncertain; and |
● | The combined company is subject to risks arising from the ongoing COVID-19 pandemic. |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The registration statement on Form S-4 of which this proxy statement/prospectus forms a part, the documents that Lemonade and Metromile refer you to in the registration statement and oral statements made or to be made by Lemonade and Metromile include certain “forward-looking statements” within the meaning of, and subject to the safe harbor created by, Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995 (together, the “safe harbor provisions”). All statements other than statements of historical fact contained in this proxy statement/prospectus, including without limitation statements about the beliefs and expectations of Lemonade and Metromile management relating to the mergers and the combined company’s future results of operations and financial position, are forward-looking statements. Words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions are intended to identify such forward-looking statements that are intended to be covered by the safe harbor provisions. Investors are cautioned that any forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond the control of both companies, and which may cause actual results and future trends to differ materially from those matters expressed in, or implied or projected by, such forward-looking statements, which speak only as of the date of this proxy statement/prospectus. Although these forward-looking statements are based on assumptions that Lemonade and Metromile management, as applicable, believe to be reasonable, they can give no assurance that these expectations will prove to be correct. Investors are cautioned not to place undue reliance on these forward-looking statements. Among the risks and uncertainties that could cause actual results to differ from those described in forward-looking statements are the following:
● | the occurrence of any change, event, series of events or circumstances that could give rise to the termination of the merger agreement, including a termination of the merger agreement under circumstances that could require Metromile to pay a termination fee to Lemonade; |
● | uncertainties related to the timing of the receipt of certain required regulatory approvals and consents for the mergers and the possibility that Lemonade and Metromile may be required to accept conditions that could reduce or eliminate the anticipated benefits of the mergers as a condition to obtaining such approvals or consents or that such approvals or consents might not be obtained at all; |
● | the price of Lemonade and Metromile common stock could change before the completion of the mergers, including as a result of uncertainty as to the long-term value of the common stock of the combined company or as a result of broader stock market movements; |
● | the possibility that the parties are unable to complete the mergers due to the failure of Metromile stockholders to adopt the merger agreement, or the failure to satisfy any of the other conditions to the completion of the mergers, or unexpected delays in satisfying any conditions; |
● | delays in closing, or the failure to close, the mergers for any reason, could negatively impact Lemonade, Metromile or the combined company; |
● | risks that the pendency or completion of the mergers and the other transactions contemplated by the merger agreement disrupt current plans and operations, which may adversely impact Lemonade’s or Metromile’s respective businesses; |
● | difficulties or delays in integrating the businesses of Lemonade and Metromile following completion of the mergers or fully realizing the anticipated synergies or other benefits expected from the mergers; |
● | certain restrictions during the pendency of the proposed mergers that may impact the ability of Lemonade or Metromile to pursue certain business opportunities or strategic transactions; |
● | the risk of legal proceedings that may be instituted against Lemonade, Metromile, their directors and/or others relating to the mergers; |
● | risks related to the diversion of the attention and time of Lemonade or Metromile management from ongoing business concerns; |
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● | the risk that the proposed mergers or any announcement relating to the proposed mergers could have an adverse effect on the ability of Lemonade or Metromile to retain and hire key personnel or maintain relationships with customers, suppliers, distributors, vendors, strategic partners or other third parties, including regulators and other governmental authorities or agencies, or on Lemonade’s or Metromile’s respective operating results and businesses generally; |
● | the potentially significant amount of any costs, fees, expenses, impairments or charges related to the mergers; |
● | the potential dilution of Lemonade and Metromile stockholders’ ownership percentage of the combined company as compared to their ownership percentage of Lemonade or Metromile, as applicable, prior to the mergers; |
● | the business, economic, political and other conditions in the countries in which Lemonade or Metromile operate; |
● | events beyond the control of Lemonade and Metromile, such as acts of terrorism or the continuation or worsening of the COVID-19 pandemic and changes in applicable law, including changes in Lemonade’s or Metromile’s estimates of their expected tax rate based on current tax law; |
● | the potential dilution of the combined company’s earnings per share as a result of the mergers; and |
● | Metromile directors and executive officers having interests in the mergers that are different from, or in addition to, the interests of Metromile stockholders generally. |
For further discussion of these and other risks, contingencies and uncertainties applicable to Lemonade and Metromile, their respective businesses and the proposed mergers, see “Risk Factors” in this proxy statement/prospectus and in similarly titled sections in Lemonade’s and Metromile’s other filings with the SEC that are incorporated by reference herein. See “Where You Can Find More Information.”
All subsequent written or oral forward-looking statements attributable to Lemonade, Metromile or any person acting on either of their behalf are expressly qualified in their entirety by these cautionary statements. Neither Lemonade nor Metromile is under any obligation to update, alter or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise, and each expressly disclaims any obligation to do so, except as may be required by law.
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MARKET PRICE AND DIVIDEND INFORMATION
Market Price
Shares of Lemonade common stock are listed for trading on the NYSE under the symbol “LMND.” Shares of Metromile common stock are listed for trading on the Nasdaq Capital Market under the symbol “MILE.” Metromile warrants are listed for trading on the Nasdaq Capital Market under the symbol “MILEW.”
On November 5, 2021, the last trading day before the public announcement of the signing of the merger agreement, the closing sale price per share of Lemonade common stock on the NYSE was $69.53, the closing sale price per share of Metromile common stock on the Nasdaq Capital Market was $3.08 and the closing price per warrant of Metromile warrants on the Nasdaq Capital Market was $0.58. As of December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, the closing price per share of Lemonade common stock on the NYSE was $43.21, the closing price per share of Metromile common stock on the Nasdaq Capital Market was $2.23 and the closing price per warrant of Metromile warrants on the Nasdaq Capital Market was $0.24.
Because the exchange ratio will not be adjusted for changes in the market price of either Lemonade common stock or Metromile common stock, the market value of the shares of Lemonade common stock that holders of Metromile common stock will have the right to receive on the effective date of the mergers may vary significantly from the market value of the shares of Lemonade common stock that holders of Metromile common stock would receive if the mergers were completed on the date of this proxy statement/prospectus. As a result, you should obtain recent market prices of Lemonade common stock and Metromile common stock prior to voting your shares. See “Risk Factors — Risks Relating to the Merger.”
Holders
As of December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, there were 116 holders of record of Metromile common stock and 4 holders of record of Metromile warrants.
Dividends
To date, neither Lemonade nor Metromile has declared or paid any dividends on the Lemonade common stock or Metromile common stock, respectively. Any future determination to pay cash dividends on the Lemonade common stock will be at the discretion of the Lemonade board of directors and will be dependent upon Lemonade’s financial condition, results of operations, capital requirements, general business conditions and such other factors as the Lemonade board of directors may deem relevant.
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RISK FACTORS
In considering how to vote on the proposals to be considered and voted on at the Metromile special meeting, you are urged to carefully consider all of the information contained or incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information.” You should also read and consider the risks associated with each of the businesses of Lemonade and Metromile because those risks will affect the combined company. The risks associated with the business of Lemonade can be found in Lemonade’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020, which is incorporated by reference to this proxy statement/prospectus and the risks associated with the business of Metromile can be found below. In addition, you are urged to carefully consider the following material risks relating to the mergers and the businesses of Lemonade, Metromile and the combined company.
Risks Relating to the Mergers
Because the exchange ratio is fixed and will not be adjusted in the event of any change in the price of either Lemonade or Metromile common stock, the value of the consideration that Metromile stockholders will actually receive in the mergers is uncertain.
Upon completion of the mergers, each share of Metromile common stock outstanding immediately prior to the mergers, other than shares held in treasury by Metromile or held directly by Lemonade or Acquisition Sub I, will be converted into the right to receive 0.05263 shares of Lemonade common stock (with cash, without interest and less any applicable withholding taxes, in lieu of any fractional shares of Lemonade common stock). This exchange ratio is fixed in the merger agreement and will not be adjusted for changes in the market price of either Lemonade or Metromile common stock prior to the completion of the mergers. The market prices of Lemonade and Metromile common stock have fluctuated prior to and after the date of the announcement of the merger agreement and may continue to fluctuate from the date of this proxy statement/prospectus to the date of the Metromile special meeting, and through the date the mergers are consummated.
Because the value of the merger consideration will depend on the market price of Lemonade common stock at the time the mergers are completed, Metromile stockholders will not know or be able to determine at the time of the Metromile special meeting the market value of the merger consideration they would receive upon completion of the mergers.
Stock price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in Lemonade’s or Metromile’s respective businesses, operations and prospects, the uncertainty as to the extent of the duration, scope and impact of the COVID-19 pandemic, market assessments of the likelihood that the mergers will be completed, interest rates, general market, industry and economic conditions and other factors generally affecting the respective prices of Lemonade and Metromile common stock, federal, state and local legislation, governmental regulation and legal developments in the industry segments in which Lemonade and Metromile operate, and the timing of the mergers and receipt of required regulatory approvals and consents.
Many of these factors are beyond the control of Lemonade and Metromile, and neither Lemonade nor Metromile is permitted to terminate the merger agreement solely due to a decline in the market price of the common stock of the other party. Metromile stockholders are urged to obtain current market quotations for Lemonade and Metromile common stock in determining whether to vote in favor of the merger proposal.
The market price of Lemonade common stock will continue to fluctuate after the mergers.
Upon completion of the mergers, Metromile stockholders will become holders of Lemonade common stock. The market price of the common stock of the combined company may continue to fluctuate, potentially significantly, following completion of the mergers, including for the reasons described above. As a result, former Metromile stockholders could lose some or all of the value of their investment in Lemonade common stock. In addition, any significant price or volume fluctuations in the stock market generally could have a material adverse effect on the market for, or liquidity of, the Lemonade common stock received in the mergers, regardless of the combined company’s actual operating performance.
The mergers may not be completed and the merger agreement may be terminated in accordance with its terms.
The mergers are subject to a number of conditions that must be satisfied or waived (to the extent permitted) prior to the completion of the mergers, including the approval by Metromile stockholders of the merger proposal. These conditions are described
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under “The Merger Agreement — Conditions to the Completion of the Merger.” These conditions to the completion of the mergers, some of which are beyond the control of Lemonade and Metromile, may not be satisfied or waived in a timely manner or at all, and, accordingly, the mergers may be delayed or not completed.
Additionally, either Lemonade or Metromile may terminate the merger agreement under certain circumstances, including, among other reasons, if the mergers are not completed by the end date. In addition, if the merger agreement is terminated under specified circumstances, including if the Metromile board of directors changes its recommendation, Metromile may be required to pay Lemonade a termination fee of $12.5 million. See “The Merger Agreement — Termination of the Merger Agreement” and “The Merger Agreement — Termination Fee” for a more complete discussion of the circumstances under which the merger agreement could be terminated and when a termination fee may be payable by Metromile.
The termination of the merger agreement could negatively impact Lemonade or Metromile and the trading prices of the Lemonade or Metromile common stock.
If the mergers are not completed for any reason, including because Metromile stockholders fail to approve the merger proposal, the ongoing businesses of Lemonade and Metromile may be adversely affected and, without realizing any of the expected benefits of having completed the mergers, Lemonade and Metromile would be subject to a number of risks, including the following:
● | each company may experience negative reactions from the financial markets, including negative impacts on its stock price; |
● | each company may experience negative reactions from its customers and employees; |
● | each company will be required to pay its respective costs relating to the mergers, such as financial advisory, legal, financing and accounting costs and associated fees and expenses, whether or not the mergers are completed; |
● | the merger agreement places certain restrictions on the conduct of each company’s business prior to completion of the mergers and such restrictions, the waiver of which is subject to the consent of the other company, may prevent Lemonade and Metromile from taking actions during the pendency of the mergers that might otherwise be beneficial (see “The Merger Agreement — Conduct of Business Prior to the Merger’s Completion” for a description of the restrictive covenants applicable to Lemonade and Metromile); and |
● | matters relating to the mergers (including integration planning) will require substantial commitments of time and resources by Lemonade and Metromile management, which could otherwise have been devoted to day-to-day operations or to other opportunities that may have been beneficial to Lemonade or Metromile, as applicable, as an independent company. |
The market price for shares of Lemonade common stock may be affected by factors different from, or in addition to, those that historically have affected or currently affect the market prices of shares of Lemonade or Metromile common stock.
Upon consummation of the mergers, Lemonade stockholders and Metromile stockholders will both hold shares of common stock in the combined company. Lemonade’s businesses differ from those of Metromile, and Metromile’s businesses differ from those of Lemonade, and, accordingly, the results of operations of the combined company will be affected by some factors that are different from those currently or historically affecting the independent results of operations of Lemonade and Metromile. The results of operations of the combined company may also be affected by factors different from those that currently affect or have historically affected either Lemonade or Metromile. For a discussion of the businesses of each of Lemonade and Metromile and some important factors to consider in connection with those businesses, see “The Parties to the Merger” and the other information contained or incorporated in this proxy statement/prospectus. See “Where You Can Find More Information.”
Based on the anticipated treatment of equity-based awards and the number of shares of Metromile common stock outstanding as of December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, it is expected that Lemonade may issue up to approximately 6,748,318 shares of Lemonade common stock in the mergers. Former Metromile stockholders may decide not to hold the shares of Lemonade common stock that they will receive in the mergers, and Lemonade stockholders may decide to reduce their investment in Lemonade as a result of the changes to Lemonade’s investment profile as a result of the mergers. Other Metromile stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of Lemonade common stock that they receive in the mergers. Such sales of Lemonade common stock could have the effect of depressing the market price for Lemonade common stock.
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The shares of common stock of the combined company to be received by Metromile stockholders as a result of the mergers will have rights different from the shares of Metromile common stock.
Upon completion of the mergers, Metromile stockholders will no longer be stockholders of Metromile, but will instead become stockholders of Lemonade. As Lemonade and Metromile are both Delaware corporations, the rights of Lemonade and Metromile stockholders are not materially different. However, there are certain differences between the rights of Lemonade stockholders under Lemonade’s amended and restated certificate of incorporation (the “Lemonade charter”) and Lemonade’s amended and restated bylaws (the “Lemonade bylaws”) and the rights of Metromile stockholders under Metromile’s amended and restated certificate of incorporation (the “Metromile charter”) and Metromile’s amended and restated bylaws (the “Metromile bylaws.”) See “Comparison of Stockholders’ Rights” for a discussion of these rights.
After the mergers, Metromile stockholders will have a significantly lower ownership and voting interest in Lemonade than they currently have in Metromile and will exercise less influence over management and policies of the combined company.
Based on the anticipated treatment of equity-based awards and the number of shares of Lemonade and Metromile common stock outstanding on December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, upon completion of the mergers, former Metromile stockholders are expected to own approximately 9.9% of the outstanding shares of Lemonade common stock and Lemonade stockholders immediately prior to the mergers are expected to own approximately 90.1% of the outstanding shares of Lemonade common stock. Consequently, former Metromile stockholders will have less influence over the management and policies of the combined company than they currently have over the management and policies of Metromile.
Until the completion of the mergers or the termination of the merger agreement in accordance with its terms, Lemonade and Metromile are each prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to Lemonade, Metromile and/or their respective stockholders.
From and after the date of the merger agreement and prior to completion of the mergers, the merger agreement restricts Lemonade and Metromile from taking specified actions without the consent of the other party and requires that the business of each company and its respective subsidiaries be conducted in the ordinary course in all material respects. These restrictions may prevent Lemonade or Metromile, as applicable, from taking actions during the pendency of the mergers that might otherwise be beneficial. Adverse effects arising from these restrictions during the pendency of the mergers could be exacerbated by any delays in consummation of the mergers or termination of the merger agreement. See “The Merger Agreement — Conduct of Business Prior to the Merger’s Completion.”
Obtaining required approvals and satisfying closing conditions may prevent or delay completion of the mergers.
The mergers are subject to a number of conditions to closing as specified in the merger agreement. These closing conditions include, among others, the approval by Metromile stockholders of the merger proposal, the effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus forms a part registering the Lemonade common stock issuable pursuant to the merger agreement and the absence of any stop order or proceedings by the SEC with respect thereto, the expiration or earlier termination of any applicable waiting period and any agreed upon extensions of any waiting period or commitment not to consummate the mergers for any period of time) applicable to the consummation of the mergers under the HSR Act, the receipt of certain regulatory consents and approvals, approval for listing on the NYSE of the shares of Lemonade common stock to be issued pursuant to the merger agreement, and the absence of governmental restraints or prohibitions preventing the consummation of the mergers. The obligation of each of Lemonade and Metromile to consummate the mergers are also conditioned on, among other things, the truth and accuracy of the representations and warranties made by the other party on the date of the merger agreement and on the closing date (subject to certain materiality and material adverse effect qualifiers), and the performance by the other party in all material respects of its obligations under the merger agreement. No assurance can be given that the other required stockholder, governmental and regulatory consents and approvals will be obtained or that the other required conditions to closing will be satisfied, and, if all required consents and approvals are obtained and the required conditions are satisfied, no assurance can be given as to the terms, conditions and timing of such consents and approvals. Any delay in completing the mergers could cause the combined company not to realize, or to be delayed in realizing, some or all of the benefits that Lemonade and Metromile expect to achieve if the mergers are successfully completed within its expected time frame. For a more complete summary of the conditions that must be satisfied or waived prior to completion of the mergers, see “The Merger Agreement — Conditions to the Completion of the Merger.”
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Lemonade and Metromile must obtain certain regulatory consents and approvals to consummate the mergers, which, if delayed, not granted or granted with burdensome or unacceptable conditions, could prevent, substantially delay or impair consummation of the mergers, result in additional expenditures of money and resources or reduce the anticipated benefits of the mergers.
The completion of the mergers is subject to the expiration or termination of all waiting periods (and any agreed upon extensions of any waiting period or commitment not to consummate the mergers for any period of time) applicable to the consummation of the mergers under the HSR Act, the absence of any agreement pending or in effect between Lemonade and any governmental entity not to close, and the receipt of certain additional regulatory consents and approvals.
With respect to United States antitrust and competition laws, under the HSR Act, the mergers may not be completed until Notification and Report Forms have been filed with the U.S. Federal Trade Commission (the “FTC”) and the U.S. Department of Justice (the “DOJ”) and the applicable waiting period (or any extension thereof) has expired or been terminated. A transaction requiring notification under the HSR Act may not be completed until the expiration of the applicable 30-day waiting period following the parties’ filing of their respective HSR notifications or the early termination of that waiting period, at the earliest. If the FTC or the DOJ issues a Request for Additional Information and Documentary Material (a “Second Request”) prior to the expiration of the waiting period, the parties must observe an additional 30-day waiting period, which begins to run only after both parties have substantially complied with the Second Request, unless the waiting period is terminated earlier or the parties otherwise agree to extend the waiting period (or commit not to consummate the mergers for a specified period of time). Each of Lemonade and Metromile filed an HSR Notification and Report Form with the FTC and the DOJ on December 3, 2021.
At any time before or after consummation of the mergers, notwithstanding the expiration or termination of the applicable waiting period under the HSR Act, the DOJ or the FTC, could take such action under antitrust or competition laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the mergers, seeking divestiture of substantial assets of the parties or requiring the parties to license, or hold separate, assets or to terminate existing relationships and contractual rights. Under certain circumstances, private parties may also seek to take legal action against the mergers under antitrust or competition laws.
Any one of these requirements, limitations, costs, divestitures or restrictions imposed by antitrust authorities could jeopardize or delay the completion, or reduce the anticipated benefits, of the mergers. There is no assurance that Lemonade and Metromile will obtain all required regulatory consents or approvals on a timely basis, or at all. Failure to obtain the necessary consents and approvals could substantially delay or prevent the consummation of the mergers, which could negatively impact both Lemonade and Metromile.
Failure to attract, motivate and retain executives and other key employees could diminish the anticipated benefits of the mergers.
The success of the mergers will depend in part on the combined company’s ability to retain the talents and dedication of the professionals currently employed by Lemonade and Metromile. It is possible that these employees may decide not to remain with Lemonade or Metromile, as applicable, while the mergers are pending, or with the combined company. If key employees terminate their employment, or if an insufficient number of employees are retained to maintain effective operations, the combined company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating Lemonade and Metromile to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, Lemonade and Metromile may not be able to locate suitable replacements for any key employees that leave either company or offer employment to potential replacements on reasonable terms. In addition, there could be disruptions to or distractions for the workforce and management, including disruptions associated with integrating employees into the combined company. No assurance can be given that the combined company will be able to attract or retain key employees of Lemonade and Metromile to the same extent that those companies have been able to attract or retain their own employees in the past.
The mergers, and uncertainty regarding the mergers, may cause customers, strategic partners and others to delay or defer decisions concerning Lemonade or Metromile and adversely affect each company’s ability to effectively manage its respective business.
The mergers will happen only if the stated conditions are met, including the approval by Metromile stockholders of the merger proposal and the receipt of required regulatory approvals, and consents among other conditions. Many of the conditions are beyond the control of Lemonade and Metromile, and both parties also have certain rights to terminate the merger agreement.
Accordingly, there may be uncertainty regarding the completion of the mergers. This uncertainty may cause customers, strategic partners or others that deal with Lemonade or Metromile to delay or defer entering into contracts with Lemonade or Metromile or making other decisions concerning Lemonade or Metromile or seek to change or cancel existing business relationships with
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Lemonade or Metromile, which could negatively affect their respective businesses. Any delay or deferral of those decisions or changes in existing agreements could have an adverse impact on the respective businesses of Lemonade and Metromile, regardless of whether the mergers are ultimately completed.
In addition, the merger agreement restricts Lemonade, Metromile and their respective subsidiaries from taking certain actions during the pendency of the mergers without the consent of the other party. These restrictions may prevent Lemonade and Metromile from pursuing attractive business opportunities or strategic transactions that may arise prior to the completion of the mergers. See “The Merger Agreement — Conduct of Business Prior to the Merger’s Completion” for a description of the restrictive covenants to which each of Lemonade and Metromile is subject.
Whether or not the mergers are completed, the announcement and pendency of the mergers could cause disruptions in the businesses of Lemonade and Metromile, which could have an adverse effect on their respective businesses and financial results.
Whether or not the mergers are completed, the announcement and pendency of the mergers could cause disruptions in the businesses of Lemonade and Metromile, including by diverting the attention of Lemonade and Metromile management toward the completion of the mergers. In addition, Lemonade and Metromile have each diverted significant management resources in an effort to complete the mergers and are each subject to restrictions contained in the merger agreement on the conduct of their respective businesses. If the mergers are not completed, Lemonade and Metromile will have incurred significant costs, including the diversion of management resources, for which they will have received little or no benefit.
Metromile directors and executive officers may have interests in the mergers that may be different from, or in addition to, the interests of Metromile stockholders generally.
In considering the recommendations of the Metromile board of directors to vote in favor of the proposals described in this proxy statement/prospectus, stockholders should be aware that Metromile directors and executive officers may have interests in the mergers, including financial interests, which may be different from, or in addition to, the interests of Metromile stockholders generally.
Metromile stockholders should be aware of these interests when they consider the recommendation of the Metromile board of directors that they vote to approve the merger proposal. The Metromile board of directors was aware of and considered these interests, among other matters, in reaching its determination that the mergers are fair to and in the best interests of Metromile and its stockholders, approving and declaring advisable the merger agreement and the transactions contemplated thereby, including the mergers, and recommending that Metromile stockholders approve the merger proposal. The interests of Metromile directors and executive officers are described in more detail under “Interests of Metromile Directors and Executive Officers in the Merger.”
Lemonade or Metromile may waive one or more of the closing conditions without re-soliciting stockholder approval from Metromile stockholders.
To the extent permitted by law, Lemonade or Metromile may determine to waive, in whole or part, one or more of the conditions to their respective obligations to consummate the mergers. Metromile expects to evaluate the materiality of any waiver and its effect on Metromile stockholders in light of the facts and circumstances at the time to determine whether any amendment of this proxy statement/prospectus or any re-solicitation of proxies is required in light of such waiver. Any determination as to whether to waive any condition to the consummation of the mergers, and as to whether to re-solicit stockholder approval and/or amend this proxy statement/prospectus as a result of such waiver, will be made by Metromile at the time of such waiver based on the facts and circumstances as they exist at that time.
The merger agreement contains provisions that could discourage a potential competing acquirer that might be willing to pay more to acquire or merge with Metromile.
The merger agreement contains “no shop” provisions that restrict the ability of Metromile to, among other things (each as described under “The Merger Agreement — No Solicitation of Acquisition Proposals”):
● | solicit, initiate, knowingly encourage or knowingly facilitate any inquiries regarding, or the submission or announcement by any person of, any proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal; |
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● | furnish any information regarding Metromile or its subsidiaries in connection with, or for the purpose of soliciting, initiating, encouraging or facilitating, or in response to, any inquiry, proposal or offer that constitutes or would reasonably be expected to lead to an acquisition proposal; |
● | engage in, enter into, continue or otherwise participate in any discussions or negotiations with any person with respect to any acquisition proposal or any inquiry, proposal or offer that would reasonably be expected to lead to any acquisition proposal; or |
● | approve, adopt, recommend, agree to or enter into, or propose to approve, adopt, recommend, agree to or enter into, any letter of intent, memorandum of understanding or similar document, agreement, commitment, or agreement in principle with respect to any acquisition proposal. |
Furthermore, there are only limited exceptions to the requirement under the merger agreement that the Metromile board of directors not withdraw, modify, amend or qualify the Metromile board of directors’ required recommendation to Metromile stockholders to adopt the merger agreement (the “Metromile recommendation”). Although the Metromile board of directors is permitted to effect a change of recommendation, after complying with certain procedures set forth in the merger agreement, in response to a superior proposal or to an intervening event (if the Metromile board of directors determines in good faith that a failure to do so would be reasonably likely to be inconsistent with its fiduciary duties under applicable law), such change of recommendation would entitle Lemonade to terminate the merger agreement and collect a termination fee from Metromile. See “The Merger Agreement — Termination of the Merger Agreement” and “The Merger Agreement — Termination Fee.”
These provisions could discourage a potential competing acquirer from considering or proposing an acquisition or merger of Metromile, even if it were prepared to pay consideration with a higher value than that implied by the exchange ratio in the merger, or might result in a potential competing acquirer proposing to pay a lower per share price than it might otherwise have proposed to pay because of the added expense of the termination fee.
The mergers will involve substantial costs.
Lemonade and Metromile have incurred and expect to incur non-recurring costs associated with combining the operations of the two companies, as well as transaction fees and other costs related to the mergers. These costs and expenses include fees paid to financial, legal and accounting advisors, facilities and systems consolidation costs, severance and other potential employment-related costs, filing fees, printing expenses and other related charges. Some of these costs are payable by Lemonade or Metromile regardless of whether the mergers are completed.
The combined company will also incur restructuring and integration costs in connection with the mergers. The costs related to restructuring will be expensed as a cost of the ongoing results of operations of the combined company. There are processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the mergers and the integration of Metromile’s business with Lemonade’s business. Although Lemonade expects that the elimination of duplicative costs, strategic benefits, and additional income, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction, merger-related and restructuring costs over time, any net benefit may not be achieved in the near term or at all. Many of these costs will be borne by Lemonade even if the mergers are not completed. While Lemonade has assumed that certain expenses would be incurred in connection with the mergers and the other transactions contemplated by the merger agreement, there are many factors beyond Lemonade’s control that could affect the total amount or the timing of the integration and implementation expenses.
Metromile stockholders will not be entitled to appraisal rights in the mergers.
Appraisal rights are statutory rights that, if applicable under law, enable stockholders of a corporation to dissent from an extraordinary transaction, such as a merger, and to demand that such corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to such stockholders in connection with the extraordinary transaction. Under the DGCL, stockholders generally do not have appraisal rights if the shares of stock they hold are either listed on a national securities exchange or held of record by more than 2,000 holders. Notwithstanding the foregoing, appraisal rights are available if stockholders are required by the terms of the merger agreement to accept for their shares anything other than (a) shares of stock of the surviving corporation, (b) shares of stock of another corporation that will either be listed on a national securities exchange or held of record by more than 2,000 holders, (c) cash in lieu of fractional shares or (d) any combination of the foregoing.
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Because Lemonade common stock is listed on the NYSE, a national securities exchange, and because Metromile stockholders are not required by the terms of the merger agreement to accept for their shares of Metromile common stock anything other than shares of Lemonade common stock and cash in lieu of fractional shares, holders of Metromile common stock are not entitled to appraisal rights in connection with the mergers. See “No Appraisal Rights.”
Lawsuits may in the future be filed against Lemonade or Metromile, or against Lemonade or Metromile directors, challenging the mergers, and an adverse ruling in any such lawsuit may prevent the mergers from becoming effective or from becoming effective within the expected time frame.
Transactions like the proposed mergers are frequently subject to litigation or other legal proceedings, including actions alleging that the Lemonade or Metromile board of directors breached their respective fiduciary duties to their stockholders by entering into the merger agreement, by failing to obtain a greater value in the transaction for their stockholders or otherwise. Neither Lemonade nor Metromile can provide assurance that such litigation or other legal proceedings will not be brought. If litigation or other legal proceedings are in fact brought against Lemonade or Metromile, or against the Lemonade or Metromile board of directors, they will defend against it, but might not be successful in doing so. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have a material adverse effect on the business, results of operation or financial position of Lemonade, Metromile or the combined company, including through the possible diversion of either company’s resources or distraction of key personnel.
Furthermore, one of the conditions to the completion of the mergers is that no injunction by any court or other governmental entity of competent jurisdiction will be in effect that prevents, enjoins or makes illegal the consummation of the mergers. As such, if any of the plaintiffs are successful in obtaining an injunction preventing the consummation of the mergers, that injunction may prevent the mergers from becoming effective or from becoming effective within the expected time frame.
The consummation of the transactions contemplated under the merger agreement are not conditioned upon the receipt of an opinion of counsel to the effect that the mergers will qualify for the Intended Tax Treatment, and neither Metromile nor Lemonade intends to request a ruling from the IRS regarding the U.S. federal income tax consequences of the mergers.
The mergers, taken together, are intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes (the “Intended Tax Treatment”). Assuming the mergers so qualify, a U.S. holder (as defined under “Material U.S. Federal Income Tax Consequences of the Mergers”) of Metromile common stock generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of Metromile common stock for Lemonade common stock in the first merger, except with respect to cash received by such U.S holder in lieu of fractional shares of Lemonade common stock.
However, it is not a condition to Metromile’s obligation or Lemonade’s obligation to consummate the transactions contemplated by the merger agreement that the mergers qualify for the Intended Tax Treatment or that Metromile or Lemonade receive an opinion from counsel to that effect. Whether or not the mergers qualify for the Intended Tax Treatment depends in part on whether holders of Metromile stock receive a sufficient amount of Lemonade common stock in the first merger to preserve a substantial part of their interest in Metromile through ownership of Lemonade common stock. The satisfaction of such requirement will not be known until the mergers are completed and depends on the treatment of the right under the merger agreement of current and former holders of Metromile common stock to receive Lemonade common stock in respect of their right to the Metromile Additional Shares (as described in “The Merger Agreement — Treatment of Additional Shares”). Furthermore, neither Metromile nor Lemonade intends to request a ruling from the IRS regarding the U.S. federal income tax consequences of the mergers. Accordingly, no assurance can be given that the mergers will qualify for the Intended Tax Treatment or that the IRS will not challenge the conclusion that the mergers will qualify for the Intended Tax Treatment or that a court would not sustain such a challenge. If, contrary to expectations, the mergers do not qualify for the Intended Tax Treatment, U.S. holders of Metromile stock could be subject to U.S. federal income tax upon the receipt of Lemonade common stock in the first merger.
See “Material U.S. Federal Income Tax Consequences of the Mergers” for a more complete description of material U.S. federal income tax consequences of the mergers. The discussion of the material U.S. federal income tax consequences contained in this proxy statement/prospectus is intended to provide only a general discussion and is not a complete analysis or description of all potential U.S. federal income tax consequences of the mergers that may vary with, or are dependent on, individual circumstances. In addition, it does not address the effects of any foreign, state or local tax laws or any U.S. federal tax laws other than U.S. federal income tax laws. Tax matters are very complicated and the tax consequences of the mergers to each U.S. holder of Metromile common stock may depend on such stockholder’s particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the mergers.
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Risks Relating to the Combined Company
Combining the businesses of Lemonade and Metromile may be more difficult, costly or time-consuming than expected and the combined company may fail to realize the anticipated benefits of the mergers, which may adversely affect the combined company’s business results and negatively affect the value of the combined company’s common stock.
The success of the mergers will depend on, among other things, the ability of Lemonade and Metromile to combine their businesses in a manner that facilitates growth opportunities. Lemonade and Metromile have entered into the merger agreement because each believes that the mergers and the other transactions contemplated by the merger agreement are fair to and in the best interests of their respective stockholders and that combining the businesses of Lemonade and Metromile will produce benefits. See “The Merger — Recommendation of the Metromile Board of Directors; Metromile’s Reasons for the Merger.”
However, Lemonade and Metromile must successfully combine their respective businesses in a manner that permits these benefits to be realized. In addition, the combined company must achieve the anticipated growth without adversely affecting current revenues and investments in future growth. If the combined company is not able to successfully achieve these objectives, the anticipated benefits of the mergers may not be realized fully, or at all, or may take longer to realize than expected.
An inability to realize the full extent of the anticipated benefits of the mergers and the other transactions contemplated by the merger agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may adversely affect the value of the common stock of the combined company.
In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual growth and any potential cost savings, if achieved, may be lower than what Lemonade and Metromile expect and may take longer to achieve than anticipated. If Lemonade and Metromile are not able to adequately address integration challenges, they may be unable to successfully integrate their operations or realize the anticipated benefits of the integration of the two companies.
The failure to successfully integrate the businesses and operations of Lemonade and Metromile in the expected time frame may adversely affect the combined company’s future results.
Lemonade and Metromile have operated and, until the completion of the mergers, will continue to operate independently. There can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key Lemonade or Metromile employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of Lemonade and Metromile in order to realize the anticipated benefits of the mergers so the combined company performs as expected:
● | combining the companies’ operations and corporate functions; |
● | combining the businesses of Lemonade and Metromile and meeting the capital requirements of the combined company, in a manner that permits the combined company to achieve any cost savings or other synergies anticipated to result from the mergers, the failure of which would result in the anticipated benefits of the mergers not being realized in the time frame currently anticipated or at all; |
● | integrating personnel from the two companies, especially in the COVID-19 environment which has required employees to work remotely in many locations; |
● | integrating the companies’ technologies and technologies licensed from third parties; |
● | integrating and unifying the offerings and services available to customers; |
● | identifying and eliminating redundant and underperforming functions and assets; |
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● | harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes; |
● | maintaining existing agreements with customers, suppliers, distributors and vendors, avoiding delays in entering into new agreements with prospective customers, suppliers, distributors and vendors, and leveraging relationships with such third parties for the benefit of the combined company; |
● | addressing possible differences in business backgrounds, corporate cultures and management philosophies; |
● | consolidating the companies’ administrative and information technology infrastructure; |
● | coordinating distribution and marketing efforts; |
● | managing the movement of certain positions to different locations; |
● | coordinating geographically dispersed organizations; and |
● | effecting actions that may be required in connection with obtaining regulatory or other governmental approvals and consents. |
In addition, at times the attention of certain members of Lemonade’s and Metromile’s management and each company’s respective resources may be focused on completion of the mergers and the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial to such company, which may disrupt each company’s ongoing business and the business of the combined company.
The combined company may not be able to retain customers, which could have an adverse effect on the combined company’s business and operations. Third parties may terminate or alter existing contracts or relationships with Lemonade or Metromile.
As a result of the mergers, the combined company may experience impacts on relationships with customers that may harm the combined company’s business and results of operations. Certain customers may seek to terminate or modify contractual obligations following the mergers whether or not contractual rights are triggered as a result of the mergers. There can be no guarantee that customers will remain with or continue to have a relationship with the combined company or do so on the same or similar contractual terms following the mergers. If any customers seek to terminate or modify contractual obligations or discontinue the relationship with the combined company, then the combined company’s business and results of operations may be harmed.
Lemonade and Metromile also have contracts with landlords, licensors and other business partners which may require Lemonade or Metromile, as applicable, to obtain consent from these other parties in connection with the mergers, or which may otherwise contain limitations applicable to such contracts following the mergers. If these consents cannot be obtained, the combined company may suffer a loss of potential future revenue, incur costs and lose rights that may be material to the combined company’s business. In addition, third parties with whom Lemonade or Metromile currently have relationships may terminate or otherwise reduce the scope of their relationship with either party in anticipation of the mergers. Any such disruptions could limit the combined company’s ability to achieve the anticipated benefits of the mergers. The adverse effect of any such disruptions could also be exacerbated by a delay in the completion of the mergers or by a termination of the merger agreement.
The combined company may be exposed to increased litigation, which could have an adverse effect on the combined company’s business and operations.
The combined company may be exposed to increased litigation from stockholders, customers, suppliers, distributors, consumers and other third parties due to the combination of Lemonade’s and Metromile’s businesses following the mergers. Such litigation may have an adverse impact on the combined company’s business and results of operations or may cause disruptions to the combined company’s operations.
Declaration, payment and amounts of dividends, if any, distributed to stockholders of the combined company will be uncertain.
Lemonade and Metromile have not historically paid cash dividends on their common stock. Whether any dividends are declared or paid to stockholders of the combined company, and the amounts of any such dividends that are declared or paid, are uncertain and depend on a number of factors. The Lemonade board of directors will have the discretion to determine the dividend policy of the
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combined company, including the amount and timing of dividends, if any, that the combined company may declare from time to time, which may be impacted by any of the following factors:
● | the combined company may not have enough cash to pay such dividends or to repurchase shares due to its cash requirements, capital spending plans, cash flow or financial position; |
● | decisions on whether, when and in which amounts to make any future distributions will remain at all times entirely at the discretion of the Lemonade board of directors, which could change its dividend practices at any time and for any reason; |
● | the amount of dividends that the combined company may distribute to its stockholders is subject to restrictions under Delaware law; and |
● | certain limitations on the amount of dividends subsidiaries of the combined company can distribute to the combined company, as imposed by state law, regulators or agreements. |
Stockholders should be aware that they have no contractual or other legal right to dividends that have not been declared.
The combined company is subject to risks arising from the ongoing COVID-19 pandemic.
The outbreak of COVID-19, which the World Health Organization declared a pandemic in March 2020, has spread across the globe and disrupted the global economy. Governmental actions to reduce the spread of COVID-19 have negatively impacted the macroeconomic environment in many ways, while the pandemic itself has significantly increased economic uncertainty and abruptly reduced economic activity.
The extent to which the COVID-19 pandemic will impact the combined company is highly uncertain and is difficult to predict. The pandemic’s effects and their extent will depend on various factors, including, but not limited to, the duration, scope and impact of the pandemic, restrictions on business and social distancing guidelines that may be requested or mandated by governmental authorities and how quickly and to what extent normal economic and operating conditions can resume. Relevant adverse consequences of the pandemic could include reduced liquidity, increased volatility of the combined company’s stock price, operational disruption or failure due to spread of disease within the combined company or due to restrictions on business and social distancing guidelines imposed or requested by governmental authorities, unavailability of raw materials, disruption in the supply chain and increased cybersecurity and fraud risks due to increased online and remote activity, as well as the adverse consequences of a macroeconomic slowdown, recession or depression.
Even after the COVID-19 pandemic has subsided, the combined company may continue to experience adverse impacts to its business as a result of the global economic impact of the COVID-19 pandemic, including reduced availability of credit, adverse impacts on liquidity and the negative financial effects from any recession or depression that may occur.
Risks Relating to Metromile
Metromile has a history of net losses and could continue to incur substantial net losses in the future.
Metromile has incurred recurring losses on an annual basis since its incorporation in 2011. Metromile incurred net losses of $120.1 million and $41.3 million for the year ended December 31, 2020, and the three months ended June 30, 2021, respectively. Metromile had an accumulated deficit of $366.6 million and $511.5 million as of December 31, 2020, and June 30, 2021, respectively.
The principal driver of its losses to date is its insured losses paid associated with accidents and other insured events by its customers. Establishing adequate premium rates is necessary to generate sufficient revenue to offset losses, LAE and other costs. If Metromile does not accurately assess the risks that it underwrites, the premiums that Metromile charges may not be adequate to cover its losses and expenses, which would adversely affect its results of operations and its profitability. Moreover, as Metromile continues to invest in its business, Metromile expects expenses to continue to increase in the near term. Such expenses may occur in the areas of telematics, digital marketing, brand advertising, consumer-facing technologies, core insurance operations services and lines of business not presently offered by Metromile. These investments may not result in increased revenue or growth in its business. If Metromile fails to manage its losses or to grow its revenue sufficiently to keep pace with its investments and other expenses, its business will be seriously harmed.
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In addition, Metromile will incur additional expenses to support its growth. As a public company, Metromile will incur significant legal, accounting and other expenses that Metromile did not incur as a private company. Metromile may encounter unforeseen or unpredictable factors, including unforeseen operating expenses, complications or delays, which may also result in increased costs. Further, it is difficult to predict the size and growth rate of its market or demand for its services and success of current or potential future competitors. As a result, Metromile may not achieve or maintain profitability in future periods.
Metromile may lose existing customers or fail to acquire new customers.
Metromile believe that growth of its business and revenue depends upon its ability to continue to grow its business in the geographic markets that Metromile currently serves by retaining its existing customers and adding new customers in its current as well as new geographic markets. Expanding into new geographic markets takes time, requires it to navigate and comply with extensive regulations and may occur more slowly than Metromile expects or than it has occurred in the past. If Metromile loses customers, its value will diminish. In particular, while loss performance has improved over time as more customers renew their policies and remain policyholders for longer, a future loss of customers could lead to higher loss ratios or loss ratios that cease to decline, which would adversely impact its profitability. If Metromile fails to remain competitive on customer experience, pricing, and insurance coverage options, its ability to grow its business may also be adversely affected. In addition, Metromile may fail to accurately predict risk segmentation of new customers or potential customers, which could also reduce its profitability.
While a key part of its business strategy is to retain and add customers in its existing markets and into its current product offerings, Metromile also intends to expand its operations into new markets and new product offerings. In doing so, Metromile may incur losses or otherwise fail to enter new markets or offer new products successfully. Its expansion into new markets and product offerings may place it in unfamiliar competitive environments and involve various risks, including competition, government regulation, the need to invest significant resources and the possibility that returns on such investments will not be achieved for several years or at all.
There are many factors that could negatively affect Metromile’s ability to grow its customer base, including if:
● | Metromile loses customers to new market entrants and/or existing competitors; |
● | Metromile does not obtain regulatory approvals necessary for expansion into new markets or in relation to its products (such as underwriting and rating requirements); |
● | Metromile fails to effectively use search engines, social media platforms, digital app stores, content-based online advertising, and other current and emerging online sources for generating traffic to its website and its mobile app; |
● | its digital platform experiences disruptions; |
● | Metromile suffers reputational harm to its brand including from negative publicity, whether accurate or inaccurate; |
● | Metromile fails to expand geographically; |
● | Metromile fails to offer new and competitive products, to provide effective updates to its existing products or to keep pace with technological improvements in its industry; |
● | customers have difficulty installing, updating or otherwise accessing its app or website on mobile devices or web browsers as a result of actions by it or third parties; |
● | customers prefer less technological solutions or are unable or unwilling to adopt or embrace new technology; |
● | the perception emerges that purchasing insurance products online is not as effective as purchasing those products through traditional offline methods; |
● | technical or other problems frustrate the customer experience, particularly if those problems prevent Metromile from generating quotes or paying claims in a fast and reliable manner; or |
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● | Metromile is unable to address customer concerns regarding the content, privacy, and security of its digital platform. |
Metromile’s inability to overcome these challenges could impair its ability to attract new customers and retain existing customers, and could have a material adverse effect on its business, operating results and financial condition.
Metromile may require additional capital to support business growth or to satisfy its regulatory capital and surplus requirements, and this capital might not be available on acceptable terms, if at all.
Metromile intends to continue to make investments to support its business growth and may require additional funds to respond to business challenges, including the need to develop new features and products or enhance its existing products and services, satisfy its regulatory capital and surplus requirements, cover losses, improve its operating infrastructure or acquire complementary businesses and technologies. Many factors will affect its capital needs as well as their amount and timing, including its growth and profitability, regulatory requirements, market disruptions and other developments. If its present capital and surplus is insufficient to meet its current or future operating requirements, including regulatory capital and surplus requirements, or to cover losses, Metromile may need to raise additional funds through financings or curtail its growth. Metromile evaluates financing opportunities from time to time, and its ability to obtain financing will depend, among other things, on its development efforts, business plans and operating performance, as well as the condition of the capital markets at the time Metromile seeks financing. Metromile cannot be certain that additional financing will be available to it on favorable terms, or at all.
If Metromile raises additional funds through future issuances of equity or convertible debt securities, its existing stockholders could suffer significant dilution, and any new equity securities Metromile issues could have rights, preferences and privileges superior to those of holders of its Common Stock. As an insurance company, Metromile is subject to extensive laws and regulations in every jurisdiction in which Metromile conducts business, and any such issuances of equity or convertible debt securities to secure additional funds may be impeded by regulatory approvals or requirements imposed by such regulatory authorities if such issuances were deemed to result in a person acquiring “control” of its company under applicable insurance laws and regulations. Such regulatory requirements may require potential investors to disclose their organizational structure and detailed financial statements as well as require managing partners, directors and/or senior officers submit biographical affidavits which may deter funds from investing in Metromile. Moreover, any debt financing, in addition to its outstanding credit facilities, that Metromile secures in the future could subject it to restrictive covenants relating to its capital raising activities, its ability to make certain types of investments or payments, and other financial and operational matters, which may increase its difficulty to obtain additional capital or to pursue business opportunities, including new product offerings and potential acquisitions. Metromile may not be able to obtain additional financing on terms favorable to it, if at all. If Metromile is unable to obtain adequate financing or financing on terms satisfactory to it when Metromile requires it, its ability to continue to support its business growth and to respond to business challenges could be impaired, and its business, revenue, results of operations and financial condition may be materially harmed.
Further, Metromile is restricted by covenants in its credit agreements. These covenants restrict, among other things, its ability to incur additional debt without lender consent or grant liens over its assets, which may limit its ability to obtain additional funds.
The COVID-19 pandemic has caused disruption to Metromile’s operations and may negatively impact its business, key metrics, and results of operations in numerous ways that remain unpredictable.
Metromile’s business has been and may continue to be impacted by the effects of the outbreak COVID-19, which was declared a global pandemic in March 2020. This pandemic and related measures taken to contain the spread of COVID-19, such as government-mandated business closures, orders to “shelter in place” (“SIPs”) and travel and transportation restrictions, have negatively affected the U.S. and global economies, disrupted global supply chains, and led to unprecedented levels of unemployment. Beginning in the second quarter of 2020, its business was favorably impacted by the SIPs as its customers drove less. While its premiums collected declined due to per-mile billing, Metromile had a corresponding material decline in incurred losses. Its business has also been impacted by certain state regulations related to COVID-19 relief efforts, including restrictions on the ability to cancel policies for non-payment, requiring deferral of insurance premium payments for up to 60 days and restrictions on increasing policy premiums. Metromile continues to assess and update its business continuity plans in the context of this pandemic, including taking steps in an effort to help keep its employees healthy and safe. The spread of COVID-19 has caused it to modify its business practices (including employee travel, employee work locations in certain cases, and cancellation of physical participation in meetings, events, and conferences), and Metromile expects to take further actions as may be required or recommended by government authorities or as Metromile determines are in the best interests of its employees and customers. Furthermore, COVID-19 has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates, and interest rates. It is possible that the pandemic will cause an
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economic slowdown of potentially extended duration, as well as a global recession. This could result in an increase in costs associated with claims under its policies, as well as an increase in the number of customers experiencing difficulty paying premiums, any of which could have a material adverse effect on its business and results of operations. It is also possible that working from home or other remote work arrangements adopted during the SIPs become permanent on a widespread basis, thereby resulting in further reduction in premiums collected due to per-mile billing, or a permanent reduced need for auto insurance. Furthermore, due to COVID-19’s negative impact on driving, regulators in many states continue to mandate or request that auto insurance companies refund a portion of their premium to their policyholders to reflect the insurer’s decrease in projected loss exposure due to the virus. In all of the states in which Metromile operates, state insurance regulators have either encouraged, strongly suggested or mandated insurers to provide COVID-19-related consumer relief. Regulators in several states in which Metromile operates or into which Metromile plans to expand placed a mandatory moratorium on non-pay cancellations and could revive, add to, extend, or expand the scope of such moratoriums, providing consumers grace periods ranging from 60 days to indefinite (based on the term of emergency orders) in duration, during which premium did not need to be paid in a timely fashion. These moratoriums resulted in an increase of premium write-offs from 1.9% for the year ending December 31, 2019 to 2.4% for the year ending December 31, 2020. Premium write-offs have been immaterial to date, but could be significant in the future. There were still several states with bulletins effective after December 31, 2020, and depending on the unpredictable nature of the pandemic and SIPs such moratoriums could be revived, added to, or extended. These mandates and similar regulations or suggestions could negatively impact its ability to charge or increase premiums to adequately cover its losses and could result in continued increased premium write-offs. 44 Though Metromile continues to monitor the COVID-19 pandemic closely, due to the speed with which it continues to develop, the global breadth of its spread, the range of governmental and community reactions thereto and the unknown timing or effectiveness of any vaccine or treatment, there is considerable uncertainty around its duration and ultimate impact. The impact of the pandemic may also exacerbate the other risks described in these Risk Factors, and additional impacts may arise that Metromile is not currently aware of, any of which could have a material effect on it. In addition, if there is a future resurgence of COVID-19, these negative impacts on its business may be further exacerbated. As a result, the full extent of the impact of the pandemic on its overall financial and operating results, whether in the near or long term, cannot be reasonably estimated at this time.
Metromile’s future growth and profitability depend in part on its ability to successfully operate in an insurance industry that is highly competitive.
Many of its primary competitors have well-established national brands and market similar products. Its competitors include large national insurance companies as well as up-and-coming companies. Several of these established national insurance companies are larger than us and have significant competitive advantages, including better name recognition, strong financial ratings, greater resources, easier access to capital, and offer more types of insurance than Metromile does, such as homeowners and renters, which are often bundled together to help attract and retain customers. Its business model and technology is also still nascent compared to the established business models of the well-established incumbents in the insurance market. In addition, the insurance industry consistently attracts well-capitalized new entrants to the market. Its future growth will depend in large part on its ability to grow its insurance business in which traditional insurance companies retain certain advantages. In particular, unlike Metromile, many of these competitors offer customers the ability to purchase multiple other types of insurance coverage and “bundle” them together into one policy and, in certain circumstances, include an umbrella liability policy for additional coverage at competitive prices. Moreover, Metromile may in the future expand into new lines of business and offer additional products beyond automobile insurance, and as Metromile does so, Metromile could face intense competition from traditional insurance companies that are already established in such markets. These new insurance products could take months to be approved by regulatory authorities or may not be approved at all. Metromile has invested in growth strategies by utilizing unique customer value propositions, differentiated product offerings and distinctive advertising campaigns. If Metromile is unsuccessful through these strategies in generating new business, retaining a sufficient number of customers or retaining or acquiring key relationships, its ability to maintain or increase premiums written or the ability to sell its products could be adversely impacted. Because of the competitive nature of the insurance industry, there can be no assurance that Metromile will continue to compete effectively within its industry, or that competitive pressures will not have a material effect on our business, results of operations or financial condition.
Metromile relies on telematics, mobile technology and its digital platform to collect data points that Metromile evaluates in pricing and underwriting its insurance policies, managing claims and customer support, and improving business processes. To the extent regulators prohibit or restrict its collection or use of this data, its business could be harmed.
Metromile uses telematics, mobile technology and its digital platform to collect data points that Metromile evaluates in pricing and underwriting certain of its insurance policies, managing claims and customer support, and improving business processes. If federal, state or international regulators were to determine that the type of data Metromile collects, the process Metromile uses for collecting this data or how Metromile uses it unfairly discriminates against a protected class of people, regulators could move to
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prohibit or restrict its collection or use of this data. In addition, if legislation were to restrict its ability to collect driving behavior data, it could impair its capacity to underwrite insurance cost effectively, negatively impacting its revenue and earnings. 45 Due to Proposition 103 in California, its largest market, Metromile is currently limited in its ability to use telematics data beyond miles-driven to underwrite insurance, including data on how the car is driven. This could hinder its ability to accurately assess the risks that Metromile underwrites in other states if they were to pass similar laws or regulations. In three other states where Metromile currently operates, Metromile does not use behavioral telematics data because it is either permitted, but Metromile opted out given uncertainty regarding the impact such data would have on pricing or it is voluntary (meaning the policyholder has to opt in). As Metromile aims to be a fully national provider of insurance across 49 states and the District of Columbia by 2022, Metromile will need to comply with the rules and regulations of each market. At this time, Metromile does not know which of its target markets prohibit, permit with conditions, or fully permit the use of behavioral telematics to set premiums, and if permitted, if this will be of benefit to us in pricing. While Metromile is currently in discussions with regulators to allow the use of telematics to a greater extent to underwrite and price insurance policies, Metromile cannot predict the outcome of these discussions, and there can be no assurance that state regulators will revise regulations accordingly, if at all, nor that current permissive states will further restrict the use of such data.
Although there is currently limited federal and state legislation outside of California restricting Metromile’s ability to collect driving behavior data, private organizations are implementing principles and guidelines to protect driver privacy. The Alliance of Automobile Manufacturers and Global Automakers established their Consumer Privacy Protection Principles to provide member automobile manufacturers with a framework with which to consider privacy and build privacy into their products and services while the National Automobile Dealers Association has partnered with the Future of Privacy Forum to produce consumer education guidelines that explain the kinds of information that may be collected by consumers’ cars, the guidelines that govern how it is collected and used, and the options consumers may have to protect their vehicle data. The Global Alliance for Vehicle Data Access is another organization that was formed to advocate for driver ownership of all vehicle data, particularly for insurance underwriting purposes. If federal or state legislators were to pass laws limiting our ability to collect driver data, such legislation could have a material adverse effect on Metromile’s business, financial condition or results of operations.
Some state regulators have expressed interest in the use of external data sources, algorithms and/or predictive models in insurance underwriting or rating. Specifically, regulators have raised questions about the potential for unfair discrimination, disparate impact, and lack of transparency associated with the use of external consumer data. A determination by federal or state regulators that the data points Metromile collects and the process Metromile uses for collecting this data unfairly discriminates against a protected class of people could subject it to fines and other sanctions, including, but not limited to, disciplinary action, revocation and suspension of licenses, and withdrawal of product forms. Any such event could, in turn, materially and adversely affect its business, financial condition, results of operations and prospects. Although Metromile has implemented policies and procedures into its business operations that Metromile feels are appropriately calibrated to its machine learning and automation-driven operations, these policies and procedures may prove inadequate to manage its use of this nascent technology, resulting in a greater likelihood of inadvertent legal or compliance failures.
In addition, the National Association of Insurance Commissioners (“NAIC”), announced on July 23, 2020 the formation of a new Race and Insurance Special Committee (the “Special Committee”). The Special Committee is tasked with analyzing the level of diversity and inclusion within the insurance sector, identifying current practices in the insurance industry that disadvantage minorities and making recommendations to increase diversity and inclusion within the insurance sector and address practices that disadvantage minorities. The Special Committee may look into strengthening the unfair discrimination laws, such as prohibiting the use of credit scores in the underwriting of auto insurance. Any new unfair discrimination legislation that would prohibit us from using data that Metromile currently uses or plans to use in the future to underwrite insurance could negatively impact its business.
Regulators may also require it to disclose the external data Metromile uses, algorithms and/or predictive matters prior to approving its underwriting models and rates. Such disclosures could put its intellectual property at risk.
Additionally, existing laws, such as the California Consumer Privacy Act (the “CCPA”), future and recently adopted laws, such as the California Privacy Rights Act (the “CRPA”), and evolving attitudes about privacy protection may impair its ability to collect, use, and maintain data points of sufficient type or quantity to develop and train our algorithms. If such laws or regulations were enacted federally or in a large number of states in which Metromile operates, it could impact the integrity and quality of its pricing and underwriting processes.
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Metromile depends on search engines, social media platforms, digital app stores, content-based online advertising and other online sources to attract consumers to its website and its mobile app both rapidly and cost-effectively. If these third parties change their listings or increase their pricing, if its relationship with them deteriorates or terminates, or due to other factors beyond its control, Metromile may be unable to attract new customers rapidly and cost-effectively, which would adversely affect its business and results of operations.
Its success depends on its ability to attract consumers to its website and its mobile app and convert them into customers in a rapid and cost-effective manner. Metromile depends in large part on search engines, social media platforms, digital app stores, content-based online advertising and other online sources for traffic to its website and its mobile app, which are material sources for new consumers.
With respect to search engines, Metromile is included in search results as a result of both paid search listings, where Metromile purchases specific search terms that result in the inclusion of its advertisement, and free search listings, which depend on algorithms used by search engines. For paid search listings, if one or more of the search engines or other online sources on which Metromile relies for purchased listings modifies or terminates its relationship with us, its expenses could rise if Metromile is required to pay a higher price for such listings or if the alternatives Metromile finds are more expensive, or Metromile could lose consumers and traffic to its website could decrease, any of which could have a material adverse effect on its business, results of operations and financial condition. For free search listings, if search engines on which Metromile relies for algorithmic listings modify their algorithms, its websites may appear less prominently or not at all in search results, which could result in reduced traffic to its websites, as a result of which Metromile might attract fewer new customers.
Metromile’s ability to maintain or increase the number of consumers who purchase its products after being directed to its website or its mobile app from other digital platforms depends on many factors that are not within its control. Search engines, social media platforms and other online sources often revise their algorithms and introduce new advertising products. If one or more of the search engines or other online sources on which Metromile relies for traffic to its website and its mobile app were to modify its general methodology for how it displays its advertisements or keyword search results, resulting in fewer consumers clicking through to its website and its mobile app, its business and operating results are likely to suffer. In addition, if its online display advertisements are no longer effective or are not able to reach certain consumers due to consumers’ use of ad-blocking software, its business and operating results could suffer.
Additionally, changes in regulations could limit the ability of search engines and social media platforms, including but not limited to Google and Facebook, to collect data from users and engage in targeted advertising, making them less effective in disseminating its advertisements to its target customers. For example, the proposed Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data (“DASHBOARD”) Act would mandate annual disclosure to the SEC of the type and “aggregate value” of user data used by harvesting companies, such as Facebook, Google and Amazon, including how revenue is generated by user data and what measures are taken to protect the data. If the costs of advertising on search engines and social media platforms increase, Metromile may incur additional marketing expenses or be required to allocate a larger portion of its marketing spend to other channels and its business and operating results could be adversely affected. Similarly, changes to regulations applicable to the insurance brokerage and distribution business may limit its ability to rely on key distribution platforms, if the third-party distribution platforms are unable to continue to distribute its insurance products without an insurance producer license pursuant to applicable insurance law and regulations.
The marketing of its insurance products depends on its ability to cultivate and maintain cost-effective and otherwise satisfactory relationships with digital app stores, in particular, those operated by Google and Apple. As Metromile grows, it may struggle to maintain cost-effective marketing strategies, and our customer acquisition costs could rise substantially. Furthermore, because many of its customers access our insurance products through a mobile app, Metromile depends on the Apple App Store and the Google Play Store to distribute its mobile app.
Operating system platforms and application stores controlled by third parties, such as Apple and Google, may change their terms of service or policies in a manner that increases our costs or impacts Metromile’s ability to distribute its mobile app, collect data through it, and market its products.
Metromile is subject to the terms of service and policies governing the operating system platforms on which its mobile app runs and the application stores through which Metromile distributes its mobile app, such as those operated by Apple and Google. These terms of service and policies govern the distribution, operation and promotion of applications on such platforms and stores. These platforms and stores have broad discretion to change and interpret their terms of service and policies in a manner that may adversely
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affect its business. For example, an operating system platform or application store may increase fees associated with access to it, restrict the collection of data through mobile apps that run on those platforms, restrict how that data is used and shared, and limit how mobile app publishers advertise online.
Metromile relies on telematics to collect data points from an OBD-II device in customers’ vehicles. This data is used to accurately bill the miles they have driven, evaluate pricing and underwriting risks, manage claims and customer support, and improve business processes. Limitations on its ability to collect, use or share telematics and other data derived from the OBD-II device, as well as new technologies that block its ability to collect, use or share such data, could significantly diminish the value of its platform and have an adverse effect on its ability to generate revenue. Limitations or blockages on its ability to collect, use or share data derived from use of its mobile app may also restrict its ability to analyze such data to facilitate its product improvement, research and development and advertising activities. For example, in June 2020, Apple announced plans to require applications using its mobile operating systems to obtain an end-user’s permission to track them or access their device’s advertising identifier for advertising and advertising measurement purposes, as well as other restrictions that could adversely affect Metromile’s business.
If Metromile was to violate, or be perceived to have violated, the terms of service or policies of an operating system platform or application store, the provider may limit or block our access to it. It is possible that an operating system platform or application store might limit, eliminate or otherwise interfere with the distribution of our mobile app, the features Metromile provides and the manner in which Metromile markets its mobile app, or give preferential treatment on their platforms or stores to a competitor. To the extent either or both of them do so, its business, results of operations and financial condition could be adversely affected.
Furthermore, one of the factors Metromile uses to evaluate its customer satisfaction and market position is our Apple App Store ratings. This rating, however, may not be a reliable indicator of its customer satisfaction relative to other companies who are rated on the Apple App Store since, to date, Metromile has received a fraction of the number of reviews of some of the companies Metromile benchmarks against, and thus its number of positive reviews may not be as meaningful.
Metromile’s expansion within the United States will subject us to additional costs and risks, and its plans may not be successful.
Metromile’s success depends in significant part on its ability to expand into additional markets in the United States and abroad. Metromile is currently licensed in the District of Columbia and 49 states of the United States, with licenses active in 46 states and the District of Columbia, and write business in eight of those states. Metromile plans to have a presence in almost all states by 2022 but cannot guarantee that Metromile will be able to provide nationwide coverage on that timeline or at all. Moreover, one or more states could revoke its license to operate, or implement additional regulatory hurdles that could preclude or inhibit its ability to obtain or maintain its license in such states. As Metromile seeks to expand in the United States, Metromile may incur significant operating expenses, although its expansion may not be successful for a variety of reasons, including because of:
● | barriers to obtaining the required government approvals, licenses or other authorizations; |
● | failures in identifying and entering into joint ventures with strategic partners, both domestically and internationally, or entering into joint ventures that do not produce the desired results; |
● | challenges in, and the cost of, complying with various laws and regulatory standards, including with respect to the insurance business and insurance distribution, capital and outsourcing requirements, data privacy, tax, claims handling, and local regulatory restrictions; |
● | difficulty in recruiting and retaining licensed, talented and capable employees; |
● | competition from local incumbents that already own market share, better understand the local market, may market and operate more effectively and may enjoy greater local affinity or awareness; |
● | differing demand dynamics, which may make its product offerings less successful; or |
● | currency exchange restrictions or costs and exchange rate fluctuations, or significant increases to import tariffs. |
Expansion into new markets in the United States will also require additional investments by Metromile both in marketing and with respect to securing applicable regulatory approvals. These incremental costs may result from hiring additional personnel, from engaging third-party service providers and from incurring other research and development costs. If Metromile invests substantial time
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and resources to expand its operations while its revenues from those additional operations do not exceed the expense of establishing and maintaining them, or if Metromile is unable to manage these risks effectively, its business, results of operations and financial condition could be adversely affected. If Metromile fails to grow its geographic footprint or geographic growth occurs at a slower rate than expected, its business, results of operations and financial condition could be materially and adversely affected.
Metromile’s technology platform may not operate properly or as Metromile expects it to operate.
Metromile utilizes its technology platform to gather customer data in order to determine whether or not to write and how to price its insurance products. Similarly, Metromile uses its technology platform to process many of its claims. Its technology platform is expensive and complex, its continuous development, maintenance and operation may entail unforeseen difficulties including material performance problems or undetected defects or errors. Metromile may encounter technical obstacles, and it is possible that Metromile may discover additional problems that prevent its technology from operating properly. If its platform does not function reliably, Metromile may incorrectly select its customers, bill its customers, price insurance products or incorrectly pay or deny insurance claims made by its customers. These errors could result in inadequate insurance premiums paid relative to claims made, resulting in increased financial losses. These errors could also cause customer dissatisfaction with Metromile, which could cause customers to cancel or fail to renew their insurance policies with it or make it less likely that prospective customers obtain new insurance policies from it. Additionally, technology platform errors may lead to unintentional bias and discrimination in the underwriting process, which could subject it to legal or regulatory liability and harm its brand and reputation. Any of these eventualities could result in a material adverse effect on its business, results of operations and financial condition.
Metromile depends on third-party technology providers to support its telematics data acquisition.
Metromile utilizes telematics technology to gather data that Metromile uses to underwrite insurance policies, bill customers, and manage claims and customer service. Its telematics hardware is designed and manufactured and telematics data services are provided to it by third parties. These companies may fail to provide it accurate or complete data due to technical or operating failures, their hardware may have errors that inaccurately collect or represent driver behavior, car location, or other sensor data, or they may go stop offering their services to it. If Metromile is delivered inaccurate or no data due to these failures, Metromile may overpay claims, underbill customers, or create customer dissatisfaction that causes customers to cancel their insurance policies with it. Any of these eventualities could result in a material adverse effect on its business, results of operations and financial condition.
Regulatory changes may limit its ability to develop or implement its telematics-based pricing model and/or may eliminate or restrict the confidentiality of its proprietary technology.
Its future success depends on its ability to continue to develop and implement its telematics-based pricing model, and to maintain the confidentiality of its proprietary technology. Changes to existing laws, their interpretation or implementation, or new laws could impede its use of this technology, or require that Metromile discloses its proprietary technology to its competitors, which could negatively impact its competitive position and result in a material adverse effect on its business, results of operations, and financial condition. For example, the November 2020 ballot measure in California, which was formally adopted, will enact the CPRA, which mandates issuance of regulations providing California residents with the right to information about the logic of certain algorithmic decisions about them and the right to opt-out of such decisions. Such regulations, and similar laws that could be enacted in other states, could require disclosure of its proprietary technology, limit the effectiveness of its products and reduce demand for them.
Metromile’s brand may not become as widely known or accepted as incumbents’ brands or the brand may become tarnished.
Many of its competitors have brands that are well-recognized. As a relatively new entrant into the insurance market, Metromile has spent, and expect that Metromile will for the foreseeable future continue to spend, considerable amounts of money and other resources on creating brand awareness and building its reputation. Metromile may not be able to build brand awareness to levels matching its competitors, and its efforts at building, maintaining and enhancing its reputation could fail and/or may not be cost-effective. Complaints or negative publicity about its business practices, its marketing and advertising campaigns (including marketing affiliations or partnerships), its compliance with applicable laws, the integrity of the data that Metromile provides to consumers or business partners, data privacy and security issues, and other aspects of its business, whether real or perceived, could diminish confidence in its brand, which could adversely affect its reputation and business. As Metromile expands its product offerings and enter new markets, Metromile will need to establish its reputation with new customers, and to the extent Metromile is not successful in creating positive impressions, its business in these newer markets could be adversely affected. While Metromile may choose to engage in a broader marketing campaign to further promote its brand, this effort may not be successful or cost effective. If Metromile is
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unable to maintain or enhance its reputation or enhance consumer awareness of its brand in a cost-effective manner, its business, results of operations and financial condition could be materially adversely affected.
Metromile may not continue to grow at historical rates or achieve or maintain profitability in the future.
Metromile’s limited operating history may make it difficult to evaluate its current business and its future prospects. While its revenue has grown in recent periods, this growth rate may not be sustainable and should not be considered indicative of future performance, and Metromile may not realize sufficient revenue to achieve or maintain profitability. As Metromile grows its business, Metromile expects its revenue growth rates may slow in future periods due to a number of reasons, which may include slowing demand for its service, increasing competition, a decrease in the growth of its overall market, and its failure to capitalize on growth opportunities or the maturation of its business. Metromile has incurred net losses on an annual basis since its inception, and may incur significant losses in the future for a number of reasons, including insufficient growth in the number of customers, a failure to retain its existing customers, and increasing competition, as well as other risks described in these Risk Factors, and Metromile may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. Metromile expects to continue to make investments in the development and expansion of its business, which may not result in increased or sufficient revenue or growth, as a result of which Metromile may not be able to achieve or maintain profitability.
Metromile relies on highly skilled and experienced personnel and if Metromile is unable to attract, retain or motivate key personnel or hire qualified personnel, its business may be seriously harmed. In addition, the loss of key senior management personnel could harm its business and future prospects.
Its performance largely depends on the talents and efforts of highly-skilled and experienced individuals. Its future success depends on its continuing ability to identify, hire, develop, motivate and retain highly skilled and experienced personnel and, if Metromile are unable to hire and train a sufficient number of qualified employees for any reason, Metromile may not be able to maintain or implement its current initiatives or grow, or its business may contract and Metromile may lose market share. Moreover, certain of its competitors or other insurance or technology businesses may seek to hire its employees. Metromile cannot assure you that its equity incentives and other compensation will provide adequate incentives to attract, retain and motivate employees in the future, particularly if the market price of its Common Stock does not increase or declines. If Metromile does not succeed in attracting, retaining and motivating highly qualified personnel, its business may be seriously harmed.
Metromile depends on its senior management, including Dan Preston, its Chief Executive Officer, and Paw Andersen, its Chief Technology Officer, as well as other key personnel. Metromile may not be able to retain the services of any of its senior management or other key personnel, as their employment is at-will and they could leave at any time. If Metromile loses the services of one or more of its senior management and other key personnel, including as a result of the COVID-19 pandemic, Metromile may not be able to successfully manage its business, meet competitive challenges or achieve its growth objectives. Further, to the extent that its business grows, Metromile will need to attract and retain additional qualified management personnel in a timely manner, and Metromile may not be able to do so. Its future success depends on its continuing ability to identify, hire, develop, motivate, retain and integrate highly skilled personnel in all areas of its organization.
New legislation or legal requirements may affect how Metromile communicates with its customers, which could have a material adverse effect on its business model, financial condition, and results of operations.
State and federal lawmakers, insurance regulators, and advisory groups such as the NAIC are focusing upon the use of artificial intelligence broadly, including concerns about transparency, deception, and fairness in particular. Changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, specific to the use of artificial intelligence, may decrease Metromile’s revenues and earnings and may require it to change the manner in which Metromile conducts some aspects of its business. Metromile may also be required to disclose its proprietary software to regulators, putting its intellectual property at risk, in order to receive regulatory approval to use such artificial intelligence in the underwriting of insurance and/or the payment of claims. In addition, its business and operations are subject to various U.S. federal, state, and local consumer protection laws, including laws which place restrictions on the use of automated tools and technologies to communicate with wireless telephone subscribers or consumers generally. For example, a California law, effective as of July 2019, makes it unlawful for any person to use a bot to communicate with a person in California online with the intent to mislead the other person about its artificial identity for the purpose of knowingly deceiving the person about the content of the communication in order to incentivize a purchase of goods or services in a commercial transaction. Although Metromile has taken steps to mitigate its liability for violations of this and other laws restricting the use of electronic communication tools, no assurance can be given that Metromile will not be exposed to civil litigation or regulatory enforcement. Further, to the extent that any changes in law or regulation further restrict the ways in which Metromile communicates
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with prospective or current customers before or during onboarding, customer care, or claims management, these restrictions could result in a material reduction in its customer acquisition and retention, reducing the growth prospects of its business, and adversely affecting its financial condition and future cash flows.
Severe weather events and other catastrophes, including the effects of climate change, are inherently unpredictable and may have a material adverse effect on Metromile’s financial results and financial condition.
Metromile’s business may be exposed to catastrophic events such as tornadoes, tsunamis, tropical storms (including hurricanes), earthquakes, windstorms, hailstorms, severe thunderstorms, wildfires and other fires, as well as non-natural events such as explosions, riots, terrorism, or war, which could cause operating results to vary significantly from one period to the next. Metromile may incur catastrophe losses in its business in excess of: (1) those experienced in prior years, (2) the average expected level used in pricing, (3) current reinsurance coverage limits, or (4) loss estimates from external tornado, hail, hurricane and earthquake models at various levels of probability. In addition, Metromile is subject to customer insurance claims arising from weather events such as winter storms, rain, hail and high winds.
The incidence and severity of weather conditions are largely unpredictable. There is generally an increase in the frequency and severity of customer insurance claims when severe weather conditions occur. The incidence and severity of severe weather conditions and catastrophes are inherently unpredictable and the occurrence of one catastrophe does not render the possibility of another catastrophe greater or lower. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. In particular, severe weather and other catastrophes could significantly increase Metromile’s costs due to a surge in claims following such events and/or legal and regulatory changes in response to catastrophes that may impair its ability to limit our liability under its policies. Severe weather conditions and catastrophes can cause greater losses for us, which can cause its liquidity and financial condition to deteriorate. Given its current state mix and performance of our book, Metromile does not currently carry event reinsurance coverage for severe weather events. In addition, reinsurance placed in the market also carries some counterparty credit risk.
Climate change may affect the occurrence of certain natural events, such as an increase in the frequency or severity of wind and thunderstorm events, eruptions of volcanoes, and tornado or hailstorm events due to increased convection in the atmosphere; more frequent wildfires and subsequent landslides in certain geographies; higher incidence of deluge flooding and the potential for an increase in severity of the hurricane events due to higher sea surface temperatures. Additionally, climate change may cause an impact on the demand, price and availability of insurance, as well as the value of its investment portfolio. Due to significant variability associated with future changing climate conditions, Metromile is unable to predict the impact climate change will have on its business.
Denial of claims or Metromile’s failure to accurately and timely pay claims could materially and adversely affect its business, financial condition, results of operations, brand and prospects.
Under the terms of its policies, Metromile is required to accurately and timely evaluate and pay claims. Its ability to do so depends on a number of factors, including the efficacy of its claims processing, the training and experience of its claims adjusters, including its third-party claims administrators, and its ability to develop or select and implement appropriate procedures and systems to support its claims functions. Metromile believes that the speed at which its technology-based claims processing platform allows it to process and pay claims is a differentiating factor for its business relative to its competitors, and an increase in the average time to process claims could lead to customer dissatisfaction and undermine its reputation and position in the insurance marketplace. If its claims adjusters or third-party claims administrators are unable to effectively process its volume of claims, its ability to grow its business while maintaining high levels of customer satisfaction could be compromised, which in turn, could adversely affect its operating margins. Any failure to pay claims accurately or timely could also lead to regulatory and administrative actions or other legal proceedings and litigation against it, or result in damage to its reputation, any one of which could materially and adversely affect its business, financial condition, results of operations, brand and prospects.
Unexpected increases in the frequency or severity of claims may adversely affect Metromile’s results of operations and financial condition.
Metromile’s business may experience volatility in claim frequency from time to time, and short-term trends may not continue over the longer term. Changes in claim frequency may result from changes in mix of business, miles driven, distracted driving, macroeconomic or other factors. A significant increase in claim frequency could have an adverse effect on its results of operations and financial condition.
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Changes in bodily injury claim severity are impacted by inflation in medical costs, litigation trends and precedents, regulation and the overall safety of automobile travel. Changes in auto property damage claim severity are driven primarily by inflation in the cost to repair vehicles, including parts and labor rates, the mix of vehicles that are declared total losses, model year mix as well as used car values. While actuarial models for pricing and reserving typically include an expected level of inflation, unanticipated increases in claim severity can arise from events that are inherently difficult to predict. Although we pursue various loss management initiatives to mitigate future increases in claim severity, there can be no assurances that these initiatives will successfully identify or reduce the effect of future increases in claim severity.
Failure to maintain Metromile’s risk-based capital at the required levels could adversely affect its ability to maintain regulatory authority to conduct its business.
Metromile is required to have sufficient capital and surplus in order to comply with insurance regulatory requirements, support its business operations and minimize its risk of insolvency. The NAIC has developed a system to test the adequacy of statutory capital and surplus of U.S.-based insurers, known as risk-based capital, that all states have adopted. This system establishes the minimum amount of capital and surplus necessary for an insurance company to support its overall business operations in consideration of its size and risk profile. It identifies insurers that may be inadequately capitalized by looking at certain risk factors, including asset risk, credit risk and underwriting risk with respect to the insurer’s business in order to determine an insurer’s authorized control level risk-based capital. An insurer’s risk-based capital ratio measures the relationship between its total adjusted capital and its authorized control level risk-based capital.
Insurers with a ratio falling below certain calculated thresholds may be subject to varying degrees of regulatory action, including heightened supervision, examination, rehabilitation or liquidation. An insurance company with total adjusted capital that is less than 200% of its authorized control level risk-based capital is at a company action level, which would require the insurance company to file a risk-based capital plan that, among other things, contains proposals of corrective actions the company intends to take that are reasonably expected to result in the elimination of the company action level event. Additional action level events occur when the insurer’s total adjusted capital falls below 150%, 100% and 70% of its authorized control level risk-based capital. Lower percentages trigger increasingly severe regulatory responses. In the event of a mandatory control level event (triggered when an insurer’s total adjusted capital falls below 70% of its authorized control level risk-based capital), an insurer’s primary regulator is required to take steps to place the insurer into receivership. As part of its regulatory review and approval of this transaction, the Delaware Department of Insurance required us to enter into a Capital Maintenance Agreement (the “CMA”). The CMA requires Metromile, if the transaction closes, to ensure that the regulated insurance subsidiary, Metromile Insurance Company, will have and maintain total adjusted capital in an amount equal to at least 300% of the insurance company’s authorized control level risk based capital from the close of the transaction until a date to be determined by the regulator in mid-2025. Being required to maintain capital levels above the statutory requirement could put constraints on our ability to deploy capital to which Metromile’s competitors are not subject.
In addition, the NAIC Insurance Regulatory Information System (the “IRIS”), is a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. If its ratios fall outside of the usual range for one or more ratios set forth by the IRIS for any number of reasons, it could subject Metromile to heightened regulatory scrutiny or measures, or create investor uncertainty around the stability of its financial condition, which could harm its business.
Further, the NAIC has promulgated a Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition (the “Hazardous Financial Condition Standards”), which has been adopted by many states in whole or part. If its financial condition is deemed by state insurance regulators to meet the Hazardous Financial Conditions Standards, it could subject us to heightened regulatory scrutiny or measures, or create uncertainty around the stability of its financial condition, which could harm its business. As a relatively new entrant to the insurance industry, Metromile may face additional capital and surplus requirements as compared to those of its larger and more established competitors. Failure to maintain adequate risk-based capital at the levels required by law and/or the Delaware Department of Insurance as described above could result in increasingly onerous reporting and examination requirements and could adversely affect its ability to maintain regulatory authority to conduct its business.
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Security incidents, or real or perceived errors, failures or bugs in Metromile’s systems, website or app could impair its operations, compromise its confidential information or its customers’ personal information, damage its reputation and brand, and harm its business and operating results.
Metromile’s continued success depends on its systems, applications, and software continuing to operate and to meet the changing needs of its customers and users. Metromile relies on its technology and engineering staff and vendors to successfully implement changes to and maintain its systems and services in an efficient and secure manner. Like all information systems and technology, its website and mobile app may contain or develop material errors, failures, vulnerabilities or bugs, particularly when new features or capabilities are released, and may be subject to computer viruses or malicious code, break-ins, phishing impersonation attacks, attempts to overload its servers with denial-of-service or other attacks, ransomware and similar incidents or disruptions from unauthorized use of its computer systems, as well as unintentional incidents causing data leakage, any of which could lead to interruptions, delays or website or mobile app shutdowns.
Operating its business and products involves the collection, storage, use and transmission of sensitive, proprietary and confidential information, including personal information, pertaining to its current, prospective and past customers, staff, contractors, and business partners. The security measures Metromile takes to protect this information may be breached as a result of computer malware, viruses, social engineering, ransomware attacks, hacking and cyberattacks, including by state-sponsored and other sophisticated organizations. Such incidents have become more prevalent in recent years. For example, attempts to fraudulently induce its personnel into disclosing usernames, passwords or other information that can be used to access its systems and the information in them have increased and could be successful. Its security measures could also be compromised by its personnel, theft or errors, or be insufficient to prevent exploitation of security vulnerabilities in software or systems on which Metromile relies. Such incidents have in the past resulted in unauthorized access to certain personal information, and may in the future result in unauthorized, unlawful or inappropriate use, destruction or disclosure of, access to, or inability to access the sensitive, proprietary and confidential information that Metromile handles. These incidents may remain undetected for extended periods of time.
Metromile relies on third-party service providers to provide critical services that help it deliver its solutions and operate its business. These providers may support or operate critical business systems for it or store or process the same sensitive, proprietary and confidential information that Metromile handles. These service providers may not have adequate security measures and could experience a security incident that compromises the confidentiality, integrity or availability of the systems they operate for it or the information they process on its behalf. Such occurrences could adversely affect its business to the same degree as if Metromile had experienced these occurrences directly and Metromile may not have recourse to the responsible third-party service providers for the resulting liability Metromile incurs.
Because there are many different cybercrime and hacking techniques and such techniques continue to evolve, Metromile may be unable to anticipate attempted security breaches, react in a timely manner or implement adequate preventative measures. While Metromile has developed systems and processes designed to protect the integrity, confidentiality and security of its and its customers’ confidential and personal information under its control, Metromile cannot assure you that any security measures that Metromile or its third-party service providers have implemented will be effective against current or future security threats.
A security breach or other security incident of Metromile’s systems, data, website or app has occurred in the past, and may occur in the future. For example, in January 2021, Metromile discovered a security incident related to its online pre-filled quote form and application process, which resulted in unknown person(s) accessing personal information of certain individuals, including individuals’ driver’s license numbers. An actual security breach or incident, a material vulnerability, or the perception that one has occurred or exists, could result in a loss of customer confidence in the security of its platform and damage to its reputation and brand; reduce demand for its insurance products; disrupt normal business operations; require it to expend significant capital and resources to investigate and remedy the incident, and prevent recurrence and comply with any breach notification obligations; and subject it to litigation (including class actions), regulatory enforcement action, fines, penalties, and other liability, which could adversely affect its business, financial condition and results of operations.
Even if Metromile takes steps that Metromile believes are adequate to protect it from cyber threats, hacking against its competitors or other companies in its industry could create the perception among its customers or potential customers that its digital platform is not safe to use. Security incidents could also damage our IT systems and its ability to make the financial reports and other public disclosures required of public companies. These risks are likely to increase as we continue to grow and process, store and transmit an increasingly large volume of data.
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Metromile may be unable to prevent, monitor or detect fraudulent activity, including policy acquisitions or payments of claims that are fraudulent in nature.
If Metromile fails to maintain adequate systems and processes to prevent, monitor and detect fraud, including fraudulent policy acquisitions or claims activity, or if inadvertent errors occur with such prevention, monitoring and detection systems due to human or computer error, its business could be materially adversely impacted. While Metromile believes past incidents of fraudulent activity have been relatively isolated, Metromile cannot be certain that its systems and processes will always be adequate in the face of increasingly sophisticated and ever-changing fraud schemes. Metromile uses a variety of tools to protect against fraud, but these tools may not always be successful at preventing such fraud.
Instances of fraud may result in increased costs, including possible settlement and litigation expenses, and could have a material adverse effect on its business and reputation. In addition, failure to monitor and detect fraud and otherwise comply with state Special Investigation Unit requirements can result in regulatory fines or penalties.
Metromile is subject to stringent and changing privacy and data security laws, regulations, and standards related to data privacy and security. Its actual or perceived failure to comply with such obligations could harm its reputation, subject it to significant fines and liability, or adversely affect its business.
In the United States, insurance companies are subject to the privacy provisions of the federal Gramm-Leach-Bliley Act and the NAIC Insurance Information and Privacy Protection Model Act, to the extent adopted and implemented by various state legislatures and insurance regulators. The regulations implementing these laws require insurance companies to disclose their privacy practices to consumers, allow them to opt-in or opt-out, depending on the state, of the sharing of certain personal information with unaffiliated third parties, and maintain certain security controls to protect their information. Violators of these laws face regulatory enforcement action, substantial civil penalties, injunctions, and in some states, private lawsuits for damages.
Privacy and data security regulation in the U.S. is rapidly evolving. For example, California recently enacted the CCPA, which became effective January 1, 2020. The CCPA and related regulations give California residents expanded rights to access and request deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used and shared. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches, which is expected to increase the volume and success of class action data breach litigation. In addition to increasing its compliance costs and potential liability, the CCPA’s restrictions on “sales” of personal information may restrict Metromile’s use of cookies and similar technologies for advertising purposes. The CCPA excludes information covered by Gramm-Leach-Bliley Act, the Driver’s Privacy Protection Act, the Fair Credit Reporting Act (the “California Financial Information Privacy Act”) from the CCPA’s scope, but the CCPA’s definition of “personal information” is broad and may encompass other information that Metromile maintains. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., and multiple states have enacted or proposed similar laws. There is also discussion in Congress of new comprehensive federal data protection and privacy law to which Metromile likely would be subject if it is enacted.
In addition, California voters approved the November 2020 ballot measure which will enact the CPRA, substantially expanding the requirements of the CCPA. As of January 1, 2023, the CPRA will give consumers the ability to limit use of precise geolocation information and other categories of information classified as “sensitive”; add e-mail addresses and passwords to the list of personal information that, if lost or breached, would give the affected consumers the right to bring private lawsuits; increase the maximum penalties threefold for violations concerning consumers under age 16; and establish the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines. The effects of the CCPA, CPRA and other similar state or federal laws are potentially significant and may require it to modify its data processing practices and policies, incur substantial compliance costs and subject it to increased potential liability.
In addition to privacy and data security requirements under applicable laws, Metromile is subject to the Payment Card Industry Data Security Standard (“PCI DSS”), a self-regulatory standard that requires companies that process payment card data to implement certain data security measures. If Metromile or its payment processors fail to comply with the PCI DSS, Metromile may incur significant fines or liability and lose access to major payment card systems. Industry groups may in the future adopt additional self-regulatory standards by which Metromile is legally or contractually bound. If Metromile expands into Europe, Metromile may also face particular privacy, data security, and data protection risks in connection with requirements of the General Data Protection Regulation (E.U.) 2016/679 (“GDPR”) and other data protection regulations. Among other stringent requirements, the GDPR restricts transfers of data outside of the E.U. to countries deemed to lack adequate privacy protections (such as the U.S.), unless an appropriate safeguard specified by the GDPR is implemented. A July 16, 2020 decision of the Court of Justice of the European Union invalidated
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a key mechanism for lawful data transfer to the U.S. and called into question the viability of its primary alternative. As such, the ability of companies to lawfully transfer personal data from the E.U. to the U.S. is presently uncertain. Other countries have enacted or are considering enacting similar cross-border data transfer rules or data localization requirements. These developments could limit its ability to deliver its products in the E.U. and other foreign markets. In addition, any failure or perceived failure to comply with these rules may result in regulatory fines or penalties including orders that require it to change the way Metromile processes data.
Additionally, Metromile is subject to the terms of its privacy policies, privacy-related disclosures, and contractual and other privacy-related obligations to its customers and other third parties. Any failure or perceived failure by it or third parties Metromile works with to comply with these policies, disclosures, and obligations to customers or other third parties, or privacy or data security laws may result in governmental or regulatory investigations, enforcement actions, regulatory fines, criminal compliance orders, litigation or public statements against Metromile by consumer advocacy groups or others, and could cause customers to lose trust in it, all of which could be costly and have an adverse effect on its business.
Metromile relies on its mobile application to execute its business strategy. Government regulation of the internet and the use of mobile applications in particular is evolving, and unfavorable changes could seriously harm its business.
Metromile relies on its mobile application to execute its business strategy. Metromile is subject to general business regulations and laws as well as federal and state regulations and laws specifically governing the internet and the use of mobile applications in particular. Existing and future laws and regulations may impede the growth of the internet or other online services, and increase the cost of providing online services. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, electronic signatures and consents, consumer protection and social media marketing. It is at times not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the internet and the use of mobile applications in particular, as the vast majority of these laws were adopted prior to the advent of the internet and the use of mobile applications and do not contemplate or address the unique issues raised by the internet. It is possible that general business regulations and laws, or those specifically governing the internet and the use of mobile applications in particular, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Metromile cannot be sure that its practices have complied, currently comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by it to comply with any of these laws or regulations could result in damage to its reputation, a loss in business and proceedings or actions against it by governmental entities or others. Any such proceeding or action could hurt its reputation, force it to spend significant amounts in defense of these proceedings, distract its management, increase its costs of doing business and decrease the use of its mobile application or website by consumers and suppliers and may result in the imposition of monetary liability. Metromile may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations.
Metromile’s intellectual property rights are valuable, and any inability to protect them could reduce the value of its products, services and brand.
Metromile’s trade secrets, trademarks, copyrights, patents, and other intellectual property rights are important assets for us. Metromile relies on, and expects to continue to rely on, various agreements with its employees, independent contractors, consultants and third parties with whom Metromile has relationships, as well as trademark, trade dress, domain name, copyright, patent, and trade secret laws, to protect its brand and other intellectual property rights. Such agreements may not effectively prevent unauthorized use or disclosure of its confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of its confidential information, intellectual property or technology, and Metromile may fail to consistently obtain, police and enforce such agreements. Additionally, various factors outside its control pose a threat to its intellectual property rights, as well as to its products, services and technologies. For example, Metromile may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available in every country in which its products and services are available. Also, the efforts Metromile has taken to protect its intellectual property rights may not be sufficient or effective in all cases. For example, governmental entities that grant intellectual property rights may deny its applications for such rights despite its best efforts.
Additionally, granted intellectual property rights are subject to challenge. Successful challenges may result in such rights being narrowed in scope or declared invalid or unenforceable. Despite its efforts to obtain and protect broad intellectual property rights, there can be no assurance Metromile’s intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and compete with its business, and unauthorized parties may attempt to copy aspects of its technology and use information that Metromile considers proprietary. Competitors or other third parties may also attempt to circumvent or design around its intellectual property rights.
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In addition to registered intellectual property rights such as trademark registrations, Metromile relies on non-registered proprietary information and technology, such as trade secrets, confidential information, know-how and technical information. Certain information or technology that Metromile endeavors to protect as trade secrets may not be eligible for trade secret protection in all jurisdictions, or the measures Metromile undertakes to establish and maintain such trade secret protection may be inadequate. In order to protect its proprietary information and technology, Metromile relies in part on agreements with its employees, investors, independent contractors and other third parties that place restrictions on the use and disclosure of this intellectual property. In some cases, these agreements may not adequately protect its trade secrets, these agreements may be breached, or this intellectual property, including trade secrets, may otherwise be disclosed or become known to its competitors, which could cause it to lose a competitive advantage resulting from this intellectual property. However, its employees, independent contractors or other third parties with whom Metromile does business may nonetheless use intellectual property owned by others in their work for it, and disputes may arise as to the rights in related or resulting know-how and inventions. Current or future legal requirements may require it to disclose certain proprietary information or technology, such as its proprietary algorithms, to regulators or other third parties, including its competitors, which could impair or result in the loss of trade secret protection for such information or technology. The loss of trade secret protection could make it easier for third parties to compete with Metromile’s products and services by copying functionality. In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise its ability to enforce its trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of its proprietary rights, and failure to obtain or maintain protection of its trade secrets or other proprietary information could harm its business, results of operations and competitive position.
Metromile has filed, and may continue in the future to file, applications to protect certain of its innovations and intellectual property. Metromile does not know whether any of its applications will result in the issuance of a patent, trademark or copyright, as applicable, or whether the examination process will require it to narrow its claims or otherwise limit the scope of such intellectual property. In addition, Metromile may not receive competitive advantages from the rights granted under its intellectual property. Its existing intellectual property, and any intellectual property granted to it or that Metromile otherwise acquires in the future, may be contested, circumvented or invalidated, and Metromile may not be able to prevent third parties from infringing its intellectual property rights. Therefore, the exact effect of the protection of this intellectual property cannot be predicted with certainty. Because obtaining patent protection requires disclosing its inventions to the public, such disclosure may facilitate its competitors developing improvements to its innovations. Given this risk, Metromile may sometimes choose not to seek patent protection for certain innovations and instead rely on trade secret protection. Any failure to adequately obtain such patent protection, or other intellectual property protection, could later prove to adversely impact its business.
Metromile currently holds various domain names relating to its brand, including Metromile.com. Failure to protect its domain names could adversely affect its reputation and brand and make it more difficult for users to find its website and its mobile app. Metromile may be unable, without significant cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of its trademarks and other proprietary rights.
Metromile may be required to spend significant resources in order to monitor and protect its intellectual property rights, and some violations may be difficult or impossible to detect. For example, infringement of patent rights related to internal software processes may be difficult to detect. Litigation to protect and enforce its intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of its intellectual property. Its efforts to enforce its intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of its intellectual property rights or asserting that Metromile infringes third-party intellectual property rights. The unauthorized copying or use of its proprietary technology, as well as any costly litigation or diversion of its management’s attention and resources, could impair the functionality of its platform, delay introductions of enhancements to its platform, result in its substituting inferior or more costly technologies into its platform or harm its reputation or brand. In addition, Metromile may be required to license additional technology from third parties to develop and market new offerings or platform features, which may not be on commercially reasonable terms or at all and could adversely affect its ability to compete.
Although Metromile takes measures to protect its intellectual property, if Metromile is unable to prevent the unauthorized use or exploitation of its intellectual property, the value of is brand, content, and other intangible assets may be diminished, competitors may be able to more effectively mimic its service and methods of operations, the perception of its business and service to customers and potential customers may become confused, and its ability to attract customers may be adversely affected. Any failure to protect its intellectual property could adversely impact its business, results of operations and financial condition. While Metromile takes precautions designed to protect its intellectual property, it may still be possible for competitors and other unauthorized third parties to copy its technology and use its proprietary brand, content and information to create or enhance competing solutions and services, which could adversely affect its competitive position in its rapidly evolving and highly competitive industry. Some license provisions
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that protect against unauthorized use, copying, transfer and disclosure of its technology may be unenforceable under the laws of certain jurisdictions and foreign countries. While Metromile enters into confidentiality and invention assignment agreements with its employees and consultants and enter into confidentiality agreements with its third-party providers and strategic partners, Metromile cannot assure you that these agreements will be effective in controlling access to, and use and distribution of, its products and proprietary information. Further, these agreements do not prevent its competitors from independently developing technologies that are substantially equivalent or superior to its offerings.
Some of Metromile’s products and services contain open source software, which may pose particular risks to its proprietary software, products, and services in a manner that could have a negative effect on its business.
Metromile uses open source software in its products and services and anticipate continuing to use open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software product to publicly disclose all or part of the source code of such software product or to make available any derivative works of the open source code on unfavorable terms or at no cost, and Metromile may be subject to such terms. The terms of certain open source licenses to which Metromile is subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on its ability to provide or distribute its products or services. Additionally, Metromile could face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that Metromile develops using such software, which could include its proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require it to make its software source code freely available, purchase a costly license or cease offering the implicated products or services unless and until Metromile can re-engineer such source code to eliminate use of such open source software. This re-engineering process could require it to expend significant additional research and development resources, and Metromile may not be able to complete the re-engineering process successfully. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, assurance of title or controls on the origin or operation of the open source software, which are risks that cannot be eliminated, and could, if not properly addressed, negatively affect our business. Metromile has established processes to help alleviate these risks, including a review process for screening requests from its development teams for the use of open source software, but Metromile cannot be sure that all of its use of open source software is in a manner that is consistent with its current policies and procedures, or will not subject us to liability. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on its business, financial condition and operating results.
Claims by others that Metromile infringes or has infringed their proprietary technology or other intellectual property rights could harm its business.
Companies in the internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. In addition, certain companies and rights holders seek to enforce and monetize patents or other intellectual property rights they own, have purchased or have otherwise obtained. As Metromile gains an increasingly high public profile, the possibility of intellectual property rights claims against it grows. From time to time, third parties may assert claims of infringement of intellectual property rights against it. Although Metromile may have meritorious defenses, there can be no assurance that Metromile will be successful in defending against these allegations or in reaching a business resolution that is satisfactory to Metromile. Its competitors and others may now and in the future have significantly larger and more mature patent portfolios than it. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom its own patents may therefore provide little or no deterrence or protection. Many potential litigants, including some of our competitors and patent-holding companies, have the ability to dedicate substantial resources to the assertion of their intellectual property rights. Any claim of infringement by a third party, even those without merit, could cause it to incur substantial costs defending against the claim, could distract its management from its business and could require it to cease use of such intellectual property. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, Metromile risks compromising its confidential information during this type of litigation. Metromile may be required to pay substantial damages, royalties or other fees in connection with a claimant securing a judgment against it, Metromile may be subject to an injunction or other restrictions that prevent it from using or distributing our intellectual property, or from operating under its brand, or Metromile may agree to a settlement that prevents it from distributing its offerings or a portion thereof, which could adversely affect its business, results of operations and financial condition.
With respect to any intellectual property rights claim, Metromile may have to seek out a license to continue operations found or alleged to violate such rights, which may not be available, or if available, may not be available on favorable or commercially reasonable terms and may significantly increase our operating expenses. Some licenses may be non-exclusive, and therefore its
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competitors may have access to the same technology licensed to it. If a third party does not offer it a license to its intellectual property on reasonable terms, or at all, Metromile may be required to develop alternative, non-infringing technology, which could require significant time (during which Metromile would be unable to continue to offer its affected offerings), effort and expense and may ultimately not be successful. Any of these events could adversely affect its business, results of operations and financial condition. 59
Metromile may be subject to compliance obligations arising from medical information privacy regulations.
By processing certain personal injury data on behalf of its clients, Metromile may be subject to compliance obligations under privacy and data security-related laws specific to the protection of healthcare or medical information. Although Metromile may be subject to the Health Insurance Portability and Accountability Act (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”) and comparable state laws, Metromile does not have a process in place to assess or align its privacy and security practices specifically against requirements for protecting medical information.
Metromile may be unable to prevent or address the misappropriation of its data.
From time to time, third parties may misappropriate Metromile’s data through website scraping, bots or other means and aggregate this data on their websites with data from other companies. In addition, copycat websites or mobile apps may misappropriate data and attempt to imitate its brand or the functionality of its website or its mobile app. If Metromile becomes aware of such websites or mobile apps, Metromile intends to employ technological or legal measures in an attempt to halt their operations. However, Metromile may be unable to detect all such websites or mobile apps in a timely manner and, even if Metromile could, technological and legal measures may be insufficient to halt their operations. In some cases, particularly in the case of websites or mobile apps operating outside of the U.S., its available remedies may not be adequate to protect it against the effect of the operation of such websites or mobile apps. Regardless of whether Metromile can successfully enforce its rights against the operators of these websites or mobile apps, any measures that Metromile may take could require it to expend significant financial or other resources, which could harm its business, results of operations or financial condition. In addition, to the extent that such activity creates confusion among consumers or advertisers, its brand and business could be harmed.
If Metromile’s customers were to claim that the policies they purchased failed to provide adequate or appropriate coverage, Metromile could face claims that could harm our business, results of operations and financial condition.
Although Metromile aims to provide adequate and appropriate coverage under each of its policies, customers could purchase policies that prove to be inadequate or inappropriate. If such customers were to bring a claim or claims alleging that we failed in its responsibilities to provide them with the type or amount of coverage that they sought to purchase, Metromile could be found liable for amounts significantly in excess of the policy limit, resulting in an adverse effect on its business, results of operations and financial condition. While Metromile maintains errors and omissions insurance coverage to protect it against such liability, such coverage may be insufficient or inadequate.
If Metromile is unable to underwrite risks accurately or charge competitive yet profitable rates to its customers, its business, results of operations and financial condition will be adversely affected.
In general, the premiums for its insurance policies are established at the time a policy is issued and, therefore, before all of its underlying costs are known. The accuracy of its pricing depends on its ability to adequately assess risks, estimate losses and comply with state insurance regulations. Like other insurance companies, Metromile relies on estimates and assumptions in setting its premium rates. Metromile also utilizes the data that Metromile gathers through its interactions with its customers, as evaluated and curated by its technology-based pricing platform.
Establishing adequate premium rates is necessary, together with investment income, if any, to generate sufficient revenue to offset losses, LAE, and other costs. If Metromile does not accurately assess the risks that Metromile underwrites, the premiums that Metromile charges may not be adequate to cover its losses and expenses, which would adversely affect its results of operations and its profitability. Moreover, if Metromile determines that its prices are too low, insurance regulations may preclude us from being able to cancel insurance contracts, non-renew customers, or raise premiums. Alternatively, Metromile could set its premiums too high, which could reduce its competitiveness and lead to fewer customers and lower revenues, which could have a material adverse effect on its business, results of operations and financial condition.
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Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of its products in multiple risk tiers and many different markets. In order to accurately price its policies, Metromile must:
● | collect and properly analyze a substantial volume of data from its customers; |
● | develop, test and apply appropriate actuarial projections and rating formulas; |
● | review and evaluate competitive product offerings and pricing dynamics; |
● | closely monitor and timely recognize changes in trends; |
● | project both frequency and severity of its customers’ losses with reasonable accuracy; and |
● | in many states obtain regulatory approval for these processes and the resulting rates. |
There are no assurances that Metromile will have success in implementing its pricing methodology accurately in accordance with our assumptions. Its ability to accurately price its policies is subject to a number of risks and uncertainties, including:
● | insufficient or unreliable data; |
● | incorrect or incomplete analysis of available data; |
● | uncertainties generally inherent in estimates and assumptions; |
● | our failure to implement appropriate actuarial projections and rating formulas or other pricing methodologies; |
● | incorrect or incomplete analysis of the competitive environment; |
● | regulatory constraints on rate increases or the use of certain types of data; and |
● | its failure to accurately estimate investment yields and the duration of its liability for loss and loss adjustment expenses, as well as unanticipated court decisions, legislation or regulatory action. |
To address the potential inadequacy of its current business model, Metromile may be compelled to increase the amount allocated to cover policy claims, increase premium rates or adopt tighter underwriting standards, any of which may result in a decline in new business and renewals and, as a result, could have a material adverse effect on its business, results of operations and financial condition.
Metromile’s product development cycles are complex and subject to regulatory approval, and Metromile may incur significant expenses before we generate revenues, if any, from new products.
Because Metromile’s products are highly technical and require rigorous testing and regulatory approvals, development cycles can be complex. Moreover, development projects can be technically challenging and expensive, and may be delayed or defeated by the inability to obtain licensing or other regulatory approvals. The nature of these development cycles may cause it to experience delays between the time Metromile incurs expenses associated with research and development and the time Metromile generates revenues, if any, from such expenses. If Metromile expends a significant amount of resources on research and development and its efforts do not lead to the successful introduction or improvement of products that are competitive in the marketplace, this could materially and adversely affect its business and results of operations. Additionally, anticipated customer demand for a product Metromile is developing could decrease after the development cycle has commenced. Such decreased customer demand may cause it to fall short of its sales targets, and Metromile may nonetheless be unable to avoid substantial costs associated with the product’s development. If Metromile is unable to complete product development cycles successfully and in a timely fashion and generate revenues from such future products, the growth of its business may be harmed.
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Litigation and legal proceedings filed by or against Metromile and its subsidiaries could have a material adverse effect on its business, results of operations and financial condition.
From time to time, Metromile is subject to allegations, and may be party to litigation and legal proceedings relating to its business operations. Litigation and other proceedings may include complaints from or litigation by customers or reinsurers, related to alleged breaches of contract or otherwise. Metromile expects that as its market share increases, competitors may pursue litigation to require it to change its business practices or offerings and limit its ability to compete effectively.
As is typical in the insurance industry, Metromile continually faces risks associated with litigation of various types arising in the normal course of its business operations, including disputes relating to insurance claims under its policies as well as other general commercial and corporate litigation. Although Metromile is not currently involved in any material litigation with its customers, members of the insurance industry are periodically the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues, including sale of insurance and claim settlement practices. In addition, because Metromile employs a technology platform to collect customer data, it is possible that customers or consumer groups could bring individual or class action claims alleging that its methods of collecting data and pricing risk are impermissibly discriminatory. Metromile cannot predict with any certainty whether Metromile will be involved in such litigation in the future or what impact such litigation would have on its business. If Metromile was to be involved in litigation and it was determined adversely, it could require it to pay significant damages or to change aspects of its operations, either of which could have a material adverse effect on its financial results. Even claims without merit can be time-consuming and costly to defend, and may divert management’s attention and resources away from its business and adversely affect its business, results of operations and financial condition. Additionally, routine lawsuits over claims that are not individually material could in the future become material if aggregated with a substantial number of similar lawsuits. In addition to increasing costs, a significant volume of customer complaints or litigation could also adversely affect its brand and reputation, regardless of whether such allegations have merit or whether it is liable. Metromile cannot predict with certainty the costs of defense, the costs of prosecution, insurance coverage or the ultimate outcome of litigation or other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation, and other proceedings may harm its business and financial condition.
The utilization of Metromile’s net operating loss carryforwards may be limited.
As of December 31, 2020, Metromile had gross U.S. federal income tax net operating losses (“NOLs”), of approximately $279 million available to offset its future taxable income, if any, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), or otherwise. Of its NOLs, $142 million of losses will begin to expire in 2031 through 2040 and $137 million of losses can be carried forward indefinitely.
As a result of the mergers, Lemonade generally will succeed to Metromile’s NOLs, but Lemonade may be unable to fully use such NOLs, if at all. Under Section 382 of the Code, if a corporation undergoes an “ownership change” (very generally defined as a greater than 50% change, by value, in the corporation’s equity ownership by certain stockholders or groups of stockholders over a rolling three-year period), the corporation’s ability to use its pre-ownership change NOLs to offset its post-ownership change income may be limited. Metromile has experienced ownership changes in the past, and Metromile will experience an ownership change as a result of the mergers. In addition, Lemonade may experience an ownership change in the future as a result of subsequent shifts in its stock ownership, some of which may be outside of its control. Future regulatory changes could also limit its ability to utilize its NOLs. To the extent Metromile NOLs are not utilized to offset future taxable income, Lemonade’s net income and cash flows may be adversely affected. The Tax Cuts and Jobs Act (the “Tax Act”), as modified by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), among other things, includes changes to U.S. federal tax rates and the rules governing NOL carryforwards. For U.S. federal NOLs arising in tax years beginning after December 31, 2017, with certain exceptions, including for insurance companies that are not life insurance companies, the Tax Act as modified by the CARES Act limits a taxpayer’s ability to utilize NOL carryforwards in taxable years beginning after December 31, 2020 to 80% of taxable income. In addition, U.S. federal NOLs arising in tax years beginning after December 31, 2017, with an exception for insurance companies that are not life insurance companies, can be carried forward indefinitely. For U.S. federal NOLs for insurance companies that are not life insurance companies subject to taxation under Part 2 of subchapter L of the Code, NOLs may be carried forward for 20 taxable years regardless of when they arise. The income of insurance companies that are not life insurance companies is generally not subject to a percentage limitation for offset by group NOLs. Deferred tax assets for NOLs will need to be measured at the applicable tax rate in effect when the NOLs are expected to be utilized. The new limitation on use of NOLs may significantly impact Lemonade’s ability to utilize the Metromile NOLs to offset taxable income in the future. In addition, for state income tax purposes, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example,
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California recently imposed limits on the usability of California state net operating losses to offset taxable income in tax years beginning after 2019 and before 2023.
Metromile’s enterprise software business unit has limited operating history, which makes it difficult to forecast operating results from the business unit, and Metromile may not achieve the expected operating results in the future.
Metromile established the enterprise software business unit in 2018 and signed its first customer the same year. Since then, Metromile has seen a growth in revenue and deployments. However, as a result of its limited operating history, its ability to forecast future operating results from this business unit, including revenues, cash flows and profitability, is limited and subject to many uncertainties. The historical revenue growth in this business unit should not be considered indicative of its future performance.
Furthermore, the enterprise business unit’s revenue and customer growth could slow or decline for a number of reasons, including slowing demand for its products, increased competition, changes to technology, a decrease in growth in the overall market, or its failure, for any reason, to continue to take advantage of growth opportunities. Moreover, Metromile has encountered and will continue to encounter a number of risks and uncertainties frequently experienced by growing companies in the technology industry, such as the risks and uncertainties described in this proxy statement/prospectus. If its assumptions regarding these risks and uncertainties are incorrect or change due to changes in its market, or if Metromile does not address these risks successfully, the enterprise business unit’s operating and financial results could differ materially from its expectations and this business unit could suffer.
Metromile’s enterprise software business has relied on, and is expected to continue to rely on, orders from a relatively small number of customers for a substantial portion of its revenue, and the loss of any of these customers would significantly harm its operating and financial results.
Its revenue is dependent on orders from customers in the property and casualty (“P&C”) insurance industry, which may be adversely affected by economic, environmental, social, and geo-political conditions. Metromile currently charges customers a license fee for its enterprise software that is proportional to the size of their business. This means Metromile can expect to make more revenue from one large-sized customer (as measured by the size of the customer’s business) than from several small-sized customers (as measured by the size of their business). Metromile currently relies on and expect to continue to rely on a relatively small number of large-sized customers to account for a majority of its revenue. As a result, if Metromile fails to successfully sell its products and services to one or more of these large-sized customers in any particular period or fail to identify additional potential large-sized customers, or such customers purchase fewer of its products or services, defer or cancel purchase orders for any reason, fail to renew their license or subscription agreements or otherwise terminate their relationship with it for any reason, the results of operations and financial condition of the enterprise business unit would be significantly harmed.
Metromile’s Metromile Enterprise business may cost more to operate than anticipated.
Metromile Enterprise has historically generated more cash than operating expenses due to prepaid revenue and service fees associated with signed deployments. As customer deployments increase, customers request new features, and upgrades and investments are required, Metromile may need to accelerate its spend meaningfully and this could adversely impact its operating income.
The market in which the enterprise software business operates is highly competitive, and if Metromile does not compete effectively, its business, its financial condition, and results of operations could be harmed.
The market in which its enterprise software business operates is rapidly evolving and highly competitive. As it continues to mature and evolve, existing competitors will continue to introduce new, innovative products, and new competitors will continue to enter, thereby further intensifying competition.
Metromile faces competition from a number of sources:
● | Large, well-established, P&C software providers that have been selling into the P&C industry for quite some time seeking to introduce new features or launch product(s) that mimic the functionality of some of its product(s); |
● | Large, well-established, custom software development and professional services companies offering bespoke software that competes with some or all of its enterprise software products; and |
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● | New or emerging entrants seeking to develop competing technology products. |
Metromile competes based on a number of factors, including innovativeness of its products, demonstrable breadth of use cases, maturity of software, speed of deployment, total cost of ownership of its products, customer service and support, brand recognition of the core Metromile business and ease of implementation. Some of its competitors have substantially greater customer relationships, and financial, technical and other resources than Metromile does, and may be able to respond more effectively than it to new opportunities, technologies and customer needs. As a result, competition may negatively impact its ability to attract new customers or retain existing ones, or put downward pressure on its prices, any of which could materially harm its business, results of operations and financial condition.
Metromile’s enterprise software products expose it to liability associated with customer contracts and the use of their customers data.
Metromile Enterprise is a cloud-based subscription software solution provided to global P&C insurers. Through the deployment of this service, insurers may share or provide Metromile with customer data or aggregated data that reveals personally identifying information about the insurers’ customers. This data exposes it to material liability if it is publicly disclosed, copied, or used in an inadvertent way that violates the terms of its contract with its enterprise business unit’s customers, or their terms of service with their customers, or state or national laws.
Metromile may become subject to intellectual property disputes or other claims of infringement, which are costly and may subject it to significant liability and increased costs of doing business.
Metromile competes in a market where there are a large number of patents, copyrights, trademarks, trade secrets, and other intellectual and proprietary rights, as well as disputes regarding infringement of these rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against it. From time to time, third parties holding such intellectual property rights, including leading companies, competitors, patent holding companies and/or non-practicing entities, may assert patent, copyright, trademark or other intellectual property claims against it.
Although Metromile believes that its products and services do not infringe upon the intellectual property rights of third parties, Metromile cannot assure that third parties will not assert infringement or misappropriation claims against it with respect to current or future products or services, or that any such assertions will not require it to enter into royalty arrangements or result in costly litigation, or result in it being unable to use certain intellectual property. Metromile cannot assure that Metromile is not infringing or otherwise violating any third-party intellectual property rights.
Any intellectual property litigation to which Metromile becomes a party may require it to do one or more of the following:
● | cease selling, licensing, or using products or features that incorporate the intellectual property rights that Metromile allegedly infringes, misappropriates, or violates; |
● | make substantial payments for legal fees, settlement payments, or other costs or damages, including indemnification of third parties; |
● | obtain a license or enter into a royalty agreement, either of which may not be available on reasonable terms or at all, in order to obtain the right to sell or use the relevant intellectual property; or |
● | redesign the allegedly infringing products to avoid infringement, misappropriation, or violation, which could be costly, time-consuming, or impossible. |
Any of these events or any adverse result in any litigation claims against us could have a material adverse effect on its business, financial condition, and results of operations.
A significant portion of Metromile’s future operating profit gains are expected to arise from the growth in its enterprise software revenue, which may not be realized.
Metromile’s Metromile Enterprise business is a new and growing business. While Metromile has several new customer deployments active or underway, there is no guarantee that these deployments will materially increase revenue if customers cancel
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their contracts, reduce their desired level of services, or new customers do not sign up for the services. Any of which could significantly harm its business, operating results and financial condition.
The insurance business, including the market for automobile, renters’ and homeowners’ insurance, is historically cyclical in nature, and Metromile may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect its business.
Historically, insurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverse litigation trends, regulatory constraints, general economic conditions, and other factors. The supply of insurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. As a result, the insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity increased premium levels. Demand for insurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers and general economic conditions. All of these factors fluctuate and may contribute to price declines generally in the insurance industry.
Metromile cannot predict with certainty whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair its ability to underwrite insurance at rates Metromile considers appropriate and commensurate relative to the risk assumed. Additionally, negative market conditions could result in a decline in policies sold, an increase in the frequency of claims and premium defaults, and an uptick in the frequency of falsification of claims. If Metromile cannot underwrite insurance at appropriate rates, its ability to transact business will be materially and adversely affected. Any of these factors could lead to an adverse effect on Metromile’s business, results of operations and financial condition.
Reinsurance may be unavailable at current levels and prices, which may limit Metromile’s ability to underwrite new policies. Furthermore, reinsurance subjects it to counterparty risk and may not be adequate to protect it against losses, which could have a material effect on its results of operations and financial condition.
Reinsurance is a contract by which an insurer, which may be referred to as the ceding insurer, agrees with a second insurer, called a reinsurer, that the reinsurer will cover a portion of the losses incurred by the ceding insurer in the event a claim is made under one or more policies issued by the ceding insurer, in exchange for a premium. Metromile’s regulated insurance subsidiary, Metromile Insurance Company, obtains reinsurance to help manage its exposure to property and casualty insurance risks. Although its reinsurance counterparties are liable to it according to the terms of the reinsurance policies, it remains primarily liable to its policyholders as the direct insurers on all risks reinsured. As a result, reinsurance does not eliminate the obligation of its regulated insurance subsidiary to pay all claims, and Metromile is subject to the risk that one or more of its reinsurers will be unable or unwilling to honor its obligations, that the reinsurers will not pay in a timely fashion, or that its losses are so large that they exceed the limits inherent in its reinsurance contracts, limiting recovery. Metromile is also subject to the risk that under applicable insurance laws and regulations Metromile may not be able to take credit for the reinsurance on its financial statements and instead would be required to hold separate admitted assets as reserves to cover claims on the risks that Metromile has ceded to the reinsurer. Reinsurers may become financially unsound by the time they are called upon to pay amounts due, which may not occur for many years, in which case Metromile may have no legal ability to recover what is due to it under our agreement with such reinsurer. Any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success.
Market conditions beyond Metromile’s control impact the availability and cost of the reinsurance we purchase. No assurances can be made that reinsurance will remain continuously available to it to the same extent and on the same terms and rates as is currently available, as such availability depends in part on factors outside of its control. A new contract may not provide sufficient reinsurance protection. Market forces and external factors, such as significant losses from weather and seismic events (like hurricanes or earthquakes) or terrorist attacks or an increase in capital and surplus requirements, impact the availability and cost of the reinsurance it purchases. If Metromile was unable to maintain its current level of reinsurance or purchase new reinsurance protection in amounts that Metromile considers sufficient at acceptable prices, Metromile would have to either accept an increase in its catastrophe exposure, reduce its insurance underwritings, or develop or seek other alternatives.
The unavailability of acceptable reinsurance protection would have a materially adverse impact on its business model, which depends on reinsurance companies to absorb any unfavorable variance from the level of losses anticipated at underwriting. If Metromile is unable to obtain adequate reinsurance at reasonable rates, Metromile would have to increase its risk exposure or reduce the level of its underwriting commitments, each of which could have a material adverse effect upon its business volume and
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profitability. Alternatively, Metromile could elect to pay higher than anticipated rates for reinsurance coverage, which could have a material adverse effect upon its profitability unless policy premium rates could also be raised, in most cases subject to approval by state regulators, to offset this additional cost.
Reinsurance subjects Metromile to risks of its reinsurers and may not be adequate to protect it against losses arising from ceded insurance, which could have a material effect on its results of operations and financial condition.
The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, their affiliates, or certain regulatory bodies have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Any disruption, volatility and uncertainty in the financial reinsurance markets may decrease Metromile’s ability to access such markets on favorable terms or at all. In addition, Metromile is subject to the risk that one or more of its reinsurers will not honor its obligations, that the reinsurers will not pay in a timely fashion, or that its losses are so large that they exceed the limits inherent in its reinsurance contracts, limiting recovery. Reinsurers may become financially unsound by the time that they are called upon to pay amounts due, which may not occur for many years, in which case Metromile may have no legal ability to recover what is due to it under its agreement with such reinsurer. In addition, any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success. Metromile’s inability to collect a material recovery from a reinsurer could have a material effect on its results of operations and financial condition.
Metromile is subject to extensive regulation and potential further restrictive regulation may increase its operating costs and limit its growth.
Metromile is subject to extensive laws by the individual state insurance departments in the states in which Metromile transacts business. These laws are complex and subject to change. Changes may sometimes lead to additional expenses, increased legal exposure, increased required reserves or capital and surplus, delays in implementing desired rate increases or business operations, and additional limits on its ability to grow or to achieve targeted profitability. Laws to which its licensed insurance carriers and producer subsidiaries are subject include, but are not limited to:
● | prior approval of transactions resulting in a change of control; |
● | approval of policy forms and premiums; |
● | approval of intercompany service agreements; |
● | statutory and risk-based capital solvency requirements, including the minimum capital and surplus our regulated insurance subsidiary must maintain pursuant to applicable laws and the CMA entered into as required by the Delaware Department of Insurance described above; |
● | establishing minimum reserves that insurance carriers must hold to pay projected insurance claims; |
● | required participation by Metromile’s regulated insurance subsidiary in state guaranty funds; |
● | restrictions on the type and concentration of Metromile’s regulated insurance subsidiary’s investments; |
● | restrictions on the advertising and marketing of insurance; |
● | restrictions on the adjustment and settlement of insurance claims; |
● | restrictions on the use of rebates to induce a policyholder to purchase insurance; |
● | restrictions on the sale, solicitation and negotiation of insurance; |
● | restrictions on the sharing of insurance commissions and payment of referral fees; |
● | prohibitions on the underwriting of insurance on the basis of race, sex, religion and other protected classes; |
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● | restrictions on Metromile’s ability to use telematics to underwrite and price insurance policies, such as in California, its largest market, and other states in which Metromile operates or may operate in the future; |
● | restrictions on the ability of Metromile’s regulated insurance subsidiary to pay dividends to Metromile or enter into certain related party transactions without prior regulatory approval; |
● | rules requiring the maintenance of statutory deposits for the benefit of policyholders; |
● | privacy regulation and data security; |
● | state-mandated premium rebates, refunds, or reductions as a result of potentially lower risk exposure due to the COVID-19 pandemic and related emergency orders; |
● | regulation of corporate governance and risk management; and |
● | periodic examinations of operations, finances, market conduct and claims practices; and required periodic financial reporting. |
To the extent Metromile decides to expand its current product offerings to include other insurance products, this would subject it to additional regulatory requirements and scrutiny in each state in which Metromile elects to offer such products. Most states have also adopted legislation prohibiting unfair methods of competition and unfair or deceptive acts and practices in the business of insurance as well as unfair claims practices. Prohibited practices include, but are not limited to, misrepresentations, false advertising, coercion, disparaging other insurers, unfair claims settlement procedures, and discrimination in the business of insurance. Noncompliance with any of such state statutes may subject us to regulatory action by the relevant state insurance regulator, and possibly private litigation. States also regulate various aspects of the contractual relationships between insurers and independent agents as well as, in certain states, insurers and third-party administrators.
Although state insurance regulators have primary responsibility for administering and enforcing insurance regulations in the United States, such laws and regulations are further administered and enforced by a number of additional governmental authorities, each of which exercises a degree of interpretive latitude, including state securities administrators; state attorneys general as well as federal agencies including the SEC, the Financial Industry Regulatory Authority, the Federal Reserve Board, the Federal Insurance Office, the U.S. Department of Labor, the U.S. Department of Justice and the National Labor Relations Board. Consequently, compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. Such regulations or enforcement actions are often responsive to current consumer and political sensitivities, which may arise after a major event. Such rules and regulations may result in rate suppression, limit Metromile’s ability to manage its exposure to unprofitable or volatile risks, or lead to fines, premium refunds or other adverse consequences. The federal government also may regulate aspects of its businesses, such as the protection of consumer confidential information or the use of consumer insurance (credit) scores to underwrite and assess the risk of customers under the Fair Credit Reporting Act (“FCRA”). Among other things, the FCRA requires that insurance companies (i) have a permissible purpose before obtaining and using a consumer report for underwriting purposes and (ii) comply with related notice and recordkeeping requirements. Failure to comply with federal requirements under the FCRA or any other applicable federal laws could subject us to regulatory fines and other sanctions. In addition, given its short operating history to-date and rapid rate of growth, Metromile is vulnerable to regulators identifying errors in the policy forms we use, the rates Metromile charges, with respect to its customer communications. As a result of such noncompliance, regulators could impose fines, rebates or other penalties, including cease-and-desist orders with respect to its operations in an individual state, or all states, until the identified noncompliance is rectified.
In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue or the scope of a regulator’s authority may change over time to Metromile’s detriment. There is also a risk that changes in the overall legal environment may cause it to change its views regarding the actions Metromile needs to take from a legal risk management perspective. This would necessitate changes to its practices that may adversely impact its business. Furthermore, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. State insurance laws and regulations are generally intended to protect the interests of purchasers or users of insurance products, rather than the holders of securities that Metromile issues. For example, state insurance laws are generally prescriptive with respect to the content and timeliness of notices Metromile must provide policyholders. Failure to comply with state insurance laws and regulations in the future could have a material adverse effect on its business, operating results and financial condition.
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Additionally, the federal government could pass a law expanding its authority to regulate the insurance industry, expanding federal regulation over Metromile’s business to its detriment. These laws and regulations may limit its ability to grow, to raise additional capital or to improve the profitability of its business.
Metromile’s ability to retain state licenses depends on its ability to meet licensing requirements established by the NAIC and adopted by each state, subject to variations across states. If Metromile is unable to satisfy the applicable licensing requirements of any particular state, Metromile could lose its license to do business in that state, which would result in the temporary or permanent cessation of its operations in that state. Alternatively, if Metromile is unable to satisfy applicable state licensing requirements, Metromile may be subject to additional regulatory oversight, have its license suspended, or be subject to the seizure of assets. Any such events could adversely affect our business, results of operations or financial condition.
A regulatory environment that requires rate increases to be approved and that can dictate underwriting practices and mandate participation in loss sharing arrangements may adversely affect Metromile’s results of operations and financial condition.
From time to time, political events and positions affect the insurance market, including efforts to suppress rates to a level that may not allow Metromile to reach targeted levels of profitability. For example, if its loss ratio compares favorably to that of the industry, state or provincial regulatory authorities may impose rate rollbacks, require it to pay premium refunds to policyholders, or challenge or otherwise delay its efforts to raise rates even if the property and casualty industry generally is not experiencing regulatory challenges to rate increases. Such challenges affect its ability to obtain approval for rate changes that may be required to achieve targeted levels of profitability and returns on equity. In particular due to the COVID-19 pandemic, state regulators and legislators are under increased political pressure to provide financial relief to policyholders through premium rebates or requiring insurers to pay claims arising from COVID-19 related losses, regardless of the applicable policy’s exclusions.
In addition, certain states have enacted laws that require an insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities and joint underwriting associations. Certain states also require insurers to offer coverage to all consumers, often restricting an insurer’s ability to charge the price it might otherwise charge. In these markets, Metromile may be compelled to underwrite significant amounts of business at lower-than-desired rates, possibly leading to an unacceptable return on equity. Laws and regulations of many states also limit an insurer’s ability to discontinue writing some or all of its business or to withdraw from one or more lines of insurance, except pursuant to a plan that is approved by the state insurance department. Additionally, as addressed above, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess losses against all insurance companies doing business in the state. Its results of operations and financial condition could be adversely affected by any of these factors.
State insurance regulators impose additional reporting requirements regarding enterprise risk on insurance holding company systems, with which Metromile must comply as an insurance holding company.
In the past decade, various state insurance regulators have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. In 2012, the NAIC adopted significant amendments to the Insurance Holding Company Act and related regulations (the “NAIC Amendments”). The NAIC Amendments are designed to respond to perceived gaps in the regulation of insurance holding company systems in the United States. One of the major changes is a requirement that an insurance holding company system’s ultimate controlling person submit annually to its lead state insurance regulator an “enterprise risk report” that identifies activities, circumstances or events involving one or more affiliates of an insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. As the ultimate controlling person in our insurance holding company system, Metromile is required to file an annual enterprise risk report in one or more states. Other changes include the requirement that a controlling person submit prior notice to its domiciliary insurance regulator of a divestiture of control, having detailed minimum requirements for cost sharing and management agreements between an insurer and its affiliates and expanding of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator, including states in which the insurer is commercially domiciled. The NAIC Amendments must be adopted by the individual state legislatures and insurance regulators in order to be effective, and many states have already done so.
In 2012, the NAIC also adopted the Risk Management and Own Risk and Solvency Assessment Model Act (the “ORSA Model Act”). The ORSA Model Act, as adopted by the various states, requires an insurance holding company system’s Chief Risk Officer to submit annually to its lead state insurance regulator an Own Risk and Solvency Assessment Summary Report (“ORSA”). The ORSA is a confidential internal assessment appropriate to the nature, scale and complexity of an insurer, conducted by that insurer of the material and relevant risks identified by the insurer associated with an insurer’s current business plan and the sufficiency of capital
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resources to support those risks. The ORSA Model Act must be adopted by the individual state legislature and insurance regulators in order to be effective. Metromile cannot predict the impact, if any, that any other regulatory requirements may have on its business, financial condition or results of operations.
There is also risk that insurance holding company systems may become subject to group capital requirements at the holding company level. The NAIC is currently working to develop a group capital calculation framework that regulators may use for informational purposes. As envisioned, the framework is intended to complement the current holding company analytics framework by providing additional information to the lead state regulator for use in assessing group risks and capital adequacy. The NAIC has not promulgated a model law or regulation on this subject.
The increasing adoption by states of cybersecurity regulations could impose additional compliance burdens on Metromile and expose it to additional liability.
In response to the growing threat of cyber-attacks in the insurance industry, certain jurisdictions have begun to consider new cybersecurity measures, including the adoption of cybersecurity regulations. On October 24, 2017, the NAIC adopted its Insurance Data Security Model Law, intended to serve as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. Alabama, Connecticut, Delaware, Indiana, Iowa, Louisiana, Maine, Michigan, Mississippi, New Hampshire, North Dakota, Ohio, South Carolina and Virginia have adopted versions of the Insurance Data Security Model Law, each with a different effective date, and other states may adopt versions of the Insurance Data Security Model Law in the future. The New York Department of Financial Services has promulgated its own Cybersecurity Requirements for Financial Services Companies that is not based upon the Insurance Data Security Model Law and requires insurance companies to establish and maintain a cybersecurity program and implement and maintain cybersecurity policies and procedures with specific requirements. In addition, some jurisdictions, such as California, Colorado, Massachusetts, Nevada, and Virginia have enacted more generalized data security laws that apply to certain data that Metromile processes. Although Metromile takes steps to comply with financial industry cybersecurity regulations and other data security laws and believe Metromile is materially compliant with their requirements, its failure to comply with new or existing cybersecurity regulations could result in material regulatory actions and other penalties. In addition, efforts to comply with new or existing cybersecurity regulations could impose significant costs on its business, which could materially and adversely affect its business, financial condition or results of operations.
Metromile relies on technology and intellectual property from third parties for pricing and underwriting its insurance policies, handling claims and maximizing automation, the unavailability or inaccuracy of which could limit the functionality of its products and disrupt its business.
Metromile uses technology and intellectual property licensed from unaffiliated third parties in certain of its products, and Metromile may license additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in harm to its brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or at all.
Further, although Metromile believes that there are currently adequate replacements for the third-party technology and intellectual property Metromile presently uses, the loss of its right to use any of this technology and intellectual property could result in delays in producing or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Its business would be disrupted if any technology and intellectual property Metromile licenses from others or functional equivalents of this software were either no longer available to it or no longer offered to it on commercially reasonable terms or prices. In either case, Metromile would be required either to attempt to redesign its products to function with technology and intellectual property available from other parties or to develop these components itself, which would result in increased costs and could result in delays in product sales and the release of new product offerings. Alternatively, Metromile might be forced to limit the features available in affected products. Any of these results could harm its business, results of operations and financial condition.
Metromile is subject to payment processing risk.
Metromile currently relies exclusively on one third-party vendor to provide payment processing services, including the processing of payments from credit cards and debit cards, and its business would be disrupted if this vendor refuses to provide these services to it and Metromile is unable to find a suitable replacement on a timely basis or at all. If Metromile or its processing vendor fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow its continued use of their payment products. In addition, if these systems fail to work properly and, as a result,
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Metromile does not charge our customers’ credit cards on a timely basis or at all, its business, revenue, results of operations and financial condition could be harmed.
The payment methods that Metromile offers also subject it to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If Metromile fails to comply with applicable rules or requirements for the payment methods Metromile accepts, or if payment-related data are compromised due to a breach of data, Metromile may be liable for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or its ability to accept or facilitate certain types of payments may be impaired. In addition, its customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to its payment systems that may result in higher costs. If Metromile fails to adequately control fraudulent credit card transactions, Metromile may face civil liability, diminished public perception of its security measures, and significantly higher credit card-related costs, each of which could harm its business, results of operations and financial condition.
Metromile’s success depends upon the insurance industry continuing to move online at its current pace and the continued growth and acceptance of online and mobile app-based products and services as effective alternatives to traditional offline products and services.
Metromile provides automobile insurance products through its website and its online and mobile apps that compete with traditional offline counterparts. Metromile does not offer insurance through traditional, offline brokers or agents. Metromile believes that the continued growth and acceptance of online products and services as well as those offered through mobile devices generally will depend, to a large extent, on the continued growth in commercial use of the internet and mobile apps, and the continued migration of traditional offline markets and industries online.
Purchasers of insurance may develop the perception that purchasing insurance products online or through a mobile app is not as effective as purchasing such products through a broker or other traditional offline methods, and the insurance market may not migrate online as quickly as (or at the levels that) Metromile expects. Moreover, if, for any reason, an unfavorable perception develops that telematics, mobile engagement, a technology-based platform and/or bots are less efficacious than traditional offline methods of purchasing insurance, underwriting, and claims processing, or if it is perceived that its processes lead to unfair outcomes, its business, results of operations and financial condition could be adversely affected.
Metromile’s actual incurred losses may be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on its financial condition and results of operations.
Metromile’s financial condition and results of operations depend on its ability to accurately price risk and assess potential losses and loss adjustment expenses under the terms of the policies we underwrite. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what the expected ultimate settlement and administration of claims will cost, and the ultimate liability may be greater than or less than the current estimate. In its industry, there is always the risk that reserves may prove inadequate since Metromile may underestimate the cost of claims and claims administration.
Metromile bases its estimates on its assessment of known facts and circumstances, as well as estimates of future trends in claim severity, claim frequency, judicial theories of liability, and other factors. These variables are affected by both internal and external events that could increase its exposure to losses, including changes in actuarial projections, claims handling procedures, inflation, severe weather, climate change, economic and judicial trends and legislative and regulatory changes. Metromile regularly monitors reserves using new information on reported claims and a variety of statistical techniques to update its current estimate. Its estimates could prove to be inadequate, and this underestimation could have a material adverse effect on its financial condition.
Recorded claim reserves, including case reserves and incurred but not reported (“IBNR”), claims reserves, are based on our estimates of losses after considering known facts and interpretations of the circumstances, including settlement agreements. Additionally, models that rely on the assumption that past loss development patterns will persist into the future are used. Internal factors are considered including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns, pending levels of unpaid claims, loss management programs, product mix, state mix, contractual terms, industry payment and reporting patterns, and changes in claim reporting and settlement practices. External factors are also considered, such as court decisions, changes in law and litigation imposing unintended coverage. Metromile also considers benefits, such as the availability of multiple limits for a single loss occurrence. Regulatory requirements and economic conditions are also considered.
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Because reserves are estimates of the unpaid portion of losses and expenses for events that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process that is regularly refined to reflect current estimation processes and practices. The ultimate cost of losses may vary materially from recorded reserves and such variance may adversely affect its results of operations and financial condition as the reserves and reinsurance recoverables are re-estimated.
If any of its insurance reserves should prove to be inadequate for the reasons discussed above, or for any other reason, Metromile will be required to increase reserves, resulting in a reduction in its net income and stockholders’ equity in the period in which the deficiency is identified. Future loss experience substantially in excess of established reserves could also have a material adverse effect on future earnings and liquidity and financial rating, which would affect its ability to attract new business or to retain existing customers.
Performance of Metromile’s investment portfolio is subject to a variety of investment risks that may adversely affect its financial results.
Metromile’s results of operations depend, in part, on the performance of its investment portfolio. Metromile seek to hold a diversified portfolio of investments in accordance with its investment policy, which is routinely reviewed by the Investment Committee of our Board of Directors (the “Board”). However, its investments are subject to general economic and market risks as well as risks inherent to particular securities.
Metromile’s primary market risk exposures are to changes in interest rates. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures about Market Risk.” In recent years, interest rates have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on its net investment income, particularly as it relates to fixed income securities and short-term investments, which, in turn, may adversely affect our operating results. Future increases in interest rates could cause the values of its fixed income securities portfolios to decline, with the magnitude of the decline depending on the maturity of the securities included in our portfolio and the amount by which interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.
The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities Metromile holds, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of such securities.
Such factors could reduce our net investment income and result in realized investment losses. Its investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities Metromile holds in its portfolio does not reflect prices at which actual transactions would occur.
Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include, but are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality, which Metromile believes are within applicable guidelines established by the NAIC as it relates to the portfolio of Metromile Insurance Company. The maximum percentage and types of securities Metromile may invest in are subject to insurance laws and regulations, which may change. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in certain circumstances, Metromile would be required to dispose of such investments.
Although Metromile seeks to preserve its capital, Metromile cannot be certain that its investment objectives will be achieved, and results may vary substantially over time. In addition, although Metromile seeks to employ investment strategies that are not correlated with its insurance and reinsurance exposures, losses in its investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on it.
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Unexpected changes in the interpretation of our coverage or provisions, including loss limitations and exclusions, in Metromile’s policies could have a material adverse effect on its financial condition and results of operations.
There can be no assurances that specifically negotiated loss limitations or exclusions in its policies will be enforceable in the manner Metromile intends, or at all. As industry practices and legal, judicial, social, and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. For example, many of its policies limit the period during which a customer may bring a claim, which may be shorter than the statutory period under which such claims can be brought against our customers. While these limitations and exclusions help it assess and mitigate its loss exposure, it is possible that a court or regulatory authority could nullify or void a limitation or exclusion, or legislation could be enacted modifying or barring the use of such limitations or exclusions. These types of governmental actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on its financial condition or results of operations. In addition, court decisions, such as the 1995 Montrose decision in California, could read policy exclusions narrowly so as to expand coverage, thereby requiring insurers to create and write new exclusions. Under the insurance laws, the insurer typically has the burden of proving an exclusion applies and any ambiguities in the terms of a loss limitation or exclusion provision are typically construed against the insurer. These issues may adversely affect its business by either broadening coverage beyond its underwriting intent or by increasing the frequency or severity of claims. In some instances, these changes may not become apparent until sometime after Metromile has issued insurance contracts that are affected by the changes. As a result, the full extent of liability under its insurance contracts may not be known for many years after a contract is issued.
Concentration of ownership among Metromile’s existing executive officers, directors and their respective affiliates may prevent new investors from influencing significant corporate decisions.
At the closing of the Merger, Metromile’s affiliates, executive officers, directors and their respective affiliates as a group beneficially owned approximately 15% of Metromile’s outstanding Common Stock. As a result, these stockholders are able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of its Certificate of Incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of it or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.
Metromile does not expect to declare any dividends in the foreseeable future.
Metromile does not anticipate declaring any cash dividends to holders of Common Stock in the foreseeable future. Consequently, investors may need to rely on sales of their shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Provisions in Metromile’s charter and Delaware law may inhibit a takeover of Metromile, which could limit the price investors might be willing to pay in the future for its Common Stock and could entrench management.
Metromile’s Certificate of Incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of the Board to designate the terms of and issue new series of preferred shares, which may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of Metromile. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.
A market for Metromile’s securities may not continue, which would adversely affect the liquidity and price of its securities.
The price of Metromile’s securities may fluctuate significantly due to general market and economic conditions. An active trading market for our securities may not be sustained.
Metromile will incur significant costs and obligations as a result of being a public company.
Metromile has only recently become a publicly traded company. As a publicly traded company, Metromile has and will incur significant legal, accounting and other expenses that Metromile was not required to incur in the past. These expenses will increase once Metromile was no longer an “emerging growth company” as defined under the Jumpstart Its Business Startups Act of 2012 (the
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“JOBS Act”). In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure for public companies, including Dodd Frank, the Sarbanes-Oxley Act, regulations related thereto and the rules and regulations of the SEC and Nasdaq, have increased the costs and the time that must be devoted to compliance matters. Metromile expects these rules and regulations will increase our legal and financial costs and lead to a diversion of management time and attention from revenue-generating activities.
For as long as we remain an “emerging growth company” as defined in the JOBS Act, Metromile may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” Metromile may remain an “emerging growth company” until December 31, 2025 or such earlier time that Metromile has more than $1.07 billion in annual revenues, have more than $700.0 million in market value of its Common Stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. To the extent Metromile chooses not to use exemptions from various reporting requirements under the JOBS Act, or if Metromile no longer can be classified as an “emerging growth company,” Metromile expects that it will incur additional compliance costs, which will reduce its ability to operate profitably.
As an “emerging growth company,” Metromile cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make its Common Stock less attractive to investors.
As an “emerging growth company,” Metromile may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to obtain an assessment of the effectiveness of its internal controls over financial reporting from its independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, which Metromile has elected to do.
Metromile cannot predict if investors will find its Common Stock less attractive because Metromile will rely on these exemptions. If some investors find its Common Stock less attractive as a result, there may be a less active market for its Common Stock, its share price may be more volatile and the price at which its securities trade could be less than if it did not use these exemptions.
If Metromile does not develop and implement all required accounting practices and policies, Metromile may be unable to provide the financial information required of a U.S. publicly traded company in a timely and reliable manner.
As Legacy Metromile was a privately held company, it was not required to adopt all of the financial reporting and disclosure procedures and controls required of a U.S. publicly traded company. Metromile expects that the implementation of all required accounting practices and policies and the hiring of additional financial staff will increase its operating costs and require its management to devote significant time and resources to such implementation. If Metromile fails to develop and maintain effective internal controls and procedures and disclosure procedures and controls, Metromile may be unable to provide financial information and required SEC reports that are timely and reliable. Any such delays or deficiencies could harm it, including by limiting its ability to obtain financing, either in the public capital markets or from private sources and damaging its reputation, which in either cause could impede its ability to implement our growth strategy. In addition, any such delays or deficiencies could result in its failure to meet the requirements for continued listing of its Common Stock on Nasdaq.
Metromile may issue additional shares of Common Stock or other equity securities without your approval, which would dilute your ownership interest in us and may depress the market price of its common stock.
Metromile may issue additional shares of Common Stock or other equity securities in the future in connection with, among other things, future acquisitions, repayment of outstanding indebtedness or grants under its 2021 Equity Incentive Plan (the “2021 Plan”) without stockholder approval in a number of circumstances.
Metromile’s issuance of additional Common Stock or other equity securities could have one or more of the following effects:
● | its existing stockholders’ proportionate ownership interest in it will decrease; |
● | the amount of cash available per share, including for payment of dividends in the future, may decrease; |
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● | the relative voting strength of each previously outstanding share of Common Stock may be diminished; and |
● | the market price of its Common Stock may decline. |
If Metromile’s performance does not meet market expectations, the price of its securities may decline.*
If Metromile’s performance does not meet market expectations, the price of its Common Stock may decline from the price of its Common Stock prior to the Closing. The trading price of its Common Stock could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond its control. Any of the factors listed below could have a material adverse effect on your investment in our Common Stock and its Common Stock may trade at prices significantly below the price you paid for them.
Factors affecting the trading price of its Common Stock may include:
● | actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to it; |
● | changes in the market’s expectations about its operating results; |
● | its operating results failing to meet market expectations in a particular period; |
● | changes in financial estimates and recommendations by securities analysts concerning it or the insurance industry and market in general; |
● | operating and stock price performance of other companies that investors deem comparable to it; |
● | changes in laws and regulations affecting its business; |
● | changes in the interpretation or enforcement of statutes and regulations affecting its business; |
● | commencement of, or involvement in, litigation involving it; |
● | changes in its capital structure, such as future issuances of securities or the incurrence of additional debt; |
● | the volume of shares of its Common Stock available for public sale; |
● | any significant change in its board or management; |
● | sales of substantial amounts of Common Stock by its directors, executive officers or significant stockholders or the anticipation of sales or lock-up expirations; and |
● | general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism. |
Broad market and industry factors may depress the market price of Metromile’s Common Stock irrespective of its operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of its securities, may not be predictable. A loss of investor confidence in the market for companies in the insurance industry or the stocks of other companies which investors perceive to be similar to it could depress its stock price regardless of its business, prospects, financial conditions or results of operations. A decline in the market price of its Common Stock also could adversely affect its ability to issue additional securities and its ability to obtain additional financing in the future.
There is no guarantee that the Public Warrants may ever be in the money, and they may expire worthless.
The exercise price for Metromile’s Warrants is $11.50 per share. There can be no assurance that the Public Warrants will be in the money prior to their expiration and, as such, they may expire worthless.
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The terms of its Warrants may be amended in a manner that may be adverse to the holders. The Warrant Agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us provides that the terms of the Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding Public Warrants to make any change that adversely affects the interests of the registered holders. Accordingly, Metromile may amend the terms of the Warrants in a manner adverse to a holder if holders of at least 65% of the then outstanding Public Warrants approve of such amendment. Metromile’s ability to amend the terms of the Warrants with the consent of at least 65% of the then outstanding Public Warrants is unlimited. Examples of such amendments could be amendments to, among other things, increase the exercise price of the Warrants, shorten the exercise period or decrease the number of shares of its Common Stock purchasable upon exercise of a Warrant.
Metromile may redeem your unexpired Warrants prior to their exercise at a time that is disadvantageous to you, thereby making your Warrants worthless.
Metromile has the ability to redeem outstanding Warrants (excluding any Placement Warrants held by the Sponsor, Cantor Fitzgerald & Co (“Cantor”) or their permitted transferees) at any time after they become exercisable and prior to their expiration, at $0.01 per Warrant, provided that the last reported sales price (or the closing bid price of its Common Stock in the event the shares of its Common Stock are not traded on any specific trading day) of the Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations and the like) on each of 20 trading days within the 30 trading-day period ending on the third business day prior to the date on which Metromile sends proper notice of such redemption, provided that on the date Metromile gives notice of redemption and during the entire period thereafter until the time Metromile redeems the Warrants, Metromile has an effective registration statement under the Securities Act covering the shares of Common Stock issuable upon exercise of the Warrants and a current prospectus relating to them is available. If and when the Warrants become redeemable by it, Metromile may exercise its redemption right even if Metromile is unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Warrants could force a Warrant holder: (i) to exercise its Warrants and pay the exercise price therefore at a time when it may be disadvantageous for it to do so, (ii) to sell its Warrants at the then-current market price when it might otherwise wish to hold its Warrants or (iii) to accept the nominal redemption price which, at the time the outstanding Warrants are called for redemption, will be substantially less than the market value of its Warrants.
Metromile may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002 or which could have a material adverse effect on its business.
Commencing with Metromile’s annual report for the year ending December 31, 2021, Metromile is required to provide management’s attestation on internal controls. The standards required for a public company under Section 404 of the Sarbanes-Oxley Act are significantly more stringent than those required of Legacy Metromile as a privately-held company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable to it. If Metromile is not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, Metromile may not be able to assess whether its internal controls over financial reporting are effective, which may subject it to adverse regulatory consequences and could harm investor confidence and lead to a decrease in the market price of its Common Stock.
Pursuant to the JOBS Act, Metromile’s independent registered public accounting firm was not required to attest to the effectiveness of its internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act due to Metromile being an “emerging growth company.”
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of its internal control over financial reporting, and generally requires in the same report a report by its independent registered public accounting firm on the effectiveness of its internal control over financial reporting. However, under the JOBS Act, its independent registered public accounting firm was not required to attest to the effectiveness of its internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act due to Metromile being an “emerging growth company.” Metromile will be an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following September 8, 2025, the fifth anniversary of INSU’s IPO, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which Metromile is deemed to be a large accelerated filer, which means the market value of its Common Stock that is held by non-affiliates exceeds $700.0 million as of the last business day of its prior second fiscal quarter, and (2) the date on which Metromile has issued more than $1.0 billion in non-convertible debt during the prior three-year period. Accordingly, for the years ended December 31, 2020 and 2019, stockholders do not have the benefit of an independent assessment of the effectiveness of its internal control environment. Metromile expects to lose their emerging growth company status as of December 31, 2021.
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Metromile has identified a material weakness in its internal control over financial reporting which, if not remediated, could result in material misstatements in its financial statements.
Metromile amended and restated certain items in its Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 31, 2021 (the “Amended Annual Report”), including INSU’s consolidated financial statements and related disclosures as of and for the year ended December 31, 2020 (the “Restatement”). In connection with the Restatement, management re-evaluated the Company’s disclosure controls and procedures as of December 31, 2020 and identified a material weakness in internal control over financial reporting relating to the accounting treatment for certain complex financial instruments. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of its annual or interim financial statements will not be prevented or detected on a timely basis.
Metromile is taking steps to remediate the identified material weakness by, among other things, devoting significant effort and resources to the remediation and improvement of its internal control over financial reporting as it relates to the accounting treatment for complex financial instruments. However, Metromile cannot be certain that such measures will remediate the identified material weakness or that we will not identify additional material weaknesses in its internal control over financial reporting in the future.
If Metromile is unable to remediate the identified material weakness, its ability to record, process and report financial information and required SEC reports in an accurate and timely manner could be adversely affected. Any such failure could negatively affect the market price of its Common Stock, cause investors to lose confidence in its reported financial information, subject us to litigation or investigation by the SEC or other regulatory authorities and generally materially adversely impact its business and results of operations.
Metromile’s ability to meet expectations and projections in any research or reports published by securities or industry analysts, or a lack of coverage by securities or industry analysts, could result in a depressed market price and limited liquidity for its Common Stock.
The trading market for Metromile’s Common Stock is influenced by the research and reports that industry or securities analysts may publish about it, its business, its market, or its competitors. If no securities or industry analysts commence coverage of it, its stock price would likely be less than that which would obtain if Metromile had such coverage and the liquidity, or trading volume of its Common Stock may be limited, making it more difficult for a stockholder to sell shares at an acceptable price or amount. If any analysts do cover Metromile, their projections may vary widely and may not accurately predict the results Metromile actually achieves. Its share price may decline if its actual results do not match the projections of research analysts covering it. Similarly, if one or more of the analysts who write reports on it downgrades its stock or publishes inaccurate or unfavorable research about its business, its share price could decline. If one or more of these analysts ceases coverage of it or fails to publish reports on it regularly, its share price or trading volume could decline.
Metromile may be subject to securities litigation, which is expensive and could divert management attention.
Its share price may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Metromile may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on business, financial condition, results of operations and prospects. Any adverse determination in litigation could also subject it to significant liabilities.
Metromile’s Certificate of Incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between it and its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with it or its directors, officers or employees.
Metromile’s Certificate of Incorporation provides that the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for the following claims or causes of action under Delaware statutory or common law: (a) any derivative claim or cause of action brought on its behalf; (b) any claim or cause of action for breach of a fiduciary duty owed by any of its current or former directors, officers or other employees to it or its stockholders; (c) any claim or cause of action against it or any of its current or former directors, officers or other employees, arising out of or pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), its certificate of incorporation or its Bylaws; (d) any claim or cause of action seeking to interpret, apply, enforce or
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determine the validity of its certificate of incorporation or its Bylaws; (e) any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware; and (f) any claim or cause of action against it or any of its current or former directors, officers or other employees that is governed by the internal-affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants. This provision would not apply to claims or causes of action brought to enforce a duty or liability created by the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction, or the Securities Act.
Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, its Certificate of Incorporation provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, Metromile would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of its Certificate of Incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provision will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with Metromile or its directors, officers, or other employees, which may discourage lawsuits against it and its directors, officers and other employees. If a court were to find either exclusive-forum provision in its Certificate of Incorporation to be inapplicable or unenforceable in an action, Metromile may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm its business.
Changes in law or regulations, or a failure to comply with any laws and regulations, may adversely affect Metromile’s business, investments and results of operations.
Metromile is subject to laws and regulations enacted by national, regional and local governments, including in particular, reporting and other requirements under the Exchange Act. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on its business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could result in fines, injunctive relief or similar remedies which could be costly to it or limit its ability to operate.
Metromile has incurred significant transaction and transition costs in connection with the INSU SPAC transaction.
Metromile has incurred and expect to incur significant, non-recurring costs in connection with consummating the INSU SPAC transaction and operating as a public company following the consummation of the INSU SPAC transaction. Metromile may also incur additional costs to retain key employees. Certain expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby (including the INSU SPAC transaction) have been or will be paid by it. Metromile’s transaction expenses as a result of the INSU SPAC transaction are currently estimated at approximately $38.0 million. The amount of the deferred underwriting commissions was not adjusted for any shares that were redeemed in connection with the INSU SPAC transaction.
Metromile may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and its stock price, which could cause you to lose some or all of your investment.
Although INSU conducted due diligence on Metromile in connection with the INSU SPAC transaction, this diligence may not have surfaced all material issues present in Metromile’s business. Moreover, factors outside of Metromile’s business and outside of its control may later arise. As a result of these factors, Metromile may be forced to write down or write off assets, restructure operations, or incur impairment or other charges that could result in losses. Further, unexpected risks may arise and previously known risks may materialize in a manner not consistent with its risk analysis. Even though these charges may be non-cash items and not have an immediate impact on its liquidity, the fact that Metromile reports charges of this nature could contribute to negative market perceptions about it or its securities. Accordingly, its securities could suffer a reduction in value. Metromile’s security holders are unlikely to have a remedy for such reduction in value, unless stockholders are able to successfully claim that the reduction in stock value was due to the breach by its officers or directors of a duty of care or other fiduciary duty owed to them, or if they are able to
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bring a private claim that the proxy statement relating to the INSU SPAC transaction contained an actionable material misstatement or material omission.
If the INSU SPAC transaction’s benefits do not meet the expectations of investors or financial analysts, the market price of Metromile’s securities may decline.
If the benefits of the INSU SPAC transaction do not meet the expectations of investors or securities analysts, the market price of Metromile’s securities may decline. Fluctuations in the price of its securities could contribute to the loss of all or part of your investment. Immediately prior to the INSU SPAC transaction, there was no public market for Metromile’s stock and trading in the shares of its securities was not active. If an active market for its securities develops and continues, the trading price of its securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond its control. Any of the factors listed below could have a material adverse effect on your investment in its securities and its securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of its securities may not recover and may experience a further decline.
Factors affecting the trading price of Metromile’s securities may include:
● | actual or anticipated fluctuations in its quarterly financial results or the quarterly financial results of companies perceived to be similar to it; |
● | changes in the market’s expectations about its operating results; |
● | the public’s reaction to its press releases, its other public announcements and its filings with the SEC; |
● | speculation in the press or investment community; |
● | success of competitors; |
● | its operating results failing to meet the expectation of securities analysts or investors in a particular period; |
● | changes in financial estimates and recommendations by securities analysts concerning it or the market in general; |
● | operating and stock price performance of other companies that investors deem comparable to it; |
● | its ability to market new and enhanced services on a timely basis; |
● | changes in laws and regulations affecting its business; |
● | commencement of, or involvement in, litigation involving it following the INSU SPAC transaction; |
● | changes in its capital structure following the INSU SPAC transaction, such as future issuances of securities or the incurrence of additional debt; |
● | the volume of securities available for public sale; |
● | any major change in the Board or management; |
● | sales of substantial amounts of securities by its directors, officers or significant stockholders or the perception that such sales could occur; |
● | the realization of any of the other risks described herein; |
● | additions or departures of key personnel; |
● | failure to comply with the requirements of Nasdaq; |
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● | failure to comply with the Sarbanes-Oxley Act of 2002 or other laws or regulations; |
● | actual, potential or perceived control, accounting or reporting problems; |
● | changes in accounting principles, policies and guidelines; and |
● | general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism. |
Broad market and industry factors may materially harm the market price of Metromile’s securities irrespective of its operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of its securities, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be similar to the post-combination company could depress its stock price regardless of its business, prospects, financial conditions or results of operations. A decline in the market price of its securities also could adversely affect its ability to issue additional securities and its ability to obtain additional financing in the future.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert Metromile’s management’s attention and resources, and could also require it to make substantial payments to satisfy judgments or to settle litigation.
Future acquisitions or investments could disrupt Metromile’s business and harm its financial condition.
In the future Metromile may pursue acquisitions or investments that Metromile believe will help it achieve its strategic objectives. There is no assurance that such acquisitions or investments will perform as expected or will be successfully integrated into its business or generate substantial revenue, and Metromile may overestimate cash flow, underestimate costs or fail to understand the risks of or related to any investment or acquired business. The process of acquiring a business, product or technology can also cause it to incur various expenses and create unforeseen operating difficulties, expenditures and other challenges, whether or not those acquisitions are consummated, such as:
● | intense competition for suitable acquisition targets, which could increase prices and adversely affect its ability to consummate deals on favorable or acceptable terms; |
● | inadequacy of reserves for losses and loss adjustment expenses; |
● | failure or material delay in closing a transaction, including as a result of regulatory review and approvals; |
● | regulatory conditions attached to the approval of the acquisition and other regulatory hurdles; |
● | a need for additional capital that was not anticipated at the time of the acquisition; |
● | anticipated benefits not materializing or being lower than anticipated; |
● | diversion of management time and focus from operating its business to addressing acquisition integration challenges; |
● | transition of the acquired company’s customers; |
● | difficulties in integrating the technologies, operations, existing contracts and personnel of an acquired company; |
● | retention of employees or business partners of an acquired company; |
● | cultural challenges associated with integrating employees from the acquired company into its organization; |
● | integration of the acquired company’s accounting, management information, human resources and other administrative systems; |
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● | the need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies; |
● | coordination of product development and sales and marketing functions; |
● | theft of its trade secrets or confidential information that Metromile shares with potential acquisition candidates; |
● | risk that an acquired company or investment in new offerings cannibalizes a portion of its existing business; |
● | adverse market reaction to an acquisition; |
● | liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and |
● | litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders or other third parties. |
If Metromile is unable to address these difficulties and challenges or other problems encountered in connection with any future acquisition or investment, Metromile might not realize the anticipated benefits of that acquisition or investment and Metromile might incur unanticipated liabilities or otherwise suffer harm to its business generally.
To the extent that Metromile pay the consideration for any future acquisitions or investments in cash, it would reduce the amount of cash available to it for other purposes. Future acquisitions or investments could also result in dilutive issuances of its equity securities or the incurrence of debt, contingent liabilities, amortization expenses, increased interest expenses or impairment charges against goodwill on its consolidated balance sheet, any of which could seriously harm its business.
Metromile expects a number of factors to cause its results of operations to fluctuate on a quarterly and annual basis, which may make it difficult to predict its future performance.
Metromile’s revenue and results of operations could vary significantly from quarter to quarter and year to year, and may fail to match periodic expectations as a result of a variety of factors, many of which are outside of its control. Its results may vary from period to period as a result of fluctuations in the number of customers purchasing its insurance products and renewing their agreements with it as well as fluctuations in the timing and amount of its expenses. In addition, the insurance industry is subject to its own cyclical trends and uncertainties, including extreme weather which is often seasonal and may result in volatility in claims reporting and payment patterns. Fluctuations and variability across the industry may also affect its revenue. As a result, comparing Metromile’s results of operations on a period-to-period basis may not be meaningful, and the results of any one period should not be relied on as an indication of future performance. Its results of operations may not meet the expectations of investors or public market analysts who follow it, which may adversely affect its stock price. In addition to other risks described in these Risk Factors, and elsewhere in this proxy statement/prospectus, factors that may contribute to the variability of its quarterly and annual results include:
● | its ability to attract new customers and retain existing customers, including in a cost-effective manner; |
● | its ability to accurately forecast revenue and losses and appropriately plan its expenses; |
● | its ability to develop and offer new products, including in a cost-effective manner; |
● | the effects of changes in search engine placement and prominence; |
● | the effects of increased competition on its business; |
● | its ability to successfully maintain its position in and expand in existing markets as well as successfully enter new markets; |
● | its ability to protect its existing intellectual property and to create new intellectual property; |
● | its ability to maintain an adequate rate of growth and effectively manage that growth; |
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● | its ability to keep pace with technology changes in the insurance, mobile and automobile industries; |
● | the success of its sales and marketing efforts; |
● | costs associated with defending claims, including accident and coverage claims, intellectual property infringement claims, misclassifications and related judgments or settlements; |
● | the impact of, and changes in, governmental or other regulation affecting its business; |
● | the attraction and retention of qualified employees and key personnel; |
● | its ability to choose and effectively manage third-party service providers; |
● | its ability to identify and engage in joint ventures and strategic partnerships, both domestically and internationally; |
● | the effects of natural or man-made catastrophic events; |
● | the effectiveness of its internal controls; and |
● | changes in its tax rates or exposure to additional tax liabilities. |
New or changing technologies, including those impacting personal transportation, could cause a disruption in Metromile’s business model, which may materially impact its results of operations and financial condition.
If Metromile fails to anticipate the impact on its business of changing technology, including automotive technology, its ability to successfully operate may be materially impaired. Metromile’s business could also be affected by potential technological changes, such as autonomous or partially autonomous vehicles or technologies that facilitate ride, car or home sharing, or vehicles with built-in telematics features. Such changes could disrupt the demand for products from current customers, create coverage issues or impact the frequency or severity of losses, or reduce the size of the automobile insurance market, causing our business to decline. Since auto insurance constitutes substantially all of its current business, Metromile is more sensitive than other insurers and more adversely affected by trends that could decrease auto insurance rates or reduce demand for auto insurance over time. Metromile may not be able to respond effectively to these changes, which could have a material effect on its results of operations and financial condition.
A significant portion of Metromile’s total outstanding shares of its Common Stock are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of its common stock to drop significantly, even if its business is doing well.
Sales of a substantial number of shares of Metromile’s Common Stock in the public market could occur at any time. Metromile has filed a registration statement to register for resale the shares issued in the private placement that closed concurrent with the INSU SPAC transaction, and certain other holders pursuant to a registration rights agreement. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of its Common Stock. Metromile is unable to predict the effect that sales may have on the prevailing market price of its Common Stock and Public Warrants.
To the extent its warrants are exercised, additional shares of its Common Stock will be issued, which will result in dilution to the holders of its Common Stock and increase the number of shares eligible for resale in the public market. Sales, or the potential sales, of substantial numbers of shares in the public market by certain selling securityholders, subject to certain restrictions on transfer until the termination of applicable lock-up periods, could increase the volatility of the market price of its Common Stock or adversely affect the market price of its Common Stock.
The announcement and pendency of the mergers may result in disruptions to Metromile’s business.
The merger agreement generally requires Metromile to operate its business in the ordinary course pending completion of the mergers and restricts it from taking certain specified actions without Lemonade’s consent until the mergers are completed or the merger agreement is terminated. These restrictions may affect its ability to execute its business strategies and attain financial and other goals and may impact its financial condition, results of operations and cash flows.
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Further, in connection with the mergers, Metromile’s current and prospective employees may experience uncertainty about their future roles with it following the consummation of the mergers, which may materially adversely affect its ability to attract, motivate and retain key personnel.
The pendency of the mergers could also result in disruptions to its business relationships with customers, suppliers and other business partners, which could have an adverse impact on its revenues, cash flows and results of operations. Parties with which Metromile has business relationships may choose to delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with it while the mergers are pending. Parties with whom Metromile otherwise may have sought to establish business relationships may seek alternative relationships with other parties.
The pursuit of the mergers may place a significant burden on its management and internal resources, and will divert management’s time and attention from its day-to-day operations and the execution of its other strategic initiatives. This could adversely affect its financial results. In addition, Metromile has incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the mergers, and many of these fees and costs are payable regardless of whether or not the mergers are consummated.
Any of the foregoing could adversely affect its business, its financial condition, and its results of operations.
The mergers may not be completed within the intended timeframe, or at all, and the failure to complete the mergers could adversely affect Metromile’s, results of operations, financial condition, and the market price of its common stock.
There can be no assurance that the mergers will be completed in the intended timeframe, or at all. The merger agreement contains a number of conditions that must be satisfied or waived prior to the completion of the mergers, including, among others, adoption of the merger agreement by the affirmative vote of the holders of and consents a majority of the outstanding shares of Metromile’s common stock, and applicable regulatory approvals. There can be no assurance that all required approvals will be obtained or that all closing conditions will otherwise be satisfied. Even if all required approvals are obtained and all closing conditions are satisfied, Metromile can provide no assurance as to the terms, conditions, and timing of such approvals or that the mergers will be completed in a timely manner or at all. Many of the conditions to completion of the mergers are outside of its control, and Metromile cannot predict when or if these conditions will be satisfied. Even if regulatory approval is obtained, it is possible that conditions will be imposed that could result in a material delay in, or the abandonment of, the mergers or otherwise have an adverse effect on it.
If the mergers are not completed within the intended timeframe or at all, Metromile may be subject to several material risks. The price of its common stock may decline to the extent that current market prices reflect a market assumption that the business combination will be completed. In addition, some costs related to the mergers must be paid whether or not the mergers are completed, and Metromile has incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the mergers. In addition, the mergers have resulted in the diversion of management’s attention and other resources, for which Metromile will have received little or no benefit if the mergers are not completed. Metromile may also experience negative reactions from its investors, customers, partners, suppliers, and employees related to the mergers.
Other Risk Factors
Lemonade’s and Metromile’s businesses are and will be subject to the risks described above. In addition, Lemonade is, and will continue to be, subject to the risks described in Lemonade’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as such risks have been updated or supplemented in Lemonade’s subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (excluding any information and exhibits furnished under Item 2.02 or 7.01 thereof), which are filed with the SEC and incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information.”
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THE PARTIES TO THE MERGERS
Lemonade, Inc.
5 Crosby Street, 3rd Floor
New York, New York
(844) 733-8666
Lemonade is rebuilding insurance from the ground up on a digital substrate and an innovative business model. By leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics, Lemonade believes it is making insurance more delightful, more affordable, more precise, and more socially impactful. To that end, Lemonade has built a vertically-integrated company with wholly-owned insurance carriers in the United States and Europe, and the full technology stack to power them.
A two minute chat with its bot, AI Maya, is all it takes to get covered with renters or homeowners insurance, pet or life insurance, and it expects to offer a similar experience for other insurance products over time. Claims are filed by chatting to another bot, AI Jim, who pays claims in as little as three seconds. This breezy experience belies the extraordinary technology that enables it: a state-of-the-art platform that spans marketing to underwriting, customer care to claims processing, finance to regulation. Its architecture melds artificial intelligence with the human kind, and learns from the prodigious data it generates to become ever better at delighting customers and quantifying risk.
In addition to digitizing insurance end-to-end, Lemonade has also reimagined the underlying business model to minimize volatility while maximizing trust and social impact. In a departure from the traditional insurance model, where profits can literally depend on the weather, Lemonade typically retains a fixed fee, currently 25% of premiums, and its gross margins are expected to change little in good years and in bad. At Lemonade, excess claims are generally offloaded to reinsurers, while excess premiums are usually donated to nonprofits selected by customers as part of its annual “Giveback”. These two ballasts, reinsurance and Giveback, reduce volatility, while creating an aligned, trustful, and values-rich relationship with customers.
Lemonade’s cocktail of delightful experience, aligned values, and great prices enjoys broad appeal, while over indexing on younger and first time buyers of insurance. As these customers progress through predictable lifecycle events, their insurance needs normally grow to encompass more and higher-value products: renters regularly acquire more property and frequently upgrade to successively larger homes; home buying often coincides with a growing household and a corresponding need for life or pet insurance, and so forth. These progressions can trigger orders-of-magnitude increases in insurance premiums.
The result is a business with highly-recurring and naturally-growing revenue streams; a level of automation that Lemonade believes delights consumers while collapsing costs; and an architecture that generates and employs data to price and underwrite risk with ever-greater precision to the benefit of its company, its customers and their chosen nonprofits.
Lemonade is headquartered in New York, New York. Lemonade’s principal executive offices are located at 5 Crosby Street, 3rd Floor, New York, New York 10013, and its telephone number is (844) 733-8666.
Lemonade is a Delaware corporation and the Lemonade common stock is listed on the NYSE under the ticker symbol “LMND.”
For more information about Lemonade, visit Lemonade’s website at www.Lemonade.com. The information contained on or accessible through Lemonade’s website (other than the documents incorporated by reference herein) does not constitute a part of this proxy statement/prospectus or any other report or document on file with or furnished to the SEC. Additional information about Lemonade is included in the documents incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information.”
Metromile, Inc.
425 Market Street, Suite 700
San Francisco, California 94105
(888) 242-5204
Metromile is a leading digital insurance platform in the United States. With data science at its foundation, Metromile offers real-time, personalized auto insurance policies by the mile instead of the industry’s reliance on approximations that have historically made
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prices unfair. Metromile’s digitally native offering is built around the modern driver’s needs, featuring automated claims, complimentary smart driving features and annual average savings of 47% over what they were paying their previous auto insurer. In addition, through Metromile Enterprise, Metromile licenses its technology platform to insurance companies around the world. Metromile’s cloud-based software as a service enables carriers to operate with greater efficiency, automate claims to expedite resolution, reduce losses associated with fraud, and unlock the productivity of employees. Metromile’s principal executive offices are located at 425 Market Street, Suite 700, San Francisco, California 94105, and its telephone number is (888) 242-5204.
Metromile is a Delaware corporation and Metromile common stock is listed on the Nasdaq Capital Market under the ticker symbol “MILE” and Metromile warrants are listed on the Nasdaq Capital Market under the ticker symbol “MILEW.”
For more information about Metromile, visit Metromile’s website at www.metromile.com. The information contained on or accessible through Metromile’s website (other than the documents incorporated by reference herein) does not constitute a part of this proxy statement/prospectus or any other report or document on file with or furnished to the United States Securities and Exchange Commission (the “SEC”). Additional information about Metromile is included in the documents incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information.”
Citrus Merger Sub A, Inc.
5 Crosby Street, 3rd Floor
New York, New York
(844) 733-8666
Citrus Merger Sub A, Inc. was formed by Lemonade solely in contemplation of the first merger, has not conducted any business and does not have any assets, liabilities or obligations of any nature other than as set forth in the merger agreement. Upon the terms and subject to the conditions set forth in the merger agreement, Citrus Merger Sub A, Inc. will merge with and into Metromile, with Metromile continuing as the Initial Surviving Corporation. The principal executive offices of Citrus Merger Sub A, Inc. are located at 5 Crosby Street, 3rd Floor, New York, New York 10013, and its telephone number is (844) 733-8666.
Citrus Merger Sub B, LLC
5 Crosby Street, 3rd Floor
New York, New York
(844) 733-8666
Citrus Merger Sub B, LLC was formed by Lemonade solely in contemplation of the second merger, has not conducted any business and does not have any assets, liabilities or obligations of any nature other than as set forth in the merger agreement. Upon the terms and subject to the conditions set forth in the merger agreement, following the merger of Citrus Merger Sub A, Inc. with and into Metromile, with Metromile continuing as the Initial Surviving Corporation as described under “—Citrus Merger Sub A, Inc.” above, the Initial Surviving Corporation will merge with and into Citrus Merger Sub B, LLC, with Citrus Merger Sub B, LLC continuing as the surviving entity and as a wholly owned subsidiary of Lemonade. The principal executive offices of Citrus Merger Sub B, LLC are located at 5 Crosby Street, 3rd Floor, New York, New York 10013, and its telephone number is (844) 733-8666.
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THE METROMILE SPECIAL MEETING
General
This proxy statement/prospectus is first being mailed on or about , and constitutes notice of the Metromile special meeting in conformity with the requirements of the DGCL and the Metromile bylaws.
This proxy statement/prospectus is being provided to Metromile stockholders in connection with the solicitation of proxies by the Metromile board of directors for use at the Metromile special meeting and at any adjournment thereof. Metromile stockholders are encouraged to read this entire document carefully, including its annexes, for more detailed information regarding the merger agreement, the mergers and the other transactions contemplated thereby.
Date, Time and Place
The Metromile special meeting is scheduled to be held virtually via live webcast on , beginning at , Pacific Time, unless adjourned or postponed to a later date.
In light of the continuing public health concern resulting from the COVID-19 pandemic, the Metromile special meeting will be held as a completely “virtual meeting.” You will be able to attend the Metromile special meeting, and vote via a live webcast by visiting www.virtualshareholdermeeting.com/MILE2022SM. We encourage you to allow ample time for online check-in, which will open at , Pacific Time.
Matters to Be Considered at the Metromile Special Meeting
The purpose of the Metromile special meeting is to consider and vote on each of the following proposals, each of which is further described in this proxy statement/prospectus:
● | Proposal 1: Adoption of the merger agreement. |
● | Proposal 2: Adjournment of the Metromile special meeting. |
Metromile stockholders must approve the merger proposal as a condition to the completion of the mergers. If Metromile stockholders fail to approve the merger proposal, the mergers will not occur. The vote to approve the merger proposal is a vote separate and apart from the vote to approve the adjournment proposal. Accordingly, a Metromile stockholder may vote to approve the merger proposal and vote not to approve the adjournment proposal, and vice versa.
Other than the matters described above, Metromile does not expect a vote to be taken on any other matters at the Metromile special meeting or any adjournment thereof. However, if any other matters are properly brought before the Metromile special meeting or any adjournment thereof for consideration, the holders listed on the proxy cards will have discretion to vote on such matters in accordance with their best judgment.
Recommendation of the Metromile Board of Directors
After careful consideration, on November 8, 2021 the Metromile board of directors unanimously: (a) determined that the mergers are fair to and in the best interests of Metromile and its stockholders; (b) approved and declared advisable the execution and delivery of the merger agreement, the performance by Metromile of its covenants and agreements contained therein and the transactions contemplated thereby, including the mergers, on the terms and subject to the conditions set forth in the merger agreement; and (c) directed that the adoption of the merger agreement be submitted to a vote at a meeting of Metromile stockholders.
The Metromile board of directors unanimously recommends that Metromile stockholders vote:
● | “FOR” the merger proposal; and |
● | “FOR” the adjournment proposal. |
See “The Merger—Recommendation of the Metromile Board of Directors; Metromile’s Reasons for the Merger.”
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Record Date for the Metromile Special Meeting and Voting Rights
The record date to determine Metromile stockholders who are entitled to receive notice of and to vote at the Metromile special meeting or any adjournment thereof is . As of the close of business on the record date, there were shares of Metromile common stock issued and outstanding and entitled to notice of and to vote at the Metromile special meeting.
Each Metromile stockholder is entitled to one vote for each share of Metromile common stock such holder owned of record at the close of business on the record date with respect to each matter properly brought before the Metromile special meeting. Only Metromile stockholders of record at the close of business on the record date are entitled to receive notice of and to vote at the Metromile special meeting and any and all adjournment thereof.
The list of Metromile stockholders entitled to vote at the Metromile special meeting will be available electronically via the Metromile special meeting website for examination by any Metromile stockholder for any purpose germane to the Metromile special meeting beginning ten days prior to the Metromile special meeting up until the conclusion of the Metromile special meeting.
Quorum; Abstentions; Broker Non-Votes and Failure to Vote
A quorum of Metromile stockholders is necessary to conduct the Metromile special meeting. The presence, virtually via the Metromile special meeting website or by proxy, of the holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting will constitute a quorum. Shares of Metromile common stock represented at the Metromile special meeting by virtual attendance via the Metromile special meeting website or by proxy and entitled to vote, but not voted, including shares for which a Metromile stockholder directs an “abstention” from voting, will be counted for purposes of determining a quorum. However, because all of the proposals for consideration at the Metromile special meeting are considered “non-routine” matters under NYSE rules (as described below), shares held in “street name” will not be counted as present for the purpose of determining the existence of a quorum unless the Metromile stockholder provides their bank, broker or other nominee with voting instructions for at least one of the proposals at the Metromile special meeting. If a quorum is not present and an adjournment proposal is approved, the Metromile special meeting will be adjourned or postponed until the holders of the number of shares of Metromile common stock required to constitute a quorum attend.
Under NYSE rules, banks, brokers or other nominees who hold shares in “street name” on behalf of the beneficial owner of such shares have the authority to vote such shares in their discretion on certain “routine” proposals when they have not received voting instructions from the beneficial owners. However, banks, brokers or other nominees are not allowed to exercise their voting discretion with respect to matters that under NYSE rules are “non-routine.” This can result in a “broker non-vote,” which occurs on an item when (a) a bank, broker or other nominee has discretionary authority to vote on one or more “routine” proposals to be voted on at a meeting of stockholders, but is not permitted to vote on other “non-routine” proposals without instructions from the beneficial owner of the shares, and (b) the beneficial owner fails to provide the bank, broker or other nominee with voting instructions on a “non-routine” matter. All of the proposals before the Metromile special meeting are considered “non-routine” matters under NYSE rules, and banks, brokers or other nominees will not have discretionary authority to vote on any matter before the Metromile special meeting. As a result, Metromile does not expect any broker non-votes at the Metromile special meeting and if you hold your shares of Metromile common stock in “street name,” your shares will not be represented and will not be voted on any matter unless you affirmatively instruct your bank, broker or other nominee how to vote your shares in accordance with the voting instructions provided by your bank, broker or other nominee. It is therefore critical that you cast your vote by instructing your bank, broker or other nominee on how to vote. Brokers will not be able to vote on either of the proposals before the Metromile special meeting unless they have received voting instructions from the beneficial owners. The failure to issue voting instructions to your bank, broker or other nominee will have the same effect as voting “AGAINST” the merger proposal, but will have no effect on the outcome of the adjournment proposal.
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Required Votes
A quorum is required to approve the merger proposal but not the adjournment proposal. As described above, Metromile does not expect there to be any broker non-votes at the Metromile special meeting.
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Proposal 1:
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Approval requires (i) a quorum and (ii) the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting on the merger proposal. |
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An abstention or other failure to vote on the merger proposal will have the same effect as a vote “AGAINST” the merger proposal. |
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Proposal 2:
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Approval requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock virtually present via the Metromile special meeting website or represented by proxy and entitled to vote at the Metromile special meeting. |
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Any shares not virtually present or represented by proxy (including due to the failure of a Metromile stockholder who holds shares in “street name” through a bank, broker or other nominee to provide voting instructions to such bank, broker or other nominee) will have no effect on the outcome of the adjournment proposal. |
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An abstention or other failure of any shares virtually present or represented by proxy and entitled to vote at the Metromile special meeting on the adjournment proposal to vote on the adjournment proposal will have the same effect as a vote “AGAINST” the adjournment proposal. |
Vote of Metromile Directors and Executive Officers
Contemporaneously with the execution of the merger agreement, the Metromile supporting stockholders entered into the voting and support agreements with Lemonade, pursuant to which the “Metromile supporting stockholders” agreed to, among other things, vote all of their shares in Metromile “FOR” the merger proposal and “FOR” the adjournment proposal. See “Interests of Metromile Directors and Executive Officers in the Merger.”
Methods of Voting
Registered Stockholders
If you are a Metromile stockholder of record, you may vote at the Metromile special meeting by proxy through the Internet, by telephone or by mail, or by virtually attending and voting at the Metromile special meeting via the Metromile special meeting website, as described below.
● | voting by Mail: If you choose to vote by mail, simply complete the enclosed proxy card, date and sign it, and return it in the postage-paid envelope provided. If you intend to submit your proxy by mail, it must be received by us prior to the commencement of voting at the Special Meeting. If you sign your proxy card and return it without marking any voting instructions, your Shares will be voted "FOR" the Merger Proposal and "FOR" the Adjournment Proposal; |
● | voting by Telephone: You can vote your Shares by telephone by calling the toll-free telephone number provided on the proxy card. Telephone voting is available 24 hours a day, and the procedures are designed to authenticate votes cast by using the personal control number located on your proxy card. If you vote by telephone, you should not return your proxy card. If you submit your later-dated proxy by telephone you must do so no later than Pacific Time on ; |
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● | voting by Internet: You can also vote on the Internet by signing on to the website identified on the proxy card and following the procedures described on the website. Internet voting is available 24 hours a day, and the procedures are designed to authenticate votes cast by using a personal control number located on your proxy card. If you vote on the Internet, you should not return your proxy card. If you submit your later-dated proxy by Internet you must do so no later than Pacific Time on ; or |
● | attending the Special Meeting and voting online at www.virtualshareholdermeeting.com/MILE2022SM on at Pacific Time. We encourage you to allow ample time for online check-in, which begins at Pacific Time. In order to attend the virtual Special Meeting and vote online, you will need the control number included on your proxy card or on the instructions that accompanied your proxy materials. The control number is designed to verify your identity and allow you to vote your shares at the Metromile special meeting or to vote by proxy prior to the Metromile special meeting. |
Unless revoked, all duly executed proxies representing shares of Metromile common stock entitled to notice of and to vote at the Metromile special meeting will be voted at the Metromile special meeting and, where a choice has been specified on the proxy card, will be voted in accordance with such specification. If you submit an executed proxy without providing instructions for any proposal, then the Metromile officers identified on the proxy will vote your shares consistent with the recommendation of the Metromile board of directors on such proposal. If you are a Metromile stockholder of record, proxies submitted over the Internet or by telephone as described above must be received by , Pacific Time, on . Although Metromile offers four different voting methods, Metromile encourages you to submit a proxy to vote either over the Internet or by telephone to ensure that your shares are represented and voted at the Metromile special meeting.
By executing and delivering a proxy in connection with the Metromile special meeting, you designate certain Metromile officers identified therein as your proxies at the Metromile special meeting. If you deliver an executed proxy, but do not specify a choice for any proposal properly brought before the Metromile special meeting, such proxies will vote your shares of Metromile common stock on such uninstructed proposal in accordance with the recommendation of the Metromile board of directors. Metromile does not expect that any matter other than the proposals listed above will be brought before the Metromile special meeting, and the Metromile bylaws provide that the only business that may be conducted at the Metromile special meeting are those proposals brought before the Metromile special meeting pursuant to Metromile’s notice of the Metromile special meeting.
Beneficial (Street Name) Stockholders
If you hold your shares of Metromile common stock through a bank, broker or other nominee in “street name” instead of as a registered holder, you must follow the voting instructions provided by your bank, broker or other nominee in order to vote your shares. Your voting instructions must be received by your bank, broker or other nominee prior to the deadline set forth in the information from your bank, broker or other nominee on how to submit voting instructions. If you do not provide voting instructions to your bank, broker or other nominee for a proposal, your shares of Metromile common stock will not be voted on that proposal because your bank, broker or other nominee does not have discretionary authority to vote on any of the proposals to be voted on at the Metromile special meeting. See “—Quorum; Abstentions; Broker Non-Votes and Failure to Vote.”
If you hold your shares of Metromile common stock through a bank, broker or other nominee in “street name” (instead of as a registered holder), you may contact the bank, broker or other nominee where you hold your account if you have questions about obtaining your control number and attending the Metromile special meeting See “—Virtually Attending the Metromile Special Meeting.”
Revocability of Proxies
Other than with respect to the Metromile supporting stockholders, who are party to the voting and support agreements, any Metromile stockholder giving a proxy has the right to revoke it at any time before the proxy is voted at the Metromile special meeting. If you are a Metromile stockholder of record, you may revoke your proxy by any of the following actions:
● | by sending a signed written notice of revocation to Metromile’s Corporate Secretary, provided such notice is received no later than ; |
● | by voting again over the Internet or telephone as instructed on your proxy card before the closing of the voting facilities at , Pacific Time, on ; |
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● | by submitting a properly signed and dated proxy card with a later date that is received by Metromile no later than the close of business on ; or |
● | by virtually attending the Metromile special meeting via the Metromile special meeting website and requesting that your proxy be revoked, or by virtually attending and voting at the Metromile special meeting via the Metromile special meeting website as described above. |
Only your last submitted proxy will be considered.
Execution or revocation of a proxy will not in any way affect a Metromile stockholder’s right to virtually attend and vote at the Metromile special meeting via the Metromile special meeting website.
Written notices of revocation and other communications relating to the revocation of proxies should be addressed to:
Metromile, Inc.
Attn: Corporate Secretary
425 Market Street Suite 700
San Francisco, California 94105
(888) 242-5204
If your shares of Metromile common stock are held in “street name” and you previously provided voting instructions to your broker, bank or other nominee, you should follow the instructions provided by your broker, bank or other nominee to revoke or change your voting instructions.
Proxy Solicitation Costs
Metromile is soliciting proxies to provide an opportunity to all Metromile stockholders to vote on the merger proposal and the adjournment proposal, whether or not such Metromile stockholders are able to virtually attend the Metromile special meeting or any adjournment thereof. Metromile will pay all expenses of soliciting proxies from Metromile stockholders. In addition to the solicitation of proxies by mail, Metromile will request that banks, brokers and other nominee record holders send proxies and proxy material to the beneficial owners of Metromile common stock and secure their voting instructions, if necessary. Metromile may be required to reimburse those banks, brokers and other nominees on request for their reasonable expenses in taking those actions.
Metromile has also retained Morrow Sodali to assist in soliciting proxies and in communicating with Metromile stockholders and estimates that it will pay them a fee of approximately $17,000, plus reimbursement for certain reasonable documented out-of-pocket expenses. Metromile also has agreed to indemnify Morrow Sodali against various liabilities and expenses that relate to or arise out of its solicitation of proxies (subject to certain exceptions). Proxies may be solicited on behalf of Metromile or Metromile directors, officers and other employees in person or by mail, telephone, facsimile, messenger, the Internet or other means of communication, including electronic communication. Metromile directors, officers and employees will not be paid any additional amounts for their services or solicitation in this regard.
Virtually Attending the Metromile Special Meeting
If you wish to virtually attend the Metromile special meeting via the Metromile special meeting website, you must (a) be a Metromile stockholder of record at the close of business on the record date, (b) hold your shares of Metromile common stock beneficially in the name of a broker, bank or other nominee as of the record date or (c) hold a valid proxy for the Metromile special meeting.
You will be able to attend the Metromile special meeting and vote during the Metromile special meeting via a live webcast by visiting www.virtualshareholdermeeting.com/MILE2022SM. We encourage you to allow ample time for online check-in, which will open at , Pacific Time. If you hold your shares of Metromile common stock in street name beneficially through a broker, bank or other nominee and you wish to virtually attend and vote at the Metromile special meeting via the Metromile special meeting website, you should contact the bank, broker or other nominee where you hold your account if you have questions about obtaining your control number and attending the Metromile special meeting.
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If you plan to virtually attend and vote at the Metromile special meeting via the Metromile special meeting website, Metromile still encourages you to vote in advance by the Internet, telephone or (if you received a paper copy of the proxy materials) by mail so that your vote will be counted even if you later decide not to virtually attend the Metromile special meeting via the Metromile special meeting website. Voting your proxy by the Internet, telephone or mail will not limit your right to virtually attend and vote at the Metromile special meeting via the Metromile special meeting website if you later decide to do so.
No Appraisal Rights
Metromile stockholders are not entitled to appraisal or dissenters’ rights in connection with the mergers under Section 262 of the DGCL. See “The Merger—No Appraisal Rights.”
Householding
SEC rules permit companies and intermediaries such as brokers to satisfy delivery requirements for proxy statements and notices with respect to two or more stockholders sharing the same address by delivering a single proxy statement or a single notice addressed to those stockholders. This “householding” rule provides greater convenience for Metromile’s stockholders and cost savings for Metromile by reducing the number of duplicate documents that households receive. Also, this allows Metromile to be more environmentally friendly by reducing the unnecessary use of materials. Metromile stockholders with the same address and last name may receive only one copy of this proxy statement/prospectus. Please note that each Metromile stockholder will receive a separate proxy card, which will allow each Metromile stockholder to vote independently. Registered Metromile stockholders (those who hold shares of Metromile common stock directly in their name with Metromile’s transfer agent) may opt out of householding and receive a separate proxy statement/prospectus or other proxy materials by sending a written request to Metromile at the address below.
Some brokers also household proxy materials, delivering a single proxy statement or notice to multiple Metromile stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that it will be householding materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate proxy statement or notice, or if your household is receiving multiple copies of these documents and you wish to request that future deliveries be limited to a single copy, please notify your broker.
Metromile will promptly deliver a copy of this proxy statement/prospectus to any Metromile stockholder who received only one copy of these materials due to householding upon request in writing to: Metromile, Inc., Attn: Corporate Secretary, 425 Market Street, Suite 700, San Francisco, California 94105 or by calling (888) 242-5204.
Tabulation of Votes
The Metromile board of directors will appoint an independent inspector of election for the Metromile special meeting. The inspector of election will, among other matters, determine the number of shares of Metromile common stock represented at the Metromile special meeting to confirm the existence of a quorum, determine the validity of all proxies and ballots and certify the results of voting on all proposals submitted to Metromile stockholders at the Metromile special meeting.
Adjournments
If a quorum is present at the Metromile special meeting but there are insufficient votes at the time of the Metromile special meeting to approve the merger proposal, then Metromile stockholders will be asked to only vote on the adjournment proposal.
At any subsequent reconvening of the Metromile special meeting at which a quorum is present, any business may be transacted that might have been transacted at the original meeting and all proxies will be voted in the same manner as they would have been voted at the original convening of the Metromile special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the time the proxy is voted at the reconvened meeting.
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Assistance
If you need assistance voting or completing your proxy card, or if you have questions regarding the Metromile special meeting, please contact Morrow Sodali, Metromile’s proxy solicitor for the Metromile special meeting, at:
Morrow Sodali LLC
333 Ludlow Street, 5th Floor, South Tower
Stamford, Connecticut 06902
Tel: Toll-Free (800) 622-5200 or (203) 658-9400
Email: MILE@investor.morrowsodali.com
METROMILE STOCKHOLDERS SHOULD CAREFULLY READ THIS PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY FOR MORE DETAILED INFORMATION CONCERNING THE MERGER AGREEMENT AND THE MERGERS. IN PARTICULAR, METROMILE STOCKHOLDERS ARE DIRECTED TO THE MERGER AGREEMENT, WHICH IS ATTACHED AS ANNEX A HERETO.
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PROPOSAL 1: ADOPTION OF THE MERGER AGREEMENT
At the Metromile special meeting, Metromile is asking Metromile stockholders to consider and vote upon a proposal to adopt the merger agreement, pursuant to which, at the first effective time, Acquisition Sub I will merge with and into Metromile, with Metromile surviving (the “Initial Surviving Corporation”) as a wholly owned subsidiary of Lemonade. Upon completion of the first merger, Metromile stockholders will be entitled to receive 0.05263 shares of Lemonade common stock for each share of Metromile common stock held by such stockholder immediately prior to the first effective time of the first merger (together with cash in lieu of any fractional shares of Lemonade common stock). Immediately following the first merger, the Initial Surviving Corporation will merge with and into Acquisition Sub II, with Acquisition Sub II surviving as the surviving limited liability company and as a wholly owned subsidiary of Lemonade.
After careful consideration, the Metromile board of directors unanimously: (a) determined that the mergers are fair to and in the best interests of Metromile and its stockholders; (b) approved and declared advisable the execution and delivery of the merger agreement, the performance by Metromile of its covenants and agreements contained therein and the transactions contemplated thereby, including the mergers, on the terms and subject to the conditions set forth in the merger agreement; (c) directed that the adoption of the merger agreement be submitted to a vote at a meeting of Metromile stockholders and (d) recommended that Metromile stockholders adopt the merger agreement.
The Metromile board of directors unanimously recommends that Metromile stockholders vote “FOR” the merger proposal.
The mergers and a summary of the terms of the merger agreement are described in more detail under “the mergers” and “the merger agreement,” and Metromile stockholders are encouraged to read the full text of the merger agreement, which is attached as Annex A hereto.
Assuming a quorum is present at the Metromile special meeting, approval of the merger proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock entitled to vote at the Metromile special meeting on the merger proposal. Accordingly, an abstention or other failure to vote on the merger proposal will have the same effect as a vote “AGAINST” the merger proposal. It is a condition to the completion of the mergers that Metromile stockholders approve the merger proposal.
THE METROMILE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE MERGER PROPOSAL
(PROPOSAL 1)
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PROPOSAL 2: ADJOURNMENT OF THE METROMILE SPECIAL MEETING
The Metromile special meeting may be adjourned to another time and place if necessary or appropriate in order to permit the solicitation of additional proxies if there are insufficient votes to approve the merger proposal.
Metromile is asking Metromile stockholders to vote in favor of any adjournment of the Metromile special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to approve the merger proposal.
The Metromile board of directors unanimously recommends that Metromile stockholders approve the adjournment proposal
Whether or not a quorum is present at the Metromile special meeting, approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Metromile common stock that are virtually present via the Metromile special meeting website or represented by proxy and entitled to vote at the Metromile special meeting. Accordingly, any shares not virtually present or represented by proxy (including due to the failure of a Metromile stockholder who holds shares in “street name” through a bank, broker or other nominee to provide voting instructions to such bank, broker or other nominee) will have no effect on the outcome of the adjournment proposal. An abstention or other failure of any shares virtually present or represented by proxy and entitled to vote at the Metromile special meeting on the adjournment proposal to vote on the adjournment proposal will have the same effect as a vote “AGAINST” the adjournment proposal.
THE METROMILE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ADJOURNMENT PROPOSAL
(PROPOSAL 2)
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THE MERGERS
The following is a description of material aspects of the mergers. While Lemonade and Metromile believe that the following description covers the material terms of the mergers, the description may not contain all of the information that is important to you. You are encouraged to read carefully this entire proxy statement/ prospectus, including the text of the merger agreement attached as Annex A hereto, for a more complete understanding of the mergers. In addition, important business and financial information about each of Lemonade and Metromile is contained or incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information.”
General
Lemonade, Acquisition Sub I, Acquisition Sub II and Metromile have entered into the merger agreement, which provides for the merger of Acquisition Sub I with and into Metromile with Metromile surviving (the “Initial Surviving Corporation”), and subsequently, the merger of the Initial Surviving Corporation with and into Acquisition Sub II with Acquisition Sub II surviving. As a result of the first merger, the separate existence of Acquisition Sub I will cease and as a result of the second merger, the separate existence of the Initial Surviving Corporation will cease and Acquisition Sub II will continue its existence under the Delaware Limited Liability Company Act (the “DLLCA”) as the Surviving Company and as a wholly owned subsidiary of Lemonade. The Surviving Company will be renamed “Metromile, LLC.”
Merger Consideration
At the first effective time, each share of Metromile common stock (other than shares held in treasury by Metromile or held directly by Lemonade or Acquisition Sub I (which shares will be cancelled)) that was issued and outstanding immediately prior to the first effective time will be converted into the right to receive 0.05263 shares of Lemonade common stock as well as cash (without interest and less any applicable withholding taxes) in lieu of any fractional shares of Lemonade common stock. At the second effective time, each share of common stock of the Initial Surviving Corporation that was issued and outstanding immediately prior to the second effective time will be cancelled and will cease to exist. Each limited liability company interest of Acquisition Sub II issued and outstanding immediately prior to the second effective time will remain outstanding as a limited liability interest of the Surviving Company.
The exchange ratio is fixed, which means that it will not change between now and the date of the mergers, regardless of whether the market price of Lemonade or Metromile common stock changes. Therefore, the value of the merger consideration will depend on the market price of Lemonade common stock at the first effective time. The market price of Lemonade common stock has fluctuated since the date of the announcement of the merger agreement and is expected to continue to fluctuate from the date of this proxy statement/prospectus to the date of the Metromile special meeting, through the date the mergers are completed and thereafter. The market price of Lemonade common stock, when received by Metromile stockholders in connection with the mergers, could be greater than, less than or the same as the market price of Lemonade common stock on the date of this proxy statement/prospectus or at the time of the Metromile special meeting. Accordingly, you should obtain current market quotations for Lemonade and Metromile common stock before deciding how to vote on any of the proposals described in this proxy statement/prospectus. Lemonade common stock is traded on the NYSE under the symbol “LMND,” Metromile common stock is traded on the Nasdaq Capital Market under the symbol “MILE” and Metromile warrants are traded on the Nasdaq Capital Market under the symbol “MILEW.”
Background of the Mergers
The Metromile board of directors and the senior management of Metromile periodically review and consider alternatives to protect and enhance the value of Metromile’s business. Metromile considers its strategic options in light of the totality of the circumstances, including current and anticipated business and industry trends, regulatory conditions, member/policyholder interests, short-term and long-term value for the stockholders of Metromile and the impact on constituencies and the ratings environment expected to impact the insurance industry.
On November 24, 2020, INSU Acquisition Corp. II (“INSU”), INSU II Merger Sub Corp. and Metromile Operating Company (formerly known as MetroMile, Inc.) (“Legacy Metromile”) entered into an Agreement and Plan of Merger and Reorganization, as amended on January 12, 2021, with respect to a business combination involving the acquisition by INSU of Metromile Operating Company (the “INSU SPAC transaction”).
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In December 2020, the Chief Executive Officer (“CEO”) of Lemonade, Daniel Schreiber (“Mr. Schreiber”), and the then Chairman of the board of directors of Legacy Metromile David Friedberg, had an initial discussion relating to potential marketing and business development opportunities between the two companies’ businesses, including opportunities for cross-selling of the respective companies’ complementary insurance products. The conversation was focused on operational matters and did not include any discussion of a potential business combination or other strategic transaction between the two companies, and ultimately did not result in further conversations at that time.
On February 9, 2021, the INSU SPAC transaction was completed. As a result of the INSU SPAC transaction, Metromile became a publicly-traded corporation listed on NASDAQ. On February 9, 2021, the closing price per Metromile common share on NASDAQ was $18.00.
On March 30, 2021, Metromile publicly announced the financial results of Metromile Operating Company for the year ended December 31, 2020. The closing price per Metromile common share on NASDAQ on that day was $11.23.
On May 17, 2021, Metromile publicly announced its financial results for the three months ended March 31, 2021. The closing price per Metromile common share on NASDAQ on that day was $6.96.
On August 5, 2021, the Metromile board of directors held its quarterly board meeting. Members of Metromile’s senior management team were present at that meeting and presented Metromile’s financial results for the three and six months ended June 30, 2021 and its lowered growth forecast for the second half of 2021, both of which would be publicly announced on August 9, 2021. Members of Metromile’s senior management team also presented nonpublic internal financial projections for Metromile for fiscal years 2022 through 2024. In light of the recent decline in Metromile’s stock price and the likelihood that the announcements with respect to Metromile’s financial results and lowered growth forecast would lead to a further decline in Metromile’s stock price and create additional challenges for Metromile to execute on its existing strategic growth plan, among other considerations, the Metromile board of directors proposed to form a strategic committee (the “strategic committee”), consisting of John Butler (“Mr. Butler”), Ryan Graves (“Mr. Graves”) and Vikas Singhal (“Mr. Singhal”), to consider and explore potential strategic and business alternatives in an effort to maximize stockholder value. Each of Mr. Butler, Mr. Graves and Mr. Singhal was selected to be a member of the strategic committee given, among other things, their respective expertise and experience in acquiring and selling companies, to assist the Metromile board of directors in fulfilling its responsibility relating to the review, evaluation and negotiation of potential strategic alternatives that could maximize value for Metromile’s stockholders.
On August 9, 2021, Metromile publicly announced its financial results for the three and six months ended June 30, 2021, and its lowered growth forecast for the second half of 2021. As part of that announcement, Metromile disclosed that its policies in force had remained relatively flat quarter-over-quarter, that its contribution margin declined, and that its loss ratio had increased from the prior period. Among the challenges facing Metromile at the time were greater than expected policy cancellations, decreased efficacy of its product messaging to spur premium growth, and industry-wide headwinds, including government-mandated COVID-19 payment extensions and regulatory delays in obtaining approvals for proposed pricing changes for its automobile insurance products.
On August 10, 2021, the closing price per Metromile common share on NASDAQ was $5.40, which represented (i) a 22.5% decline from the previous trading day’s closing price of $6.97, (ii) a 70% decline from the closing price of $18.00 on February 9, 2021 (the day on which the INSU SPAC transaction was completed), and (iii) a 73.5% decline from its high trading price earlier in 2021 of $20.39.
Also on August 10, 2021, Mr. Schreiber contacted a representative of Allen & Company, which was familiar with both Metromile and Lemonade, having previously acted as co-placement agent for the private placement undertaken in connection with the INSU SPAC transaction and as co-bookrunning manager for the initial underwritten public offering and a follow-on underwritten public offering of Lemonade common stock. During a call later that day, representatives of Lemonade discussed with representatives of Allen & Company the potential for a transaction with Metromile.
On August 11, 2021, representatives of Allen & Company contacted Dan Preston, Chief Executive Officer of Metromile (“Mr. Preston”), and, on August 12, 2021, spoke with Mr. Preston to discuss Lemonade’s potential interest in a transaction with Metromile and potential strategic alternatives for Metromile.
On August 13, 2021, Mr. Schreiber contacted Mr. Preston to inquire about Metromile’s interest in exploring potential strategic opportunities with Lemonade. Mr. Schreiber and Mr. Preston agreed to speak via telephone on August 17, 2021. Neither value nor terms were discussed during this conversation.
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On August 16, 2021, a meeting of the strategic committee was held with members of Metromile’s senior management team present. At that meeting, the strategic committee discussed with Metromile’s senior management potential strategic and business alternatives for Metromile. Prior to such meeting, members of Metromile’s senior management shared with the strategic committee a list of potential companies to consider for such alternatives, given the strategic rationale and the future growth of Metromile’s business, including (i) Lemonade, (ii) a technology company that provides products and services complementary to Metromile’s products, which had contacted Metromile Operating Company in the second quarter of 2020 to discuss a potential sale of Party A to Metromile Operating Company although discussions at that time had not progressed (“Party A”), and (iii) an established insurance holding company that operates in the automobile insurance industry with which Metromile had held discussions regarding a potential commercial arrangement in July 2021 (“Party B”). After discussion, the strategic committee approved (i) Mr. Preston’s upcoming August 17, 2021 call with Mr. Schreiber regarding a potential strategic transaction with Lemonade, (ii) approaching representatives of Party A to gauge Party A’s interest in a potential strategic transaction with Metromile and (iii) approaching representatives of Party B to gauge Party B’s interest in a potential strategic transaction involving Metromile’s enterprise business solutions business (the “EBS business”). At such meeting, the strategic committee also discussed with Metromile’s senior management the potential engagement of legal and financial advisors to assist Metromile in connection with its exploration of potential strategic alternatives.
On August 16, 2021, Mr. Preston contacted representatives of Party B regarding a potential strategic transaction involving the EBS business. A non-disclosure agreement on customary terms was executed by Metromile and Party B on August 23, 2021, and representatives of Metromile and Party B met later that day to discuss a potential strategic transaction involving the EBS business. On August 26, 2021, representatives of Party B contacted Mr. Preston to confirm Party B was not interested in pursuing a transaction with Metromile involving the EBS business.
On August 16, 2021, Mr. Preston contacted a representative of Party A to discuss Party A’s potential interest in a strategic transaction with Metromile.
On August 17, 2021, Mr. Schreiber contacted Mr. Preston to discuss whether Metromile might be interested in exploring a potential transaction with Lemonade. Mr. Schreiber and Mr. Preston agreed to discuss further on August 23, 2021, after Mr. Preston conferred with representatives of Metromile’s board of directors. Later that day, Mr. Preston updated the strategic committee on his discussions with Mr. Schreiber and the opportunity to speak with Mr. Schreiber again on August 23, 2021. The members of the strategic committee expressed support for Mr. Preston to engage in a follow-up discussion with Mr. Schreiber and for Metromile to enter into a non-disclosure agreement with Lemonade to facilitate further discussions.
Also on August 17, 2021, representatives of Metromile senior management contacted representatives of Kirkland & Ellis LLP (“Kirkland”) to discuss Kirkland’s potential engagement as legal counsel to Metromile, and also held a discussion with Allen & Company regarding Allen & Company’s potential engagement as financial advisor to Metromile, in connection with Metromile’s exploration of potential strategic alternatives.
On August 19, 2021, Metromile sent a draft mutual non-disclosure agreement to Lemonade. The non-disclosure agreement included customary terms relating to confidentiality and included a standstill provision, with a fall-away provision upon the entry or public announcement of certain acquisition transactions. Metromile and Lemonade executed the non-disclosure agreement on August 20, 2021.
On August 23, 2021, representatives of Metromile gave a presentation on Metromile’s business to representatives of Lemonade, and Mr. Preston and Mr. Schreiber discussed Lemonade’s potential interest in acquiring Metromile. Neither value nor terms was discussed during this presentation.
On August 24, 2021, representatives of Lemonade contacted representatives of Metromile to discuss potential next steps, including topics and questions for further discussion. Neither value nor terms was discussed during this conversation.
On August 26, 2021, the Metromile board of directors held a meeting at which members of Metromile senior management and representatives of Cooley LLP (“Cooley”), Metromile’s corporate counsel, and Allen & Company were also present. At that meeting, Mr. Preston provided an update on the discussions with Lemonade and his preliminary conversations with Party A and Party B. The Metromile board of directors also approved and formalized the formation of the strategic committee and further approved that the strategic committee would be responsible for decisions regarding the identification of third parties that would be included in Metromile’s outreach to potential strategic partners and that the strategic committee would not enter into exclusivity with a potential strategic partner, nor negotiate on price without the Metromile board of directors’ input and direction. Representatives of Cooley also provided the Metromile board of directors with an overview of its fiduciary duties in the context of the exploration of potential
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strategic alternatives. In order to enable Metromile to better understand potential alternatives available to it in light of the inbound interest from Lemonade and the preliminary conversations with Party A, Allen & Company suggested that Metromile consider contacting selected third parties that might be interested in a strategic transaction with Metromile and could potentially provide long-term value to Metromile’s stockholders. Allen & Company noted that, given the small group of potential strategic partners that might be considered viable candidates, a tailored strategic approach to certain potential counterparties could provide Metromile with a sense of the potential strategic alternatives available to it in the near term and discussed with the Metromile board of directors certain potential companies (in addition to Lemonade and Party A) that could be considered. After discussion, the Metromile board of directors approved approaching certain additional companies, taking into account, among other factors, the strategic fit for Metromile’s business, the rationale for a potential transaction and the perceived likelihood of engaging in discussions regarding a potential strategic transaction that could be actionable in the near term, in order to gauge their interest in a potential strategic transaction with Metromile. The Metromile board of directors also indicated its desire that Metromile’s management team continue to engage in discussions with Lemonade and Party A.
On August 31, 2021 and September 1, 2021, senior executives of Metromile and Lemonade met in-person and via video conference to continue the discussions regarding a potential transaction and for follow-up due diligence sessions regarding the topics discussed on August 24, 2021. Neither value nor terms was discussed during these discussions. At the September 1, 2021 meeting, Mr. Schreiber initiated an initial discussion with Mr. Preston regarding the possibility that Mr. Preston continue his involvement with Metromile’s business as an employee of Lemonade post-closing. Mr. Schreiber and Mr. Preston did not discuss any potential compensation terms at this time. Following the September 1, 2021 meeting, Mr. Preston informed members of the strategic committee of Mr. Preston’s discussion with Mr. Schreiber and it was agreed that Mr. Preston would not have further discussions regarding the terms or other details of any such employment with Lemonade post-closing without authorization from the strategic committee or the Metromile board of directors.
On September 1, 2021, in accordance with Metromile’s directives, Allen & Company spoke with Party A’s financial advisor regarding Party A’s potential interest and timing considerations in pursuing a potential transaction with Metromile. Party A’s financial advisor noted that Party A was considering another potential transaction at that time, which was viewed as a priority for Party A. Allen & Company suggested that Party A follow-up with members of Metromile’s senior management if additional information was needed to assess the synergy potential for a transaction.
From September 2, 2021 to September 21, 2021, in accordance with the directives of the Metromile board of directors, representatives of Allen & Company contacted and held discussions with representatives of the additional companies approved by the Metromile board of directors at its August 26, 2021 board meeting. None of these companies executed a non-disclosure agreement and each declined to proceed with discussions with Metromile and its representatives regarding a potential strategic transaction with Metromile.
On September 6, 2021, a representative of Lemonade provided Mr. Preston with a list of additional due diligence questions. On that same day, in accordance with Metromile’s directives, Allen & Company spoke with Lemonade’s outside advisors regarding potential next steps. Neither value nor terms was discussed during this conversation.
On September 8, 2021, representatives of Lemonade spoke with representatives of Metromile regarding due diligence matters and the terms of a potential transaction between Metromile and Lemonade. Later on September 8, 2021, Lemonade sent an initial draft term sheet outlining the basic parameters for a potential transaction between Metromile and Lemonade (the “term sheet”). The initial term sheet contemplated, among other things, an exchange ratio equal to one share of Lemonade common stock for every 19 shares of Metromile common stock, and a 60-day exclusivity period.
On September 9, 2021, in accordance with Metromile’s directives, Allen & Company spoke with Lemonade’s outside advisors regarding the proposed exchange ratio and certain other items included in Lemonade’s term sheet.
On September 13, 2021, the strategic committee held a meeting at which members of senior management and representatives of Cooley, Kirkland and Allen & Company were also present. Mr. Preston and Allen & Company provided an update on the conversations with Lemonade and its outside advisors regarding the term sheet. The strategic committee agreed to provide Lemonade with certain additional financial and other information that the strategic committee believed would result in Lemonade improving the exchange ratio to Metromile’s benefit. At this meeting, the strategic committee also discussed certain other potential companies (in addition to Lemonade, Party A and the companies approved by the Metromile board of directors at its August 26, 2021 meeting) that might potentially be interested in a strategic transaction with Metromile, including a public company in the automotive space (“Party C”). After discussion, the strategic committee approved approaching representatives of Party C, taking into account, among other
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factors, the strategic fit for Metromile’s business, the rationale for a potential transaction and the perceived likelihood of engaging in discussions regarding a potential strategic transaction that could be actionable in the near term, in order to gauge its interest in a potential strategic transaction with Metromile.
On September 14, 2021, in accordance with Metromile’s directives, Allen & Company spoke with a representative of Lemonade to relay the Metromile strategic committee’s feedback and agreement to provide additional financial and other information relating to Metromile in a follow-up due diligence session.
Between September 19, 2021 and September 29, 2021, representatives of Allen & Company held discussions in the ordinary course with representatives of Party C and, in accordance with Metromile’s directives, inquired as to Party C’s potential interest in a strategic transaction with Metromile.
On September 21, 2021, representatives of Metromile met virtually with representatives of Lemonade to discuss the potential transaction and for Metromile to provide additional information on Metromile’s business.
On September 23, 2021, Lemonade provided to Allen & Company a verbal non-binding indication of interest to acquire Metromile at an exchange ratio equal to one share of Lemonade common stock for every 18 shares of Metromile common stock.
Over the course of the first three weeks in September 2021, members of Metromile’s senior management had telephonic discussions with representatives of Party A and its financial advisor to further discuss Party A’s potential interest in a strategic transaction with Metromile. To facilitate further discussions regarding a potential transaction with Party A, a non-disclosure agreement on customary terms was executed by Metromile and Party A on September 23, 2021, which included a standstill provision, with a fall-away provision upon the entry or public announcement of certain acquisition transactions, and Party A commenced its due diligence review of Metromile and its business. Also on September 23, 2021, representatives of Metromile met with representatives of Party A to discuss a potential transaction and for Metromile to provide additional information on Metromile’s business. On September 30, 2021, Party A was provided with a summary of the July Metromile forecasts (as further described in the section “Certain Financial Forecasts Utilized by Metromile in Connection with the Mergers”).
On September 27, 2021, the strategic committee held a meeting with members of Metromile senior management and representatives of Kirkland, Allen & Company and Cooley. Mr. Preston and Allen & Company updated the strategic committee on the conversations with Party A and its financial advisor, noting that, while Party A indicated that it was interested in exploring a potential strategic transaction with Metromile, Party A previously mentioned that it was considering another potential transaction as a priority and was significantly behind in its assessment of potential synergies and due diligence process relative to Lemonade. Metromile’s senior management team indicated that they would continue to encourage Party A to advance its due diligence review of Metromile. Allen & Company also updated the strategic committee on the progress of Metromile’s outreach to the additional companies approved by the Metromile board of directors at its August 26, 2021 meeting, and that all such companies had declined to proceed with discussions with Metromile and its representatives regarding a potential strategic transaction with Metromile. Allen & Company also updated the strategic committee on the progress of Metromile’s outreach to Party C, indicating that Party C had not yet indicated if it was interested in engaging in discussions regarding a strategic transaction with Metromile. Allen & Company also provided an overview of selected analysts’ perspectives on Lemonade and certain financial information relating to Lemonade and Metromile. The strategic committee then discussed potential responses to Lemonade’s term sheet and Lemonade’s September 18, 2021 verbal non-binding indication of interest to acquire Metromile at an exchange ratio equal to one share of Lemonade common stock for every 18 shares of Metromile common stock and, after such discussion, instructed Allen & Company to submit a counterproposal to Lemonade on behalf of Metromile for a transaction with an exchange ratio that reflected approximately 20-25% premium to Metromile’s current market price (or an exchange ratio of one share of Lemonade common stock for every 14.4 – 15.0 shares of Metromile common stock).
On September 28, 2021, in accordance with the directives of the strategic committee, representatives of Allen & Company sent Metromile’s proposed summary of key terms to Lemonade, which contemplated an exchange ratio in the range specified by the strategic committee. This summary of key terms did not include an exclusivity provision.
On September 29, 2021, a representative of Party C spoke with a representative of Allen & Company and indicated that Party C had decided not to proceed with discussions with Metromile and its representatives regarding a potential strategic transaction with Metromile.
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On September 30, 2021, Lemonade sent an updated term sheet to representatives of Allen & Company, which included an exchange ratio of one share of Lemonade common stock for every 17.5 shares of Metromile common stock, and a 60-day exclusivity period.
Also on September 30, 2021, a meeting of the strategic committee was held at which members of Metromile senior management and representatives of Kirkland, Allen & Company and Cooley were also present. At that meeting, the strategic committee received a report on the status of discussions with Lemonade and Party A and discussed potential proposed responses to Lemonade’s revised term sheet. Mr. Preston also reported that Party A was working diligently to advance its due diligence review of Metromile and its business and to submit a proposal prior to Metromile’s scheduled board meeting on October 5, 2021. Allen & Company noted that (i) Lemonade’s third quarter 2021 financial results were scheduled to be publicly announced in early November 2021, (ii) Lemonade had discussed that, based on Lemonade’s estimates at such time, such financial results were then preliminarily expected to exceed analysts’ consensus expectations, and (iii) Lemonade was willing to proceed and target the execution of a definitive agreement for a transaction by or before public announcement of Lemonade’s third quarter 2021 financial results. After discussion, the strategic committee agreed to provide Lemonade with a revised term sheet which: (i) contemplated an exchange ratio of one share of Lemonade common stock for every 15 shares of Metromile common stock; (ii) included the right for Metromile to sell Metromile’s EBS business prior to the closing of any transaction with Lemonade and distribute the cash proceeds from such sale as a dividend to Metromile’s stockholders (the “EBS business sale right”); and (iii) deleted the exclusivity provision.
On October 1, 2021, senior management of Metromile, together with representatives of Allen & Company, had a call with representatives of Lemonade to review selected metrics of Lemonade’s preliminary financial results for the third quarter of 2021. These selected metrics compared favorably to the midpoint of Lemonade’s prior guidance and then current Wall Street analysts’ consensus estimates for Lemonade for the third quarter of 2021.
On October 2, 2021, in accordance with the directives of the strategic committee, representatives of Allen & Company sent an updated term sheet from Metromile to Lemonade reflecting the terms approved by the strategic committee on September 30, 2021, as well as a summary of the July Metromile forecasts.
On October 3, 2021, Lemonade sent a revised term sheet to representatives of Allen & Company, which included an exchange ratio of one share of Lemonade common stock for every 17.5 shares of Metromile common stock and retained the EBS business sale right. This term sheet included a 60-day exclusivity provision.
On October 4, 2021, Mr. Preston had a conversation with representatives of Party A regarding the status of Party A’s due diligence review of Metromile and Party A’s progress toward submitting a proposal for a strategic transaction with Metromile.
On October 5, 2021 and October 6, 2021, the Metromile board of directors held meetings of the full board at which members of Metromile senior management and representatives of Kirkland, Allen & Company and Cooley were also present. At those meetings, representatives of Kirkland presented on the Metromile board of directors’ fiduciary duties in the context of a potential strategic transaction, and Metromile’s management team presented financial forecasts for Metromile’s business, including the July Metromile forecasts, and previewed with the Metromile board of directors certain metrics and financial results for Metromile for the three and nine months ended September 30, 2021 and the likelihood that Metromile would again need to revise downward its already lowered public growth forecasts for the remainder of 2021. Mr. Preston also provided an update on the discussions with Party A, noting that Metromile’s management team had encouraged Party A to accelerate its due diligence review of Metromile in order to submit a proposal for a potential strategic transaction with Metromile prior to Metromile’s October 5, 2021 board meeting, but that Party A did not submit a proposal. Mr. Preston explained that Party A had indicated that it remained interested in exploring a potential strategic transaction with Metromile, but that Party A’s board of directors had instructed Party A’s management team to focus its efforts and resources in the near term on a different M&A opportunity then in process. As a result, Party A indicated that it was not likely to provide a formal proposal for a strategic transaction with Metromile, if at all, for at least another four to six weeks. In contrast, Lemonade was willing to proceed to negotiation and finalization of a definitive agreement with respect to the mergers on a more timely basis, but had, in its conversations with Metromile’s management team and Allen & Company, conditioned its further engagement on Metromile’s agreement to engage in exclusive negotiations with Lemonade. Lemonade had indicated its willingness to execute a definitive agreement with Metromile by its earnings announcement date in early November 2021, and that, if Metromile were not willing to enter into a period of exclusive negotiations consistent with that timeline, Lemonade would disengage from further discussions with Metromile at that time and focus on its own earnings release and previously announced initiative to bring to market its own automobile insurance solution, which was already in process.
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The Metromile board of directors considered and discussed Lemonade’s desired approach regarding the timeline for a transaction, Lemonade’s third quarter financial results that Lemonade previously previewed with representatives of Metromile, Metromile’s third quarter financial results and the need to revise downward Metromile’s already lowered growth projections for the remainder of 2021, the likely effect of those upcoming announcements on the relative stock prices of Lemonade and Metromile, the risks inherent in waiting to re-engage with Lemonade until after such announcements were made, including risks to the potential value that could be obtained for Metromile’s stockholders in any business combination transaction with Lemonade at such time, and other factors, including the challenges facing Metromile with respect to its ability to execute on its stand-alone plan without raising additional capital in the near term and the potential terms and dilutive effect of any such potential capital raise. After such discussion, the Metromile board of directors authorized Metromile’s senior management team, with the assistance of Metromile’s legal and financial advisors, to negotiate final terms of a potential business combination transaction with Lemonade and its advisors, and to enter into a period of exclusive negotiations to finalize definitive agreements. The Metromile board of directors also discussed with Metromile’s management and legal and financial advisors the terms of Lemonade’s revised term sheet and potential counterproposals. After such discussion, the Metromile board of directors authorized Allen & Company, on behalf of Metromile, to submit to Lemonade a revised term sheet that included the following terms: (i) an exchange ratio of one share of Lemonade common stock for every 16.5 shares of Metromile common stock; (ii) the EBS business sale right; and (iii) an exclusivity period that would expire on the day immediately prior to the date on which Lemonade was scheduled to announce its financial results for the third quarter of 2021. The Metromile board of directors indicated its desire to execute a definitive agreement with respect to a business combination transaction with Lemonade on acceptable terms prior to the announcement by each party of its financial results for the third quarter of 2021.
Following the conclusion of that board meeting, on October 6, 2021, in accordance with the directives of the Metromile board of directors, representatives of Allen & Company sent Metromile’s updated term sheet to Lemonade reflecting the terms as outlined by the Metromile board of directors. On that day, the closing per share price of Lemonade common stock was $64.06, and the closing per share price of Metromile common stock was $3.50.
On the morning of October 7, 2021, representatives of Lemonade contacted representatives of Allen & Company to propose an exchange ratio of one share of Lemonade common stock for every 17 shares of Metromile common stock, but without the inclusion of the EBS business sale right. The representatives of Lemonade noted that Lemonade would agree to Metromile’s revised exclusivity provision. On that same day, representatives of Allen & Company updated the Metromile board of directors regarding Lemonade’s revised proposal, and the Metromile board of directors indicated its approval for Metromile to enter into the revised term sheet. Later in the day on October 7, 2021, Metromile and Lemonade executed the term sheet reflecting such terms.
On October 8, 2021, Lemonade submitted a preliminary due diligence request list to representatives of Allen & Company in respect of the potential transaction.
On October 10, 2021, representatives of Latham & Watkins LLP (“Latham & Watkins”) and Amar, Reiter, Jeanne, Shochatovitch & Co. (“AYR”), legal counsels to Lemonade, and Kirkland had an introductory call to discuss preliminary issues and process considerations for the definitive documentation in respect of the potential transaction and diligence efforts.
On October 13, 2021, representatives of Lemonade, Latham & Watkins and AYR were provided with access to a virtual data room (the “data room”) for purposes of conducting a detailed due diligence review of Metromile and its business. Over the course of the next several weeks, Lemonade engaged in a detailed due diligence review of Metromile, which involved the review of materials in the data room as well as numerous virtual, telephonic and in-person meetings and conversations with Metromile’s management team. Concurrently during that time, representatives of Metromile and its advisors also conducted a due diligence review of Lemonade.
On October 14, 2021, the July Metromile forecasts were made available to a representative of Lemonade, which were consistent with the summary provided on October 2, 2021.
On October 19, 2021, representatives of Latham & Watkins sent an initial draft of a proposed definitive merger agreement to representatives of Kirkland.
On each of October 21, 2021 and October 25, 2021, the strategic committee held meetings with representatives of Kirkland and Allen & Company in attendance. In each such meeting, Mr. Preston provided an update on Lemonade’s due diligence efforts. Representatives of Kirkland also discussed the terms of Lemonade’s initial draft of the merger agreement and potential responses to the terms proposed by Lemonade and other matters relating to the proposed transaction.
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On October 18, 2021 and October 19, 2021, senior executives of Metromile and Lemonade met in person and via video conference to continue the due diligence process and discussions regarding a potential combination of the parties’ businesses. At the October 18, 2021 meeting, Mr. Schreiber initiated a second discussion with Mr. Preston regarding the possibility that Mr. Preston continue his involvement with Metromile’s business as an employee of Lemonade post-closing. Mr. Schreiber and Mr. Preston did not discuss any potential compensation terms at this time. See “Interests of Metromile’s Directors and Executive Officers in the Merger — New Compensation Arrangements with Lemonade” for further information. On October 27, 2021, Metromile’s executive officers, following a discussion with and approval by the strategic committee and the compensation committee of Metromile’s board of directors (the “compensation committee”), after consideration by the strategic committee and the compensation committee regarding the progress that had been made to date on finalizing the terms of the proposed transaction and in view of the material economic terms having been previously agreed, engaged the law firm Withers Bergman LLP to serve as their independent employment counsel with respect to certain post-closing employment matters with Lemonade (see further discussion in the section titled “Interests of Metromile’s Directors and Executive Officers in the Mergers”). Thereafter, certain members of Metromile’s senior management team, including Mr. Preston, were permitted to have discussions with Lemonade regarding the terms of their post-closing employment, and Mr. Preston signed an offer letter from Lemonade regarding such post-closing employment on November 8, 2021, concurrently with the execution and delivery by Lemonade and Metromile of the merger agreement.
Following the October 25, 2021 meeting of the strategic committee, on October 26, 2021, representatives of Kirkland provided a revised draft of the definitive merger agreement to representatives of Latham & Watkins.
Between October 26, 2021 and November 8, 2021, representatives of Latham & Watkins and representatives of Kirkland exchanged drafts of the merger agreement, voting and support agreement and ancillary transaction documents, and together with representatives of Metromile, Lemonade, and Allen & Company, held numerous virtual and telephonic meetings to discuss and negotiate the terms of the merger agreement and other definitive agreements for the transaction.
On October 27, 2021, the compensation committee met to discuss matters relating to employee retention arrangements, the treatment of Metromile’s equity awards in the mergers, and certain related provisions of the merger agreement. Members of Metromile senior management and Kirkland were also present at that meeting.
On October 29, 2021 the Metromile supporting stockholders, representatives of Latham & Watkins sent an initial draft of the voting and support agreement to representatives of Kirkland. Lemonade proposed that the voting and support agreement be executed by certain stockholders of Metromile, including all members of the Metromile board of directors and certain officers (the “supporting stockholders”), pursuant to which the Metromile supporting stockholders would agree, among other things, to vote all of their shares in Metromile in favor of the transaction. For more information, please see “Voting and Support Agreement.”
Also on October 29, 2021, a meeting of the Metromile board of directors was held at which members of Metromile senior management and representatives of Kirkland and Allen & Company were also present. At that meeting, Mr. Preston provided an update regarding the discussions with Lemonade and representatives of Kirkland reviewed with the Metromile board of directors the outstanding material legal issues relating to the transaction agreements. Mr. Preston also notified the Metromile board of directors that representatives of Lemonade had indicated to him that Lemonade’s due diligence review of Metromile had uncovered some items that could change its view on the value of the transaction to Lemonade, but that Lemonade had not yet proposed a change to the exchange ratio of one share of Lemonade common stock for every 17 shares of Metromile common stock that was contemplated by the executed term sheet. During the October 29, 2021 meeting, representatives of Metromile discussed selected metrics of the October Metromile forecasts, which later that day were provided in full to the Metromile board of directors (as further described in the section “Certain Financial Forecasts Utilized by Metromile in Connection with the Mergers”).
Following such meeting, representatives of Kirkland sent representatives of Latham & Watkins a revised draft of the voting and support agreement.
On November 1, 2021, Metromile provided the October Metromile forecasts to Lemonade in the virtual data room.
Also on November 1, 2021, representatives of Latham & Watkins sent a revised draft of the merger agreement to representatives of Kirkland.
On November 2, 2021, the compensation committee met to discuss matters relating to compensation and retention-related matters with respect to, and in light of, the proposed transaction. Representatives of Kirkland and Cooley were also present at that meeting, as well as members of Metromile’s senior management for portions of the meeting.
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On November 3, 2021, Lemonade publicly announced the launch of its own automobile insurance product. On that date, the closing price per share of Lemonade common stock was $72.06, and the closing per share price of Metromile common stock was $3.29.
On November 4, 2021, senior management of Metromile, together with representatives of Allen & Company, had a call with representatives of Lemonade to discuss Lemonade’s upcoming financial results for the third quarter of 2021 and anticipated new guidance for fiscal year 2021. Consistent with Lemonade’s prior preliminary views, such financial results compared favorably to the midpoint of Lemonade’s prior guidance and then-current Wall Street analysts’ consensus estimates for Lemonade for the third quarter. Lemonade’s expected new guidance for the fiscal year 2021 was generally in line with prior guidance, with slightly higher revenue as compared to guidance and Wall Street analysts’ consensus estimates, but with a greater amount of investment (more negative EBITDA loss) as compared to Wall Street consensus estimates and prior guidance.
Also on November 4, 2021, a meeting of the strategic committee was held at which members of Metromile senior management and representatives of Kirkland and Allen & Company were also present. Earlier that day, representatives of Lemonade contacted Metromile management and representatives of Allen & Company to state that, given the relative divergence of the trading prices of Metromile shares and Lemonade shares since the date on which the parties agreed to execute the term sheet, as well as certain items Lemonade had discovered during the course of its due diligence review of Metromile, Lemonade was no longer willing to proceed with the transaction at an exchange ratio of one share of Lemonade common stock for every 17 shares of Metromile common stock, as contemplated by the term sheet, but would be willing to proceed with the transaction if the exchange ratio were revised to one share of Lemonade common stock for every 21 shares of Metromile common stock. After some discussion, the strategic committee determined to authorize a counterproposal to Lemonade to revise the exchange ratio to one share of Lemonade common stock for every 18.5 shares of Metromile common stock, conditioned on Lemonade’s agreement to certain terms of the merger agreement relating to deal protections, which the parties had been negotiating but that had not been agreed upon.
On November 5, 2021, the strategic committee met with members of Metromile senior management and representatives of Kirkland and Allen & Company. Allen & Company noted that it had submitted Metromile’s revised proposal to Lemonade as directed by the strategic committee at its meeting on November 4, 2021, and that Lemonade had not agreed to the counterproposal but had provided verbal feedback regarding a potential path to the resolution of the outstanding points, including that Lemonade could potentially agree to an exchange ratio of one Lemonade share for every 19 shares of Metromile common stock. The strategic committee, members of Metromile senior management and representatives of Kirkland and Allen & Company also discussed potential responses to Lemonade.
On November 6, 2021, representatives of Kirkland sent a revised draft of the merger agreement to representatives of Latham & Watkins and representatives of Metromile, Lemonade and their respective legal advisors met to discuss the draft merger agreement.
On November 7, 2021, representatives of Latham & Watkins sent a revised draft of the merger agreement and voting and support agreement to representatives of Kirkland. The draft of the merger agreement included, among other things, placeholders for the exchange ratio and amount of the termination fee.
On the evening of November 7, 2021, the Metromile board of directors held a virtual meeting at which Metromile’s senior management team and representatives of Kirkland and Allen & Company also were present. Representatives of Kirkland reviewed the framework for the Metromile board of directors’ decision-making process in evaluating a potential transaction with Metromile, as well as the fiduciary duties of the board members. Representatives of Kirkland then provided an overview of the negotiation process to date, as well as a presentation regarding the material terms of the draft merger agreement and the draft voting and support agreement. Specifically, representatives of Kirkland noted that Lemonade had communicated that they would agree to an exchange ratio of one share of Lemonade common stock for every 19 shares of Metromile common stock, but that certain other terms of the merger agreement and voting and support agreement relating to deal protections and termination rights remained outstanding. Also at this meeting, Allen & Company reviewed with the Metromile board of directors its preliminary financial analysis of the exchange ratio. In advance of this meeting, Allen & Company provided certain updated information to the Metromile board of directors regarding Allen & Company’s material relationships with Metromile and Lemonade during the preceding two-year period (this information was consistent with similar information regarding Allen & Company initially provided to the Metromile board of directors on October 6, 2021). After discussion, in order to secure the transaction, the members of the Metromile board of directors determined to agree to the proposed exchange ratio and to many of the proposed material terms of the merger agreement proposed by Lemonade that remained outstanding. The Metromile board then further discussed the advantages and risks of the mergers that are described below in greater detail under the sections titled “The Merger — Reasons for the Merger; Recommendation of Metromile Board of Directors.”
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Following such meeting, on the evening of November 7, 2021, representatives of Kirkland sent a revised draft of the merger agreement to representatives of Latham & Watkins.
On the morning of November 8, 2021, the Metromile board of directors held a virtual meeting with representatives of Kirkland in attendance. Representatives of Metromile’s management team and Allen & Company were also in attendance for portions of the meeting. Representatives of Kirkland provided a presentation regarding the final terms of the merger agreement and the voting and support agreement. Allen & Company then reviewed with the Metromile board of directors its financial analysis of the exchange ratio and rendered an oral opinion, confirmed by delivery of a written opinion dated November 8, 2021, to the Metromile board of directors to the effect that, as of such date and based on and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken as set forth in such opinion, the exchange ratio provided for in the merger agreement was fair, from a financial point of view, to holders of Metromile common stock (other than, to the extent applicable, Lemonade, Acquisition Subs and their respective affiliates). After further discussions, and taking into account the factors described below in greater detail under the sections titled “The Merger — Reasons for the Merger; Recommendation of the Metromile Board of Directors,” the Metromile board of directors unanimously: (i) determined that the mergers are fair to and in the best interests of Metromile and its stockholders; (ii) approved and declared advisable the execution and delivery of the merger agreement, the performance by Metromile of its covenants and agreements contained therein and the transactions contemplated by the merger agreement, including the mergers, all on the terms and subject to the conditions contained therein; (iii) authorized and approved, for all purposes under Section 203 of the Delaware General Corporation Law, the merger agreement and the transactions and other documents and agreements contemplated by the merger agreement and such other documents and agreements, including the voting and support agreements; (iv) directed that the adoption of the merger agreement be submitted to a vote at a meeting of Metromile’s stockholders; and (v) recommended that Metromile’s stockholders adopt the Merger Agreement.
On November 8, 2021, the board of directors of Lemonade approved the execution and delivery of the merger agreement, the performance by Lemonade of its covenants and agreements contained therein and the consummation of the transactions contemplated by the merger agreement, including the mergers, and the issuance of shares of Lemonade common stock in connection therewith.
Immediately after the closing of trading markets on November 8, 2021, Metromile, the Acquisition Subs and Lemonade entered into the merger agreement and the supporting stockholders and Lemonade entered into the voting and support agreements, and Metromile and Lemonade issued a joint press release announcing the mergers.
Metromile Board of Directors and its Reasons for the Transaction
Metromile’s Reasons for the Mergers
The Metromile board of directors held a meeting on November 8, 2021, at which the Metromile board of directors unanimously: (i) determined that the mergers are fair to and in the best interests of Metromile and its stockholders; (ii) approved and declared advisable the execution and delivery of the merger agreement, the performance by Metromile of its covenants and agreements contained therein and the transactions contemplated by the merger agreement, including the mergers, on the terms and subject to the conditions contained therein; (iii) authorized and approved, for all purposes under Section 203 of the Delaware General Corporation Law, the merger agreement and the transactions and other documents and agreements contemplated by the merger agreement and such other documents and agreements; (iv) directed that the adoption of the merger agreement be submitted to a vote at a meeting of Metromile’s stockholders; and (v) recommended that Metromile’s stockholders adopt the merger agreement.
In evaluating the mergers, the Metromile board of directors consulted with Metromile’s management and legal and financial advisors and, in reaching its determinations, the Metromile board of directors considered a number of factors, including the following material factors (not necessarily in order of importance) which they viewed as supporting its unanimous decision to approve the merger agreement:
● | Benefits of a Combination with Lemonade |
● | All-Stock Consideration. As a result of the all-stock merger consideration, upon completion of the mergers, former Metromile stockholders are expected to own approximately 9.9% of the outstanding shares of Lemonade common stock, which will provide such stockholders with an opportunity to participate in the future earnings and growth of Lemonade and indirectly, Metromile, including any appreciation that may be reflected in the value of the combined company (including any resulting synergies). |
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● | Fixed Exchange Ratio. The exchange ratio is fixed, which affords Metromile stockholders the opportunity to benefit from any potential appreciation in the value of Lemonade common stock after the announcement of the mergers. The exchange ratio resulted from extensive negotiation between the parties and, as a result, the Metromile board of directors believes that the final exchange ratio represented the highest value that Metromile could obtain from Lemonade. |
● | Potential Stockholder Value in Light of Available Alternatives. The Metromile board of directors, with the assistance of the strategic committee and Metromile’s senior management and legal and financial advisors, reviewed potential strategic alternatives for Metromile in light of its current and projected financial position and results of operations, the challenges it faces in growing its core business operations as a stand-alone company (including its projected need to raise additional capital in the near term), and its historical and projected ability to execute on its long-term stand-alone plan, in order to identify the course of action that would, in the Metromile board of directors’ opinion, create the most value for Metromile stockholders. The Metromile board of directors believes, after such review of potential strategic alternatives and Metromile’s prospects and challenges as a stand-alone company, that the mergers with Lemonade are a superior alternative to the other alternatives available to Metromile, including remaining a stand-alone public company, considering the potential stockholder value that might result from such alternatives, the feasibility of such alternatives and the risks and uncertainties associated with pursuing such alternatives relative to the mergers with Lemonade. |
● | Exchange Ratio. Based on the closing price of Lemonade common stock on November 5, 2021, the last full trading day before the public announcement of the mergers, the exchange ratio represented an implied value of $3.66 per share and a premium of approximately 18.8% to Metromile’s closing price on November 5, 2021. |
● | Complementary Businesses. The belief of the Metromile board of directors that Metromile’s stockholders will be positioned to enjoy the benefits of combining Metromile’s business with Lemonade’s business, including from the following: |
● | the opportunity to combine with a well-capitalized company with a strong balance sheet and improved liquidity relative to Metromile as a stand-alone company, and the ability of Lemonade to fund additional growth capital into Metromile’s business; |
● | Lemonade’s position in the insurance industry, which the Metromile board of directors believes will provide growth opportunities through bundling, cross-selling and economies of scale that may benefit Metromile’s stockholders as a result of the mergers as compared to Metromile continuing as a stand-alone company; |
● | the fact that Lemonade’s core business has been to offer insurance products that are complementary but not overlapping with Metromile’s core automobile insurance products through technology-enabled platforms and processes, which aligns well with Metromile’s business; and |
● | the potential for the mergers to enhance Metromile’s ability to compete effectively in existing market environments and expand into additional markets, including the ability to capitalize on new growth opportunities and economies of scale by having access to Lemonade’s broad customer base and market experience. |
● | Tax Considerations. The fact that the mergers are intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code with the result that U.S. holders of shares of Metromile common stock generally will not recognize any gain or loss for U.S. federal income tax purposes upon receipt of any portion of the merger consideration delivered in the form of Lemonade common stock. |
● | Opinion of Metromile’s Financial Advisor. The opinion dated November 8, 2021, of Allen & Company to the Metromile board of directors as to the fairness, from a financial point of view and as of such date, of the exchange ratio provided for in the merger agreement, which opinion was based on and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken as set forth in such opinion and is more fully described in the section entitled “Opinion of Metromile’s Financial Advisor”. |
● | Likelihood of Completion. The likelihood that the mergers will be completed, taking into account Lemonade’s strong financial condition, the extensive due diligence performed by Lemonade and the commitments by Lemonade to obtain applicable approvals under regulatory laws pursuant to the merger agreement. |
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● | Terms of the Merger Agreement. As more fully described in the section titled “The Merger Agreement”, the Metromile board of directors, together with Metromile’s legal counsel, carefully reviewed the structure of the proposed mergers and the other terms of the merger agreement, including but not limited to: |
● | that Metromile and Lemonade have agreed to use their respective reasonable best efforts to complete the mergers and obtain the consents and approvals required under applicable insurance and antitrust laws, including the obligation of Lemonade to agree to conditions imposed by regulators to obtain such consents and approvals for the mergers unless such conditions would or would reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of Metromile or Lemonade, respectively, or the aggregate economic benefits that Lemonade reasonably expects to receive from the mergers; and |
● | the right of the Metromile board of directors to respond to unsolicited acquisition proposals, and certain reasonably unforeseeable events or developments, by changing or withdrawing its recommendation to Metromile’s stockholders with respect to the adoption of the merger agreement, generally subject to the payment to Lemonade of the termination fee of $12.5 million if the merger agreement is terminated after such a change or withdrawal of such recommendation. The Metromile board of directors also considered the provisions in the merger agreement restricting Metromile’s ability to solicit alternative transactions or unilaterally to terminate the merger agreement to accept an alternative transaction, and determined in its reasonable judgment that, in light of Metromile’s ability to respond to alternative proposals and the ability of the Metromile board of directors to change or withdraw its recommendation to Metromile’s stockholders with respect to the adoption of the merger agreement, as described in the preceding sentence, such provisions would not preclude other interested third parties from submitting a competing offer for Metromile. In particular, the Metromile board of directors considered the size of the “break-up” termination fee and the related termination rights of the parties and determined that they were reasonable in light of the benefits of the mergers and would not, in the Metromile board of directors’ judgment, preclude other interested third parties, if any, from making a competing offer for Metromile. |
The Metromile board also considered and balanced against the potentially positive factors a number of uncertainties, risks and other countervailing factors in its deliberations concerning the mergers and the merger agreement, including the following (not necessarily in order of relative importance):
● | Fixed Exchange Ratio. The fact that the merger consideration is based on a fixed exchange ratio rather than a fixed value, and, as such, Metromile stockholders cannot be certain at the time of the Metromile special meeting of the market value of the merger consideration they will receive, and the possibility that Metromile stockholders could be adversely affected by a decrease in the trading price of Lemonade common stock before the closing of the mergers. |
● | Interests of Metromile Officers and Directors. The fact that certain of Metromile’s officers and directors may have interests in the mergers that are different from, or in addition to, the interests of Metromile’s stockholders (as more fully described in the section titled “The Merger—Interests of Metromile’s Directors and Executive Officers in the Mergers”). |
● | Risks Associated with the Pendency of the Mergers. The risks and costs relating to the announcement and pendency of the mergers, including the potential for diversion of management and employee attention and the potential effect of the combination on the businesses of both companies and the restrictions on the conduct of Metromile’s business during the period between the execution of the merger agreement and the completion of the mergers. Additionally, the Metromile board of directors considered the possibility that the mergers may not be completed, or that completion may be unduly delayed, for reasons beyond the control of Metromile or Lemonade, including the failure to obtain any required insurance regulatory or antitrust consent or approval, which could result in significant costs and disruptions to Metromile’s normal business, and including that Metromile’s stockholder may not approve adoption of the merger agreement. |
● | Termination Fees and Expenses. The fact that Metromile would be required to pay Lemonade a termination fee of $12.5 million if, among other things, the merger agreement were terminated by Lemonade in connection with a change in the Metromile board of directors’ recommendation to the Metromile stockholders with respect to adoption of the merger agreement. Although the Metromile board of directors believed that this termination fee is reasonable in light of the benefits of the mergers, it is possible that such termination fee, either alone or together with other terms of the merger agreement, could discourage other potential interested third parties, if any, from making a competing offer for Metromile. In addition, Metromile will generally be required to pay its own expenses associated with the mergers, including if the merger agreement is terminated. |
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● | Restrictions on Third-Party Discussions and Termination. The fact that there are restrictions in the merger agreement on Metromile’s ability to solicit competing bids to acquire it and to entertain other acquisition proposals, unless certain conditions are satisfied, and the fact that the Metromile board of directors may not, under the merger agreement, unilaterally terminate the merger agreement to accept an alternative proposal. |
● | Interim Operating Covenants. The fact that the merger agreement contains restrictions on Metromile’s conduct of business prior to the completion of the mergers, which could delay or prevent Metromile from undertaking business opportunities that may arise, or taking other actions with respect to the operations and strategy of Metromile that the Metromile board of directors and Metromile’s management might otherwise believe were appropriate or desirable. |
● | Merger Costs. The substantial transaction costs associated with entering into the merger agreement, whether or not the mergers are completed, as well as the possible diversion of management and employee time and energy, potential opportunity cost and disruption of Metromile’s business operations. |
● | Less Influence over Business Decisions. The fact that current Metromile stockholders will have a significantly reduced ownership and voting interest of the combined company after the mergers and will thus exercise significantly less influence over the policies of the combined company than they now have on the policies of Metromile. |
The foregoing discussion of factors considered by the Metromile board of directors is not intended to be exhaustive, but rather, includes material factors considered by the Metromile board of directors. In reaching its decision to approve the merger agreement, the Metromile board of directors did not quantify or assign relative weights to the factors considered, and individual directors may have given different weights to different factors. The Metromile board of directors considered all of the factors set forth above as a whole, and overall concluded the factors to be favorable and supportive of the determination of the Metromile board of directors.
Recommendation of the Metromile Board
The Metromile board of directors unanimously recommends that you vote “FOR” the Merger Proposal. The Metromile board of directors also recommends that you vote “FOR” the Adjournment Proposal.
In considering the recommendation of the Metromile board of directors with respect to adoption of the merger agreement, Metromile stockholders should note that Metromile directors and executive officers have certain interests in the mergers that may be different from, or in addition to, the interests of stockholders of Metromile generally. The Metromile board of directors was aware of these interests and considered them, among other matters, in approving the mergers and the merger agreement. For more information, please see the section titled “The Mergers—Interests of Metromile’s Directors and Executive Officers in the Mergers.”
Opinion of Metromile’s Financial Advisor
Metromile has engaged Allen & Company as Metromile’s financial advisor in connection with the proposed mergers. In connection with this engagement, Metromile requested that Allen & Company render an opinion to the Metromile board of directors regarding the fairness, from a financial point of view, of the exchange ratio provided for in the merger agreement. On November 8, 2021, at a meeting of the Metromile board of directors held to evaluate the mergers, Allen & Company rendered an oral opinion, which was confirmed by delivery of a written opinion dated November 8, 2021, to the Metromile board of directors to the effect that, as of that date and based on and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken described in its opinion, the exchange ratio provided for in the merger agreement was fair, from a financial point of view, to holders of Metromile common stock (other than, to the extent applicable, Lemonade, Acquisition Subs and their respective affiliates).
The full text of Allen & Company’s written opinion, dated November 8, 2021, which describes the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken, is attached to this proxy statement/prospectus as Annex B and is incorporated by reference herein in its entirety. The description of Allen & Company’s opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of Allen & Company’s opinion. Allen & Company’s opinion and advisory services were intended for the benefit and use of the Metromile board of directors (in its capacity as such) in connection with its evaluation of the exchange ratio from a financial point of view and did not address any other terms, aspects or implications of the mergers. Allen & Company’s opinion did not constitute a recommendation as to the course of action that Metromile (or the Metromile board of directors or any committee thereof) should pursue in connection with the mergers or otherwise address the merits of the underlying decision by Metromile to
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engage in the mergers, including in comparison to other strategies or transactions that might be available to Metromile or which Metromile might engage in or consider. Allen & Company’s opinion does not constitute advice or a recommendation to any securityholder or other person as to how to vote or act on any matter relating to the mergers or otherwise.
Allen & Company’s opinion reflected and gave effect to Allen & Company’s general familiarity with Metromile and Lemonade and the industry in which Metromile and Lemonade operate as well as information that Allen & Company received during the course of its assignment, including information provided by the managements of Metromile and Lemonade in the course of discussions relating to the mergers as more fully described below. In arriving at its opinion, Allen & Company neither conducted a physical inspection of the properties or facilities of Metromile, Lemonade or any other entity nor made or obtained any evaluations or appraisals of the insurance premiums, assets or liabilities (contingent, accrued, derivative, off-balance sheet or otherwise) of Metromile, Lemonade or any other entity, or conducted any analysis concerning the solvency or fair value of Metromile, Lemonade or any other entity. Allen & Company did not investigate, and expressed no opinion or view regarding, any actual or potential litigation, proceedings or claims involving or impacting Metromile, Lemonade or any other entity and Allen & Company assumed, with Metromile’s consent, that there would be no developments with respect to any such matters that would be meaningful in any respect to its analyses or opinion.
In arriving at its opinion, Allen & Company, among other things:
● | reviewed the financial terms of a draft, dated November 8, 2021, of the merger agreement; |
● | reviewed certain publicly available historical and other business and financial information relating to Metromile and Lemonade, including public filings of Metromile and Lemonade, and historical market prices for Metromile common stock and Lemonade common stock; |
● | reviewed certain financial information relating to Metromile, including certain internal financial forecasts, estimates and other financial and operating data relating to Metromile, provided to or discussed with Allen & Company by the management of Metromile; |
● | reviewed certain financial information relating to Lemonade, including certain internal financial forecasts, estimates and other financial and operating data relating to Lemonade, provided to or discussed with Allen & Company by the management of Lemonade and as approved and extended per the management of Metromile; |
● | held discussions with the respective managements of Metromile and Lemonade relating to the operations, financial condition and prospects of Metromile and Lemonade; |
● | reviewed and analyzed certain publicly available information, including certain stock market data and financial information, relating to selected companies with businesses that Allen & Company deemed generally relevant in evaluating Metromile and Lemonade; |
● | reviewed and analyzed certain publicly available financial information relating to selected transactions that Allen & Company deemed generally relevant in evaluating the mergers; and |
● | conducted such other financial analyses and investigations as Allen & Company deemed necessary or appropriate for purposes of its opinion. |
In rendering its opinion, Allen & Company relied upon and assumed, with Metromile’s consent and without independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information available to Allen & Company from public sources, provided to or discussed with Allen & Company by the managements and other representatives of Metromile and Lemonade or otherwise reviewed by Allen & Company. With respect to the financial forecasts, estimates and other financial and operating data relating to Metromile and Lemonade (as approved and extended, in the case of Lemonade, per the management of Metromile and including, without limitation, as to tax attributes) that Allen & Company was directed to utilize for purposes of its analyses and opinion, Allen & Company was advised by the respective managements of Metromile and Lemonade and Allen & Company assumed, at Metromile’s direction, that such financial forecasts, estimates and other financial and operating data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such managements, as the case may be, as to, and were a reasonable basis upon which to evaluate, the future financial and operating performance of Metromile and Lemonade and the other matters covered thereby. Allen & Company expressed no
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opinion or view as to any financial forecasts, estimates or other financial or operating data or the assumptions on which they were based.
Allen & Company relied, at Metromile’s direction, upon the assessments of the managements of Metromile and Lemonade as to, among other things, (i) the potential impact on Metromile and Lemonade of certain market, competitive, geopolitical, macroeconomic, cyclical, seasonal and other conditions, trends and developments in and prospects for, and governmental, regulatory and legislative policies and matters relating to or otherwise affecting, the insurance industry, including the sectors of such industry and geographic regions in which Metromile and Lemonade operate, (ii) the capital necessary to support the respective businesses and growth initiatives of Metromile and Lemonade and to satisfy statutory capital and surplus requirements, (iii) the respective products and digital platforms, software, technology and intellectual property of Metromile and Lemonade (including associated risks), (iv) Metromile’s and Lemonade’s internal controls over financial reporting and related procedures, (v) implications for Metromile and Lemonade and their respective operations of the global COVID-19 pandemic, (vi) existing and future agreements and arrangements involving, and the ability to attract, retain and/or replace, key employees, customers, reinsurers, third-party service providers, partners and other commercial relationships of Metromile and Lemonade, and (vii) the ability to integrate the operations of Metromile and Lemonade. With Metromile’s consent, Allen & Company assumed that there would be no developments with respect to any such matters that would have an adverse effect on Lemonade, Metromile or the mergers (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to its analyses or opinion.
Further, Allen & Company’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Allen & Company as of, the date of its opinion. It should be understood that subsequent developments may affect the conclusion expressed in Allen & Company’s opinion and that Allen & Company assumed no responsibility for advising any person of any change in any matter affecting Allen & Company’s opinion or for updating or revising its opinion based on circumstances or events occurring after the date of such opinion. As the Metromile board of directors was aware, the credit, financial and stock markets, the industry in which Metromile and Lemonade operate and the securities of Metromile and Lemonade have experienced and may continue to experience volatility and Allen & Company expressed no opinion or view as to any potential effects of such volatility on Metromile, Lemonade or the mergers (including the contemplated benefits thereof).
Allen & Company assumed, with Metromile’s consent, that the mergers would be consummated in accordance with their terms and in compliance with all applicable laws, documents and other requirements, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the necessary governmental, regulatory or third party approvals, consents, releases, waivers, decrees and agreements for the mergers, no delay, limitation, restriction or condition, including any divestiture or other requirements or remedies, amendments or modifications, would be imposed or occur that would have an adverse effect on Metromile, Lemonade or the mergers (including the contemplated benefits thereof) that would be meaningful in any respect to Allen & Company’s analyses or opinion. Allen & Company also assumed, with Metromile’s consent, that the mergers, taken together, would qualify for U.S. federal income tax purposes as a reorganization within the meaning of Section 368 of the Code and would otherwise qualify for the intended tax treatment contemplated by the merger agreement. In addition, Allen & Company assumed, with Metromile’s consent, that the final executed merger agreement would not differ from the draft reviewed by Allen & Company in any respect meaningful to its analyses or opinion.
Allen & Company’s opinion was limited to the fairness, from a financial point of view and as of the date of such opinion, of the exchange ratio (to the extent expressly specified in such opinion), without regard to individual circumstances of specific holders of Metromile common stock (whether by virtue of control, voting, liquidity, contractual arrangements or otherwise) that may distinguish such holders or the securities of Metromile held by such holders, and Allen & Company’s opinion did not in any way address proportionate allocation or relative fairness. Allen & Company’s opinion also did not address any other terms, aspects or implications of the mergers, including, without limitation, the form or structure of the mergers, any voting and support agreement or any other agreements, arrangements or understandings entered into in connection with, related to or contemplated by the mergers or otherwise. Allen & Company expressed no opinion or view as to the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation or other consideration payable to any officers, directors or employees of any party to the mergers or any related entities, or any class of such persons or any other party, relative to the exchange ratio or otherwise. Allen & Company did not express any opinion or view as to the actual value of Lemonade common stock when issued or the prices at which Lemonade common stock or any other securities of Lemonade, or any securities of Metromile, may trade or otherwise be transferable at any time, including following announcement or consummation of the mergers. In addition, Allen & Company expressed no opinion or view with respect to accounting, tax, regulatory, legal or similar matters, including, without limitation, as to tax or other consequences of the mergers or otherwise or changes in, or the impact of, accounting standards, tax and other laws, regulations and governmental and legislative policies affecting Metromile, Lemonade or the mergers (including the contemplated benefits thereof), and Allen & Company relied, at Metromile’s direction, upon the assessments of representatives of Metromile as to such matters. Allen & Company’s opinion did not
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constitute a recommendation as to the course of action that Metromile (or the Metromile board of directors or any committee thereof) should pursue in connection with the mergers or otherwise address the merits of the underlying decision by Metromile to engage in the mergers, including in comparison to other strategies or transactions that might be available to Metromile or which Metromile might engage in or consider.
In connection with its opinion, Allen & Company performed a variety of financial and comparative analyses, including those described below. The summary of the analyses below and certain factors considered is not a comprehensive description of all analyses undertaken or factors considered by Allen & Company. The preparation of a financial opinion or analysis is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion and analyses are not readily susceptible to summary description. Allen & Company arrived at its opinion based on the results of all analyses undertaken and assessed as a whole, and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, Allen & Company believes that the analyses and factors summarized below must be considered as a whole and in context. Allen & Company further believes that selecting portions of the analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses and factors, could create a misleading or incomplete view of the processes underlying Allen & Company’s analyses and opinion.
In performing its financial analyses, Allen & Company considered industry performance, general business and economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Metromile and Lemonade. No company, business or transaction reviewed is identical or directly comparable to Metromile or Lemonade, their respective businesses or the mergers and an evaluation of these analyses is not entirely mathematical; rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading, acquisition or other values of the companies, businesses or transactions reviewed. The estimates of the future performance of Metromile and Lemonade in or underlying Allen & Company’s analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those estimates or those suggested by such analyses. These analyses were prepared solely as part of Allen & Company’s analysis of the fairness, from a financial point of view, of the exchange ratio and were provided to the Metromile board of directors in connection with the delivery of Allen & Company’s opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, the assumptions and estimates used in, and the reference ranges resulting from, any particular analysis described below are inherently subject to substantial uncertainty and should not be taken as the views of Allen & Company regarding the actual value of Metromile and Lemonade.
Allen & Company did not recommend that any specific consideration constituted the only appropriate consideration in the mergers. The type and amount of consideration payable in the mergers was determined through negotiations between Metromile and Lemonade, rather than by any financial advisor, and was approved by the Metromile board of directors. The decision of Metromile to enter into the merger agreement was solely that of the Metromile board of directors. Allen & Company’s opinion and analyses were only one of many factors considered by the Metromile board of directors in its evaluation of the proposed mergers and the exchange ratio and should not be viewed as determinative of the views of the Metromile board of directors or management with respect to the mergers or the exchange ratio provided for in the mergers.
Financial Analysis
The summary of the financial analyses described in this section entitled “—Financial Analysis” is a summary of the material financial analyses provided by Allen & Company in connection with its opinion, dated November 8, 2021, to the Metromile board of directors. The summary set forth below is not a comprehensive description of all analyses undertaken by Allen & Company in connection with its opinion, nor does the order of the analyses in the summary below indicate that any analysis was given greater weight than any other analysis. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by Allen & Company, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses performed by Allen & Company. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Allen & Company. Future results may differ from those described and such differences may be material. For purposes of the financial analyses described below, the term (i) “gross earned premium” refers to such term to the extent reported as such or, alternatively, to similar metrics as reported, such as total revenue, total generated premium, net earned premium or gross written premium, and (ii) “adjusted gross profit” refers to such term to the extent reported as such or, alternatively, to similar metrics as reported, such as net revenue, and is calculated, as applicable, as revenue less loss and loss
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adjustment expense less servicing expense. Except as otherwise noted, financial data utilized for Metromile in the financial analyses described below were based on certain internal financial forecasts, estimates and other financial and operating data relating to Metromile provided to or discussed with Allen & Company by the management of Metromile, referred to in this section as the “Metromile forecasts,” and financial data utilized for Lemonade in the financial analyses described below were based on certain internal financial forecasts, estimates and other financial and operating data relating to Lemonade provided to or discussed with Allen & Company by the management of Lemonade and as approved and extended per the management of Metromile, referred to in this section as the “Lemonade forecasts.”
In calculating implied exchange ratio reference ranges as reflected in the financial analyses described below, Allen & Company divided the low-ends (or high-ends, as the case may be) of the approximate implied per share equity value reference ranges derived for Metromile from such analyses by the high-ends (or low-ends, as the case may be) of the approximate implied per share equity value reference ranges derived for Lemonade from such analyses in order to calculate the low-ends (or high-ends, as the case may be) of the implied exchange ratio reference ranges.
Selected Public Companies Analyses. Allen & Company performed separate selected public companies analyses of Metromile and Lemonade in which Allen & Company reviewed certain financial and stock market information relating to Metromile, Lemonade and the selected publicly traded companies listed below.
Metromile. In its selected public companies analysis of Metromile, Allen & Company reviewed certain financial and stock market information relating to Metromile and the following 11 selected publicly traded companies with operations in the insurance industry that Allen & Company considered generally relevant for purposes of analysis, consisting of the following six growth insurance companies, referred to in this section as the “Metromile selected growth insurance companies,” and five mature insurance companies, referred to in this section as the “Metromile selected mature insurance companies” and, together with the Metromile selected growth insurance companies, collectively, the “Metromile selected companies:”
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Metromile Selected
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Metromile Selected
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· Hippo Holdings, Inc. · Kinsale Capital Group, Inc. · Lemonade · Palomar Holdings, Inc. · Root, Inc. · Trupanion, Inc. |
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· Aflac Incorporated · Chubb Limited · The Allstate Corporation, Inc. · The Progressive Corporation · The Travelers Companies, Inc. |
Allen & Company reviewed, among other information, enterprise values, calculated as implied equity values based on closing stock prices on November 5, 2021 plus total debt, preferred equity and non-controlling interests (as applicable) and less cash and cash equivalents (excluding insurance subsidiary cash, restricted cash and required regulatory capital) and unconsolidated assets, as a multiple of calendar year 2022 estimated gross earned premium. Financial data of the Metromile selected companies were based on publicly available Wall Street research analysts’ estimates, public filings and other publicly available information. Financial data of Metromile was based on the Metromile forecasts, Wall Street research analysts’ estimates, public filings and other publicly available information.
The overall low to high calendar year 2022 estimated gross earned premium multiples observed for the Metromile selected companies were 0.8x to 7.8x (with a mean of 3.1x and a median of 2.4x). Allen & Company noted that the calendar year 2022 estimated gross earned premium multiples observed for Metromile based on the Metromile forecasts and Wall Street research analysts’ estimates were 2.1x and 1.6x, respectively. Allen & Company then applied a selected range of calendar year 2022 estimated gross earned premium multiples derived from the Metromile selected companies of 1.5x to 2.5x to corresponding data of Metromile based on the Metromile forecasts. This analysis indicated an approximate implied equity value reference range for Metromile of $2.53 to $3.45 per share.
Lemonade. In its selected public companies analysis of Lemonade, Allen & Company reviewed certain financial and stock market information relating to Lemonade and the following 15 publicly traded companies with operations in the insurance and financial technology industries that Allen & Company considered generally relevant for purposes of analysis, consisting of the following four growth insurance companies, referred to in this section as the “Lemonade selected growth insurance companies,” five mature insurance companies, referred to in this section as the “Lemonade selected mature insurance companies” and six growth financial technology companies, referred to in this section as the “Lemonade selected growth financial technology companies” and,
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together with the Lemonade selected growth insurance companies and the Lemonade selected mature insurance companies, collectively, the “Lemonade selected companies:”
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Lemonade Selected
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Lemonade Selected
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Lemonade Selected Growth
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· Hippo Holdings, Inc. · Kinsale Capital Group, Inc. · Palomar Holdings, Inc. · Trupanion, Inc. |
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· Aflac Incorporated · Chubb Limited · The Allstate Corporation, Inc. · The Progressive Corporation · The Travelers Companies, Inc. |
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· Adyen N.V. · Affirm Holdings, Inc. · Lending Club Corporation · Shopify Inc. · SoFi Technologies, Inc. · Upstart Holdings, Inc. |
Allen & Company reviewed, among other information, enterprise values, calculated as implied equity values based on closing stock prices on November 5, 2021 plus total debt, preferred equity and non-controlling interests (as applicable) and less cash and cash equivalents (excluding insurance subsidiary cash, restricted cash and required regulatory capital) and unconsolidated assets, as multiples of calendar year 2022 estimated gross earned premium and calendar year 2023 estimated adjusted gross profit. Financial data of the Lemonade selected companies were based on publicly available Wall Street research analysts’ estimates, public filings and other publicly available information. Financial data of Lemonade was based on the Lemonade forecasts, Wall Street research analysts’ estimates, public filings and other publicly available information.
The overall low to high calendar year 2022 estimated gross earned premium and calendar year 2023 estimated adjusted gross profit multiples observed for the Lemonade selected companies were 0.8x to 6.0x (with a mean of 2.9x and a median of 2.4x) and 2.2x to 43.4x (with a mean of 18.5x and a median of 11.5x), respectively. Allen & Company noted that the calendar year 2022 estimated gross earned premium and calendar year 2023 estimated adjusted gross profit multiples observed for Lemonade were 7.7x and 24.1x, respectively, based on the Lemonade forecasts and 7.8x and 24.5x, respectively, based on Wall Street research analysts’ estimates. Allen & Company then applied selected ranges of calendar year 2022 estimated gross earned premium and calendar year 2023 estimated adjusted gross profit multiples derived from the Lemonade selected companies of 4.0x to 6.0x and 20.0x to 30.0x, respectively, to corresponding data of Lemonade based on the Lemonade forecasts. This analysis indicated an approximate implied equity value reference range for Lemonade of $43.44 to $57.48 per share (based on calendar year 2022 estimated gross earned premium) and $60.44 to $82.87 per share (based on calendar year 2023 estimated adjusted gross profit).
Utilizing the approximate implied per share equity value reference ranges derived for Metromile and Lemonade described above, Allen & Company calculated the following approximate implied exchange ratio reference ranges, as compared to the exchange ratio:
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Implied Exchange Ratio Reference Range
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Implied Exchange Ratio Reference Range
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Exchange Ratio |
0.044x – 0.080x |
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0.031x – 0.057x |
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0.05263x |
Selected Precedent Transactions Analysis. Using publicly available information, Allen & Company reviewed financial data relating to the following eight selected transactions involving target companies with operations in the insurance industry that Allen & Company considered generally relevant for purposes of analysis, collectively referred to in this section as the “Metromile selected transactions:”
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Announcement Date |
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Acquiror |
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Target |
February 2021 |
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· The Progressive Corporation |
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· Protective Insurance Corporation |
January 2021 |
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· TowerBrook Capital Partners, L.P.; Further Global Capital Management L.P. |
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· Prosight Global, Inc. |
October 2020 |
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· Arch Capital Group Ltd. |
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· Watford Holdings Ltd. |
August 2018 |
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· Apollo Global Management LLC |
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· Aspen Insurance Holdings Limited |
August 2018 |
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· The Hartford Financial Services Group, Inc. |
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· The Navigators Group, Inc. |
February 2018 |
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· Kemper Corporation |
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· Infinity Property and Casualty Corporation |
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July 2017 |
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· Markel Corporation |
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· State National Companies, Inc. |
March 2015 |
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· Endurance Specialty Holdings Ltd. |
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· Montpelier Re Holdings Ltd. |
Allen & Company reviewed, among other information, transaction values of the Metromile selected transactions, calculated as the enterprise values implied for the target companies involved in the selected transactions based on the consideration paid or payable in the selected transactions as a multiple of the latest 12 months gross earned premium of the target company as of the applicable announcement date of such transaction. Financial data for the Metromile selected transactions were based on publicly available Wall Street research analysts’ estimates, public filings and other publicly available information. Financial data of Metromile was based on internal financial information provided by Metromile management, public filings and other publicly available information.
The overall low to high latest 12 months gross earned premium multiples observed for the Metromile selected transactions were 0.6x to 2.7x (with a mean of 1.2x and a median of 1.1x). Allen & Company then applied a selected range of latest 12 months gross earned premium multiples derived from the Metromile selected transactions of 1.5x to 2.5x to the latest 12 months (as of September 30, 2021) gross earned premium of Metromile based on the Metromile forecasts. This analysis indicated an approximate implied equity value reference range for Metromile of $2.28 to $3.04 per share, as compared to the approximate implied value for Metromile common stock of $3.66 per share based on the exchange ratio and the closing price of Lemonade common stock on November 5, 2021.
Discounted Cash Flow Analyses. Allen & Company performed separate discounted cash flow analyses of Metromile and Lemonade as described below.
Metromile. Allen & Company performed a discounted cash flow analysis of Metromile by calculating, based on the Metromile forecasts, the estimated present value (as of September 30, 2021) of the standalone unlevered, after-tax free cash flows that Metromile was forecasted to generate during the fiscal years ending December 31, 2021 through December 31, 2031. For purposes of this analysis, (i) stock-based compensation was treated as a cash expense and the potential tax benefit of Metromile’s net operating losses was taken into account and (ii) Allen & Company observed the calendar year 2022 estimated net operating profit after-tax multiples for the Metromile selected mature insurance companies, which ranged from approximately 12x to 19x, and the calendar year 2021 estimated revenue multiples for selected public companies with enterprise business operations that Allen & Company deemed generally relevant, which indicated a median calendar year 2021 estimated revenue multiple of 6.3x. Allen & Company calculated implied terminal values for Metromile by applying to Metromile’s fiscal year 2031 estimated net operating profit after tax for its insurance operations a selected range of net operating profit after-tax multiples of 16.0x to 19.0x and applying to Metromile’s fiscal year 2031 estimated revenue for its enterprise business operations a selected revenue multiple of 6.5x. The present values (as of September 30, 2021) of the cash flows and terminal values were then calculated using a selected range of discount rates of 8.5% to 9.5%. This analysis indicated an approximate implied equity value reference range for Metromile of $2.30 to $3.48 per share.
Lemonade. Allen & Company performed a discounted cash flow analysis of Lemonade by calculating, based on the Lemonade forecasts, the estimated present value (as of September 30, 2021) of the standalone unlevered, after-tax free cash flows that Lemonade was forecasted to generate during the fiscal years ending December 31, 2021 through December 31, 2031. For purposes of this analysis, (i) stock-based compensation was treated as a cash expense and the potential tax benefit of Lemonade’s net operating losses was taken into account and (ii) Allen & Company observed the calendar year 2022 estimated net operating profit after-tax multiples for the Lemonade selected mature insurance companies, which ranged from approximately 12x to 19x. Allen & Company calculated implied terminal values for Lemonade by applying to Lemonade’s fiscal year 2031 estimated net operating profit after tax a selected range of net operating profit after-tax multiples of 16.0x to 19.0x. The present values (as of September 30, 2021) of the cash flows and terminal values were then calculated using a selected range of discount rates of 8.0% to 9.0%. This analysis indicated an approximate implied equity value reference range for Lemonade of $69.78 to $83.67 per share.
Utilizing the approximate implied per share equity value reference ranges derived for Metromile and Lemonade described above, Allen & Company calculated the following implied exchange ratio reference range, as compared to the exchange ratio:
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Implied Exchange Ratio Reference Range |
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Exchange Ratio |
0.027x – 0.050x |
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0.05263x |
Miscellaneous
Metromile selected Allen & Company as its financial advisor in connection with the proposed mergers based on, among other things, Allen & Company’s reputation, experience and general familiarity with Metromile and Lemonade and the industry in which
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Metromile and Lemonade operate. Allen & Company, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, private placements and related financings, negotiated underwritings, secondary distributions of listed and unlisted securities, and valuations for corporate and other purposes. As the Metromile board of directors was aware, Allen & Company in the past has provided investment banking services to Metromile unrelated to the mergers and to Lemonade and in the future may provide such services to Metromile, Lemonade and/or their respective affiliates, for which Allen & Company has received and would expect to receive compensation, including, during the two-year period prior to the date of Allen & Company’s opinion, having acted as (i) co-placement agent for the private placement undertaken in connection with Metromile’s business combination with INSU for which services, during such two-year period, Allen & Company received an aggregate fee of approximately $1.1 million, and (ii) co-bookrunning manager for the initial underwritten public offering and a follow-on underwritten public offering of Lemonade common stock for which services, during such two-year period, Allen & Company received aggregate fees of approximately $7.5 million. In the ordinary course, Allen & Company as a broker-dealer and certain of its affiliates, directors and officers have invested or may invest, hold long or short positions and may trade, either on a discretionary or non-discretionary basis, for their own or beneficiaries’ accounts or for those of Allen & Company’s clients, in the debt and equity securities (or related derivative securities) of Metromile and Lemonade and/or their respective affiliates. The issuance of Allen & Company’s opinion was approved by Allen & Company’s opinion committee.
For Allen & Company’s financial advisory services, Metromile has agreed to pay Allen & Company an aggregate cash fee, based on the exchange ratio and the closing price of Lemonade common stock on November 5, 2021 (the last trading day prior to public announcement of the mergers), of approximately $10.5 million, of which a portion was payable upon delivery of Allen & Company’s opinion and approximately $9 million is payable contingent upon consummation of the mergers. Metromile also agreed to reimburse Allen & Company’s reasonable expenses and to indemnify Allen & Company and related parties against certain liabilities, including liabilities under the federal securities laws, arising out of its engagement.
Certain Financial Forecasts Utilized by Metromile in Connection with the Mergers
Metromile does not, as a matter of general practice, publicly disclose long-term forecasts or internal projections of its future performance, revenues, earnings, financial condition or other results given, among other reasons, the inherent uncertainty and subjectivity of the underlying assumptions and estimates.
In late July and early August 2021, as part of Metromile’s quarterly business plan review, the Metromile board of directors reviewed nonpublic internal financial projections for Metromile for fiscal years 2022 through 2024. In October 2021, in connection with its consideration of potential strategic alternatives, including a potential transaction with Lemonade, the Metromile board of directors again reviewed such forecasts, which now included fiscal years 2025 and 2026 (as had been extrapolated by Metromile management in July 2021) (the “July Metromile forecasts”). The July Metromile forecasts were not updated as of that time by Metromile management to refine the assumptions and estimates included therein to reflect more recent information available to Metromile management regarding the Metromile business and industry dynamics.
In October 2021, the Metromile board of directors and management team determined that, as a result of more up-to-date information then available to Metromile regarding industry dynamics and the performance of the Metromile business, an update of the July Metromile forecasts was necessary and appropriate. Accordingly, Metromile management (i) updated the July Metromile forecasts to refine certain of the assumptions and estimates included therein to reflect more recent information available to Metromile management at the time of such update and (ii) further extrapolated such projections for fiscal years 2027 through 2031 (such updated and extrapolated forecasts, the “October Metromile forecasts” and, together with the July Metromile forecasts, the “Metromile standalone forecasts”).
Also, in connection with Metromile’s evaluation of a potential transaction with Lemonade, Lemonade provided to Metromile and its financial advisor, Allen & Company, a summary forecast relating to Lemonade’s business and financial prospects, derived from selected equity research analysts’ estimates concerning Lemonade for fiscal years 2022 through 2025, which, informed by discussions with Lemonade management, Metromile management then extrapolated for fiscal years 2026 through 2031 (the “extrapolated Lemonade forecasts” and, together with the Metromile standalone forecasts, the “Metromile forecasts”).
Metromile management provided the Metromile forecasts to the Metromile board of directors in connection with its evaluation of the mergers. The Metromile forecasts were also provided to Metromile’s financial advisor, Allen & Company, which was directed by Metromile to use and rely upon the October Metromile forecasts and the extrapolated Lemonade forecasts for purposes of its financial analyses and opinion as more fully described in the section entitled “Opinion of Metromile’s Financial Advisor” of this proxy statement/prospectus. In connection with Lemonade’s due diligence review of Metromile, the Metromile standalone forecasts were also provided to Lemonade and Lemonade’s financial advisor, Liontree, as well as certain elements of the extrapolated Lemonade forecasts.
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The inclusion of the Metromile forecasts in this proxy statement/prospectus should not be regarded as an indication that any of Metromile, Lemonade, their respective advisors or other representatives, or any other recipient of such forecasts considered, or now considers, them to be necessarily predictive of actual future performance or events, or that they should be construed as financial guidance, and such summary projections set forth below should not be relied on as such.
The Metromile forecasts were prepared treating Metromile (and Lemonade, with respect to the extrapolated Lemonade forecasts) on a standalone basis, without giving effect to the mergers. The Metromile forecasts represent only one respective scenario in a wide range of potential outcomes. While presented with numerical specificity, the Metromile forecasts reflect numerous respective estimates and assumptions relating to industry dynamics, changes and performance, general business, economic, regulatory, market, and financial conditions and other future events, as well as matters specific to Metromile’s business (or Lemonade’s business, with respect to the extrapolated Lemonade forecasts), all of which are inherently uncertain and difficult to predict and many of which are beyond Metromile’s and Lemonade’s control. As a result, there can be no assurance that the financial projections and extrapolations included in this proxy statement/prospectus will be realized or that actual results will not be significantly higher or lower than such financial projections and extrapolations. Since the Metromile forecasts cover multiple years, such information, by its nature, becomes less predictive with each successive year. The Metromile forecasts are subjective in many respects and thus are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. As such, the Metromile forecasts constitute forward-looking information and are subject to risks and uncertainties. For a description of certain of such risks and uncertainties, please see the section entitled “Risk Factors” of this proxy statement/prospectus. You should also read the section entitled “Forward-Looking Statements” of this proxy statement/prospectus for additional information regarding the risks inherent in forward-looking information such as the Metromile forecasts.
The Metromile forecasts were prepared solely for internal use and not with a view toward public disclosure or toward complying with GAAP, the published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither Metromile’s nor Lemonade’s respective independent registered public accounting firm, nor any other independent accountants, has compiled, examined or performed any procedures with respect to the Metromile forecasts, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the Metromile forecasts. Furthermore, the Metromile forecasts do not take into account any circumstances or events occurring after the date on which they were prepared. Nonetheless, a summary of the Metromile forecasts is provided in this proxy statement/prospectus only because the Metromile forecasts were made available to the Metromile board and Allen & Company, and the Metromile standalone forecasts and certain elements of the extrapolated Lemonade forecasts were made available to Lemonade and Liontree. A summary of the Metromile forecasts is not included in this proxy statement/prospectus to influence any stockholder’s decision regarding how to vote on any given proposal. None of Metromile, Lemonade or their respective affiliates, officers, directors, advisors or other representatives can give any assurance that actual results will not differ from the Metromile forecasts and none of them has made or makes any representation to any stockholder of Metromile or other person regarding the ultimate performance of Metromile compared to the information contained in the Metromile forecasts or that forecasted results will be achieved. Neither Metromile nor any of its affiliates undertakes any obligation to update or otherwise revise or reconcile the Metromile forecasts to reflect circumstances existing after the date on which such Metromile forecasts were prepared or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the Metromile forecasts are shown to be inappropriate. In light of the foregoing factors and the uncertainties inherent in the Metromile forecasts, Metromile stockholders are cautioned not to unduly rely on the summary of the Metromile forecasts included in this proxy statement/prospectus, and Metromile urges you to review Metromile’s most recent SEC filings for a description of Metromile’s reported financial results included therein.
The tables below presents a summary of the Metromile forecasts. Certain of the financial measures included in the Metromile forecasts that are included in the summary tables of the Metromile forecasts presented below may be considered non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by Metromile may not be comparable to similarly titled amounts used by other companies. Financial measures provided to a board of directors or financial advisor in connection with a business combination are excluded from the definition of non-GAAP financial measures under the rules of the SEC, and therefore the Metromile forecasts are not subject to SEC rules regarding disclosures of non-GAAP financial measures, which would otherwise require a reconciliation of a non-GAAP financial measure to a GAAP financial measure. Reconciliations of non-GAAP financial measures were not provided to or relied upon by the Metromile board of directors, Allen & Company, Lemonade or Liontree in connection with the mergers. Accordingly, no reconciliation of the financial measures included in the Metromile forecasts is provided in this proxy statement/prospectus.
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July Metromile Forecasts
The following is a summary of the July Metromile forecasts:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending December 31, |
|
|||||||||||||
(Dollars in millions) |
|
2022E |
|
2023E |
|
2024E |
|
2025E |
|
2026E |
|
|||||
Direct Earned Premium |
|
$ |
160 |
|
$ |
275 |
|
$ |
470 |
|
$ |
743 |
|
$ |
1,138 |
|
Insurance Revenue(1) |
|
$ |
162 |
|
$ |
281 |
|
$ |
484 |
|
$ |
766 |
|
$ |
1,176 |
|
Contribution Profit(2) |
|
$ |
7 |
|
$ |
31 |
|
$ |
79 |
|
$ |
151 |
|
$ |
269 |
|
Operating Income(3) |
|
$ |
(133) |
|
$ |
(140) |
|
$ |
(130) |
|
$ |
(97) |
|
$ |
(19) |
|
(1) | The Metromile board of directors was provided with this Insurance Revenue line item for the July Metromile Forecasts only through fiscal year 2024. |
(2) | Contribution Profit is defined as premiums, interest and other income, minus losses, loss adjustment expense, premium taxes, bad debt, payment processing fees, data costs, underwriting reports and other costs related to servicing policies. |
(3) | The Metromile board of directors was provided with this Operating Income line item for the July Metromile Forecasts only through fiscal year 2024. |
October Metromile Forecasts
The following is a summary of the October Metromile forecasts:
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Fiscal Year Ending December 31, |
|
||||||||||||||||||||||||||||
(Dollars in millions) |
|
2022E |
|
2023E |
|
2024E |
|
2025E |
|
2026E |
|
2027E |
|
2028E |
|
2029E |
|
2030E |
|
2031E |
|
||||||||||
Direct Earned Premium |
|
$ |
131 |
|
$ |
183 |
|
$ |
272 |
|
$ |
385 |
|
$ |
512 |
|
$ |
644 |
|
$ |
780 |
|
$ |
924 |
|
$ |
1,075 |
|
$ |
1,235 |
|
Insurance Revenue |
|
$ |
132 |
|
$ |
187 |
|
$ |
281 |
|
$ |
397 |
|
$ |
530 |
|
$ |
665 |
|
$ |
807 |
|
$ |
955 |
|
$ |
1,111 |
|
$ |
1,277 |
|
Contribution Profit(1) |
|
$ |
0 |
|
$ |
12 |
|
$ |
31 |
|
$ |
57 |
|
$ |
93 |
|
$ |
136 |
|
$ |
187 |
|
$ |
245 |
|
$ |
304 |
|
$ |
350 |
|
Operating Income |
|
$ |
(126) |
|
$ |
(130) |
|
$ |
(132) |
|
$ |
(127) |
|
$ |
(102) |
|
$ |
(69) |
|
$ |
(28) |
|
$ |
22 |
|
$ |
74 |
|
$ |
109 |
|
Unlevered Free Cash Flow (2) |
|
$ |
(111) |
|
$ |
(104) |
|
$ |
(100) |
|
$ |
(124) |
|
$ |
(108) |
|
$ |
(84) |
|
$ |
(60) |
|
$ |
(25) |
|
$ |
8 |
|
$ |
78 |
|
(1) | Contribution Profit is defined as premiums, interest and other income, minus losses, loss adjustment expense, premium taxes, bad debt, payment processing fees, data costs, underwriting reports and other costs related to servicing policies. |
(2) | Unlevered Free Cash flow is defined as after-tax operating income, less capital expenditures, plus depreciation and amortization, plus change in net working capital. |
Extrapolated Lemonade Forecasts
The following is a summary of the extrapolated Lemonade forecasts:
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|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Fiscal Year Ending December 31, |
|
||||||||||||||||||||||||||||
(Dollars in millions) |
|
2022E |
|
2023E |
|
2024E |
|
2025E |
|
2026E |
|
2027E |
|
2028E |
|
2029E |
|
2030E |
|
2031E |
|
||||||||||
In Force Premium |
|
$ |
632 |
|
$ |
864 |
|
$ |
1,248 |
|
$ |
1,693 |
|
$ |
2,235 |
|
$ |
2,838 |
|
$ |
3,520 |
|
$ |
4,224 |
|
$ |
5,000 |
|
$ |
5,750 |
|
Gross Earned Premium |
|
$ |
458 |
|
$ |
692 |
|
$ |
1,024 |
|
$ |
1,400 |
|
$ |
1,869 |
|
$ |
2,414 |
|
$ |
3,026 |
|
$ |
3,685 |
|
$ |
4,389 |
|
$ |
5,116 |
|
Adjusted Gross Profit(1) |
|
$ |
91 |
|
$ |
147 |
|
$ |
212 |
|
$ |
303 |
|
$ |
414 |
|
$ |
547 |
|
$ |
701 |
|
$ |
872 |
|
$ |
1,061 |
|
$ |
1,262 |
|
EBITDA(2) |
|
$ |
(235) |
|
$ |
(196) |
|
$ |
(173) |
|
$ |
(117) |
|
$ |
(39) |
|
$ |
57 |
|
$ |
171 |
|
$ |
299 |
|
$ |
442 |
|
$ |
594 |
|
Unlevered Free Cash Flow(3) |
|
$ |
(249) |
|
$ |
(180) |
|
$ |
(121) |
|
$ |
(22) |
|
$ |
94 |
|
$ |
227 |
|
$ |
374 |
|
$ |
546 |
|
$ |
729 |
|
$ |
942 |
|
(1) | Adjusted Gross Profit is defined as gross profit, excluding net investment income, plus employee-related costs, plus professional fees and other, plus depreciation and amortization (allocated to cost of revenue). |
95
(2) | EBITDA is defined as net loss excluding the impact of interest expense, income tax expense, depreciation, amortization, stock-based compensation, net investment income and other transactions that Lemonade considers to be unique in nature. |
(3) | Unlevered free cash flow is defined as EBITDA, less stock-based compensation expense, less cash taxes, less capital expenditures, plus change in working capital. |
Closing and Effective Time of the Mergers
The closing of the mergers will take place no later than the second (2nd) business day after the satisfaction or waiver (to the extent permitted) of the last of the conditions to closing (described under “The Merger Agreement—Conditions to the Completion of the Merger”) to be satisfied or waived (other than such conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of each of such conditions at the closing), unless another date is agreed to in writing by Lemonade and Metromile.
At the closing, the parties to the merger agreement will cause a certificate of merger relating to the first merger to be executed and filed with the Secretary of State of the State of Delaware and make all other filings or recordings required by the DGCL in connection with effecting the first merger and immediately thereafter a certificate of merger relating to the second merger (together with the certificate of merger relating to the first merger, the “certificates of merger”) to be executed and filed with the Secretary of State of the State of Delaware and make all other filings or recordings required by the DGCL and DLLCA in connection with effecting the second merger. The mergers will become effective at the time when the certificates of merger are filed with the Secretary of State of the State of Delaware or at such later time as may be agreed to in writing by Lemonade and Metromile and specified in the certificates of merger.
Lemonade and Metromile currently expect the mergers to close by the second quarter of 2022 and are working to complete the mergers on this timeline and prior to the end date (which, pursuant to the terms of the merger agreement, may be extended to November 8, 2022 in certain circumstances related to the receipt of required regulatory approvals and the absence of restraints under applicable legal requirements). However, it is possible that factors outside Lemonade’s or Metromile’s control could result in the mergers being completed at a different time, or not at all.
Ownership of the Combined Company
Based on the anticipated treatment of equity-based awards and the number of shares of Lemonade and Metromile common stock outstanding on December 10, 2021, the latest practicable date prior to the date of this proxy statement/prospectus, upon completion of the mergers, former Metromile stockholders are expected to own approximately 9.9% of the outstanding shares of Lemonade common stock and Lemonade stockholders immediately prior to the mergers are expected to own approximately 90.1% of the outstanding shares of Lemonade common stock. The relative ownership interests of Lemonade stockholders and former Metromile stockholders in the combined company immediately following the mergers will depend on the number of shares of Lemonade and Metromile common stock issued and outstanding immediately prior to the mergers.
Governance of the Combined Company
Upon consummation of the mergers, the executive management team of Lemonade is expected to remain unchanged and consist of members of the Lemonade executive management team prior to the mergers, including Lemonade’s executive officers set forth below in “Interests of Lemonade Directors and Executive Officers in the Merger.”
U.S. Federal Securities Law Consequences
Assuming the effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus forms a part, the shares of Lemonade common stock issued in the mergers will not be subject to any restrictions on transfer arising under the Securities Act or the Exchange Act, except for shares of Lemonade common stock issued to any Metromile stockholder who may be deemed an “affiliate” of Lemonade after the completion of the mergers. This proxy statement/prospectus does not cover resales of shares of Lemonade common stock received by any person upon the completion of the mergers, and no person is authorized to make any use of this proxy statement/prospectus, or the registration statement on Form S-4 of which this proxy statement/prospectus forms a part, in connection with any resale of shares of Lemonade common stock.
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Accounting Treatment
Lemonade prepares its financial statements in accordance with GAAP. The mergers will be accounted for using the acquisition method of accounting under the provisions of ASC 805, Business Combinations. Lemonade’s management has evaluated the guidance contained in ASC 805 with respect to the identification of the acquirer in the mergers and concluded, based on a consideration of the pertinent facts and circumstances, that Lemonade will be the acquirer for financial accounting purposes. Accordingly, Lemonade’s cost to acquire Metromile has been allocated to Metromile’s acquired assets and liabilities based upon their estimated fair values. The allocation of the purchase price is estimated and is dependent upon estimates of certain valuations that are subject to change. In addition, the final purchase price of Lemonade’s acquisition of Metromile will not be known until the date of the completion of the mergers and could vary materially from the preliminary purchase price. Accordingly, the final acquisition accounting adjustments may be materially different from the preliminary unaudited pro forma adjustments presented.
The financial condition and results of operations of Lemonade after completion of the mergers will include the operating results of Metromile beginning from the closing date but will not be restated retroactively to reflect the historical financial condition or results of operations of Metromile. The earnings of Lemonade following completion of the mergers will reflect acquisition accounting adjustments, including the effect of changes in the carrying value for assets and liabilities on depreciation expense and amortization expense. Indefinite-lived intangible assets, including goodwill, will not be amortized but will be tested for impairment at least annually, and all tangible and intangible assets including goodwill will be tested for impairment when certain indicators are present. If, in the future, Lemonade determines that tangible or intangible assets (including goodwill) are impaired, Lemonade would record an impairment charge at that time.
Exchange of Shares
Prior to the closing date, Lemonade will select its transfer agent or another reputable bank or trust company reasonably satisfactory to both parties to act as exchange agent with respect to the mergers. Prior to or substantially concurrent with the first effective time, Lemonade will deposit with the exchange agent (a) certificates or evidence of book-entry shares representing the shares of Lemonade common stock issuable pursuant to the merger agreement and (b) cash sufficient to make payments in lieu of fractional shares in accordance with the merger agreement. In addition, at or prior to the closing, Lemonade will deposit (or cause to be deposited or maintained) with Metromile, by wire transfer of immediately available funds, the aggregate (i) Option Consideration owed to all holders of outstanding and unexercised Metromile stock options held by any individual who was not employed by or providing services to Metromile as of November 8, 2021 and (ii) RSU Consideration owed to all holders of each outstanding Metromile RSU award held by Metromile’s non-employee directors and each Metromile RSU award that is outstanding and vests based on the achievement of one or more performance criteria.
At the first effective time, all shares of Metromile common stock outstanding immediately prior to the first effective time will automatically be cancelled and will cease to exist, and all holders of Metromile stock certificates and of Metromile book-entry shares (each as defined under “The Merger Agreement—Exchange of Shares”) will cease to have any rights as Metromile stockholders, except the right to receive the merger consideration, any cash in lieu of fractional shares of Lemonade common stock, and any dividends or other distributions that such holder has the right to receive pursuant to the merger agreement.
At the second effective time, all shares of common stock of Metromile as the surviving corporation in the first merger outstanding immediately prior to the second effective time will automatically be cancelled and will cease to exist. In addition, each limited liability company interest of Acquisition Sub II issued and outstanding immediately prior to the second effective time will remain outstanding as a limited liability company interest of the Surviving Company.
As promptly as reasonably practicable after the first effective time (but in no event later than five (5) business days after the first effective time), Lemonade will cause the exchange agent to mail to each holder of record (a) a notice advising such holder of the effectiveness of the mergers, (b) a letter of transmittal and (c) instructions for surrendering such holder’s Metromile stock certificates in exchange for the merger consideration.
Holders of Metromile stock certificates, after providing the proper documentation to the exchange agent, will receive from the exchange agent a statement reflecting the number of whole shares of Lemonade common stock such holder was entitled to receive (in non-certificated book-entry form) and cash in lieu of fractional shares of Lemonade common stock to which such holders are entitled (without interest and less any applicable withholding taxes) plus any unpaid dividends or other distributions that such holder has the right to receive pursuant to the merger agreement.
97
Holders of book-entry shares of Metromile common stock, whether through DTC or otherwise, will not be required to take any specific actions to exchange their shares of Metromile common stock for shares of Lemonade common stock.
Book-entry shares not held through DTC will be exchanged for shares of Lemonade common stock (in non-certificated book-entry form) and cash in lieu of fractional shares of Lemonade common stock to which such holders are entitled without any action on the part of the applicable holder plus any unpaid dividends or other distributions that such holder has the right to receive pursuant to the merger agreement. Lemonade, Metromile and the exchange agent will implement customary procedures with respect to the surrender and exchange of shares held of record by DTC and its nominees.
More information can be found under “The Merger Agreement—Exchange of Shares.”
Listing of Lemonade Common Stock; Delisting and Deregistration of Metromile Common Stock
It is a condition of the mergers that the shares of Lemonade common stock to be issued to Metromile stockholders in the mergers be approved for listing on the NYSE, subject to official notice of issuance.
If the mergers are completed, Metromile common stock will be delisted from the Nasdaq Capital Market and deregistered under the Exchange Act, and Metromile will no longer be required to file periodic reports with the SEC with respect to Metromile common stock.
Metromile has agreed to cooperate with Lemonade prior to the closing to cause the Metromile common stock to be delisted from the Nasdaq Capital Market and deregistered under the Exchange Act as soon as practicable following the first effective time.
98
THE MERGER AGREEMENT
The following description sets forth the principal terms of the merger agreement, which is attached as Annex A hereto and incorporated by reference in this proxy statement/prospectus. The rights and obligations of the parties are governed by the express terms and conditions of the merger agreement and not by this description, which is summary by nature. This description does not purport to be complete and is qualified in its entirety by reference to the complete text of the merger agreement. You are encouraged to read the merger agreement carefully and in its entirety, as well as this proxy statement/prospectus and the documents incorporated by reference herein, before making any decisions regarding any of the proposals described in this proxy statement/prospectus. This section is intended to provide you with information regarding the terms of the merger agreement. Accordingly, the representations, warranties, covenants and other agreements in the merger agreement should not be read alone, and you should read the information provided elsewhere in this proxy statement/prospectus and in the public filings Lemonade and Metromile make with the SEC. See “Where You Can Find More Information.”
Explanatory Note Regarding the Merger Agreement
The merger agreement and this summary of its terms have been included to provide you with information regarding the terms of the merger agreement. Lemonade and Metromile are responsible for considering whether additional disclosure of material information is required to make the statements in this proxy statement/prospectus not misleading. Factual disclosures about Lemonade and Metromile contained in this proxy statement/prospectus and in the public filings Lemonade and Metromile make with the SEC may supplement, update or modify the factual disclosures about Lemonade and Metromile contained in the merger agreement and described in this summary. The representations, warranties and covenants made in the merger agreement by Lemonade, the Acquisition Subs and Metromile are qualified and subject to important limitations agreed to by the parties to the merger agreement in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were made solely for the benefit of the parties to the merger agreement, and were negotiated with the principal purpose of allocating risk between the parties to the merger agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality that may be different from that generally relevant to stockholders or applicable to reports and documents filed with the SEC, and in some cases are qualified by confidential disclosures that were made by each party to the other, which disclosures are not reflected in the merger agreement or otherwise publicly disclosed. The representations and warranties in the merger agreement will not survive the completion of the mergers. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement/prospectus, may have changed since the date of the merger agreement. For the foregoing reasons, the representations, warranties and covenants or any descriptions of those provisions should not be read alone, but instead should be read together with the information provided elsewhere in this proxy statement/prospectus and in the public filings Lemonade and Metromile make with the SEC.
Additional information about Lemonade and Metromile can be found elsewhere in this proxy statement/prospectus and in the public filings Lemonade and Metromile make with the SEC. See “Where You Can Find More Information.”
Structure of the Mergers
First, on the closing date, at the effective time of the first merger (the “first effective time”), Acquisition Sub I will be merged with and into Metromile in accordance with the DGCL and on the terms and subject to the conditions set forth in the merger agreement, whereupon the separate existence of Acquisition Sub I will cease and Metromile will be the surviving corporation of the first merger and a wholly owned subsidiary of Lemonade.
Second, on the closing date following the first merger, at the effective time of the second merger (the “second effective time”), Metromile will be merged with and into Acquisition Sub II in accordance with the DGCL and the DLLCA, whereupon the separate existence of Metromile will cease and Acquisition Sub II will be the surviving limited liability company (the “Surviving Company”).
At the second effective time, all of the property, rights, powers, privileges and franchises of Metromile, Acquisition Sub I and Acquisition Sub II will vest in the Surviving Company as the surviving limited liability company, and all of the debts, obligations, liabilities, restrictions and duties of Metromile, Acquisition Sub I and Acquisition Sub II will become debts, obligations, liabilities, restrictions and duties of the Surviving Company as the surviving limited liability company.
99
Completion and Effectiveness of the Mergers
The closing of the mergers will take place on a date to be designated jointly by Lemonade and Metromile, which date will be no later than the second (2nd) business day after the satisfaction or waiver (to the extent permitted) of the last of the conditions to closing (described under “—Conditions to the Completion of the Mergers”) to be satisfied or waived (other than such conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of each of such conditions at the closing), unless another date is agreed to in writing by Lemonade and Metromile. The date on which the closing occurs is referred to as the “closing date.”
At the closing, the parties to the merger agreement will cause separate certificates of merger relating to each merger to be executed and filed with the Secretary of State of the State of Delaware and make all other filings or recordings required by the DGCL in connection with each merger (and, in connection with the second merger, required by the DLLCA). Each merger will become effective at the time when the respective certificate of merger is filed with the Secretary of State of the State of Delaware or at such later time as may be agreed to in writing by Lemonade and Metromile and specified in the applicable certificate of merger.
Merger Consideration
At the first effective time, automatically, by virtue of the first merger and without any further action on the part of Metromile, Metromile stockholders, Lemonade or Acquisition Sub I:
● | all shares of Metromile common stock that are held in treasury by Metromile or are held directly by Lemonade or Acquisition Sub I immediately prior to the first effective time will be cancelled and will cease to exist and no consideration will be paid or payable in respect thereof; |
● | except as described in the preceding bullet point, each share of Metromile common stock that is issued and outstanding immediately prior to the first effective time (including the “Earnout Shares,” as such term is defined in that certain Sponsor Share Cancellation and Vesting Agreement, dated as of November 24, 2020, by and among INSU, Insurance Acquisition Sponsor II, LLC, and Dioptra Advisors II, LLC) will be converted into the right to receive, without interest, 0.05263 validly issued, fully paid and non-assessable shares of Lemonade common stock; and |
● | each share of common stock, par value $0.01 per share, of Acquisition Sub I that is issued and outstanding immediately prior to the first effective time will be converted into one (1) validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of Metromile as the Surviving Company. |
At the second effective time, automatically, by virtue of the second merger and without any further action on the part of Metromile, Metromile stockholders, Lemonade or the Acquisition Subs:
● | each share of common stock, par value $0.01 per share, of Metromile that is issued and outstanding immediately prior to the second effective time will be cancelled and will cease to exist. Each limited liability company interest of Acquisition Sub II issued and outstanding immediately prior to the second effective time will remain outstanding as a limited liability company interest of the Surviving Company. |
Treatment of Fractional Shares
No fractional shares of Lemonade common stock will be issued in connection with the mergers. Each Metromile stockholder who would otherwise have been entitled to receive in the mergers a fractional share of Lemonade common stock pursuant to the merger agreement will, in lieu of such fractional share and upon surrender of such holder’s certificates representing shares of Metromile common stock or book-entry positions representing non-certificated shares of Metromile common stock, in each case outstanding as of immediately prior to the first effective time, be paid in cash the dollar amount (rounded to the nearest whole cent), without interest and subject to any required tax withholding, determined by multiplying such fraction by the average of the volume-weighted average trading prices per share of Lemonade common stock on the NYSE (as reported by Bloomberg L.P.) on each of the twenty consecutive trading days ending on (and including) the trading day that is three (3) trading days prior to the date of the first effective time (as adjusted to reflect any stock splits, stock dividends, combinations, reorganizations, reclassifications or similar events). No such holder will be entitled to dividends, voting rights or any other rights in respect of any fractional share of Lemonade common stock that would otherwise have been issuable as part of the merger consideration. The payment of cash in lieu of fractional share interests merely represents a mechanical rounding-off of the fractions in the exchange.
100
Exchange of Shares
Exchange Agent
Prior to the closing date, Lemonade will select its transfer agent or another reputable bank or trust company reasonably satisfactory to both parties to act as exchange agent with respect to the mergers.
Prior to or substantially concurrent with the first effective time, Lemonade will deposit with the exchange agent (a) certificates or evidence of book-entry shares representing the shares of Lemonade common stock issuable pursuant to the merger agreement and (b) cash sufficient to make payments in lieu of fractional shares in accordance with the merger agreement. In addition, at or prior to the closing, Lemonade will deposit (or cause to be deposited or maintained) with Metromile, by wire transfer of immediately available funds, the aggregate (i) Option Consideration owed to all holders of outstanding and unexercised Metromile stock options held by any individual who was not employed by or providing services to Metromile as of November 8, 2021 and (ii) RSU Consideration owed to all holders of each outstanding Metromile RSU award held by Metromile’s nonemployee directors and each Metromile RSU award that is outstanding and vests based on the achievement of one or more performance criteria.
Exchange of Metromile Stock Certificates and Metromile Book-Entry Shares
With respect to certificates representing shares of Metromile common stock (collectively, the “Metromile stock certificates”), as promptly as reasonably practicable after the first effective time (but in no event later than five (5) business days after the first effective time), the exchange agent will mail to each holder of record of each Metromile stock certificate (a) a notice advising such holder of the effectiveness of the mergers, (b) a letter of transmittal and (c) instructions for surrendering Metromile stock certificates in exchange for the merger consideration.
Upon surrender of a Metromile stock certificate and a duly executed letter of transmittal to the exchange agent in compliance with the instructions for surrender, Lemonade will instruct, and use its reasonable best efforts to cause, the exchange agent to mail to each holder of record, as promptly as reasonably practicable thereafter:
● | a statement reflecting the number of whole shares of Lemonade common stock, if any, that such holder is entitled to receive pursuant to the merger agreement in non-certificated book-entry form in the name of such record holder; and |
● | a check in the amount (after giving effect to any required tax withholdings as provided in the merger agreement) of (a) any cash in lieu of fractional shares of Lemonade common stock plus (b) any unpaid cash dividends and any other dividends or other distributions that such holder has the right to receive pursuant to the merger agreement. |
With respect to book-entry positions representing non-certificated shares of Metromile common stock (the “Metromile book-entry shares”) that are not held through DTC, the exchange agent will pay and deliver to each holder of record of any such share as promptly as reasonable practicable after the first effective time, but in any event within five (5) business days thereafter:
● | the merger consideration; and |
● | a check in the amount (after giving effect to any required tax withholdings as provided in the merger agreement) of (a) any cash in lieu of fractional shares of Lemonade common stock plus (b) any unpaid cash dividends and any other dividends or distributions that such holder has the right to receive pursuant to the merger agreement. The exchange agent will promptly cancel each such non-DTC book-entry share. |
With respect to Metromile book-entry shares that are held through DTC, Lemonade and Metromile will cooperate to establish procedures with the exchange agent and DTC to ensure that the exchange agent will transmit to DTC or its nominees as soon as practicable after the effective time, but in any event within five (5) business days thereafter, upon surrender of shares held of record by DTC or its nominees in accordance with DTC’s customary surrender procedures:
● | the merger consideration; |
● | any cash in lieu of fractional shares of Lemonade common stock; and |
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● | any unpaid cash dividends and any other dividends or other distributions that such holder has the right to receive pursuant to the merger agreement. |
In the event of a transfer of ownership of shares of Metromile common stock that is not registered in Metromile’s transfer records, the exchange agent may deliver the merger consideration and any cash in lieu of fractional shares of Lemonade common stock to such transferee if:
● | in the case of Metromile book-entry shares, written instructions authorizing the transfer of the Metromile book-entry shares are presented to the exchange agent; |
● | in the case of Metromile stock certificates, the Metromile stock certificates formerly representing such shares of Metromile common stock are surrendered to the exchange agent; and |
● | such Metromile stock certificates or Metromile book-entry shares are presented to the exchange agent accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable transfer taxes have been paid or are not applicable, in each case, in form and substance reasonably satisfactory to Lemonade and the exchange agent. |
Lost, Stolen or Destroyed Certificates
In the event that any Metromile stock certificate has been lost, stolen or destroyed, then, upon the making of an affidavit of that fact by the person claiming such Metromile stock certificate to be lost, stolen or destroyed and the posting by such person of a bond in a reasonable and customary amount and upon such terms as may reasonably be required as indemnity against any claim that may be made against it with respect to such Metromile stock certificate, the exchange agent will issue in exchange for such lost, stolen or destroyed Metromile stock certificate, the merger consideration, any cash in lieu of fractional shares of Lemonade common stock, and any unpaid cash dividends and any other dividends or other distributions, in each case, payable or issuable pursuant to the merger agreement, as if such lost, stolen or destroyed Metromile stock certificate had been surrendered.
Dividends and Distributions with Respect to Unexchanged Shares of Metromile Common Stock
No dividends or other distributions declared or made with respect to shares of Lemonade common stock with a record date after the effective time will be paid or otherwise delivered to the holder of any unsurrendered Metromile stock certificate or Metromile book-entry shares with respect to the shares of Lemonade common stock that such holder has the right to receive in the mergers until the later to occur of:
● | the date on which the holder surrenders such Metromile stock certificate or Metromile book-entry shares in accordance with the merger agreement; and |
● | the payment date for such dividend or distribution with respect to shares of Lemonade common stock (at which time such holder will be entitled, subject to the effect of applicable abandoned property, escheat or similar laws, to receive all such dividends and distributions, without interest). |
Rights of Metromile Stockholders Following the Effective Time and Transfers Following the Effective Time
At the first effective time, all shares of Metromile common stock outstanding immediately prior to the first effective time will automatically be cancelled and will cease to exist, and all holders of Metromile stock certificates and of Metromile book-entry shares will cease to have any rights as Metromile stockholders, except the right to receive the merger consideration, any cash in lieu of fractional shares of Lemonade common stock, and any dividends or other distributions that such holder has the right to receive pursuant to the merger agreement.
At the second effective time, all shares of common stock of Metromile as the surviving corporation in the first merger outstanding immediately prior to the second effective time will automatically be cancelled and will cease to exist. In addition, each limited liability company interest of Acquisition Sub II issued and outstanding immediately prior to the second effective time will remain outstanding as a limited liability company interest of the Surviving Company.
Neither Lemonade, Metromile as the surviving corporation in the first merger nor the Surviving Company will be liable to any holder or former holder of shares of Metromile common stock or to any other person with respect to any portion of the merger
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consideration delivered to any public official pursuant to any applicable abandoned property law, escheat law or other similar law. If any Metromile stock certificate or Metromile book-entry share has not been surrendered prior to the date on which any portion of the merger consideration and any dividends or distributions, in each case, that a holder of such Metromile stock certificate or Metromile book-entry share has the right to receive pursuant to the merger agreement in respect of such Metromile stock certificate or Metromile book-entry share would otherwise escheat to or become property of any governmental entity, any such shares, cash, dividends or distributions in respect of such Metromile stock certificate or Metromile book-entry share will, to the extent permitted by applicable legal requirements, become the property of Lemonade, free and clear of all claims or interests of any person previously entitled thereto.
Withholding Rights
Lemonade, the exchange agent, the Acquisition Subs, Metromile, Metromile as the surviving corporation in the first merger and the Surviving Company will each be entitled to deduct and withhold any amounts required to be deducted or withheld pursuant to applicable tax laws from the amounts that would otherwise be payable under the terms of the merger agreement. Any such amounts that are deducted or withheld and, if required, paid over to the appropriate governmental authorities will be treated as having been paid to the person in respect of which such deduction or withholding was made.
Treatment of Metromile Equity Awards
Except as set forth in the immediately following sentence, each Metromile stock option, whether vested or unvested, that is outstanding and unexercised immediately prior to the effective time will, as of the effective time, be assumed by Lemonade and automatically converted into a stock option to acquire a number of shares of Lemonade common stock (rounded down to the nearest whole share) equal to the product of (i) the number of shares subject to the Metromile stock option and (ii) the exchange ratio, with an exercise price per share of Lemonade common stock (rounded up to the nearest whole cent) equal to (A) the per share exercise price of the Metromile stock option divided by (B) the exchange ratio. Each outstanding and unexercised Metromile stock option held by any individual who was not employed by or providing services to Metromile as of November 8, 2021, will, as of the effective time, be converted into the right to receive an amount in cash, without interest, equal to the Option Consideration. Any such Metromile stock option that has an exercise price per share that is greater than or equal to the per Metromile share cash consideration will be cancelled for no consideration.
Except as set forth in the immediately following sentence, each Metromile RSU award that is outstanding immediately prior to the effective time will, as of the effective time, be assumed by Lemonade and automatically converted into a Lemonade RSU award covering a number of shares of Lemonade common stock equal to (i) the number of shares of Metromile common stock underlying such Metromile RSU award multiplied by (ii) the exchange ratio. Each outstanding Metromile RSU award held by Metromile’s non-employee directors and each Metromile RSU award that is outstanding and vests based on the achievement of one or more performance criteria will be cancelled and converted automatically into the right to receive an amount in cash, without interest, equal to the RSU Consideration. For purposes of the foregoing, the determination of actual performance with respect to any performance-based Metromile RSU awards and the number of shares underlying the Metromile RSU award that vest as of the effective time as a result of such performance will be made by Metromile prior to the effective time in accordance with the terms and conditions of the applicable award agreement.
Aside from the foregoing adjustments, each Metromile stock option and Metromile RSU Award that is assumed by Lemonade will generally remain subject to the same vesting and other terms and conditions that applied to such award immediately prior to the effective time.
Treatment of Metromile Warrants
At the first effective time, each Metromile warrant exercisable for Metromile common stock (each, a “Metromile Warrant”) will cease to represent a Metromile Warrant and will be assumed by Lemonade and converted automatically into a warrant denominated in shares of Lemonade common stock from Lemonade on the same terms and conditions (including vesting terms) as applied to such Metromile Warrant immediately prior to the first effective time (with the number of warrants and exercise price being adjusted based on the exchange ratio).
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Treatment of Additional Shares
The parties agreed that if the transactions contemplated by the merger agreement, including the mergers, constitute an “Acceleration Event” (as such term is defined in that certain Agreement and Plan of Merger and INSU, Reorganization, dated as of November 24, 2020 and as amended on January 12, 2021 and further amended on February 8, 2021, by and among INSU, INSU II Merger Sub Corp. and Legacy Metromile the “INSU Merger Agreement”), (a) the terms and conditions set forth in Section 2.17(g) of the INSU Merger Agreement will apply to the transactions contemplated by the merger agreement, including the mergers, (b) the Metromile Additional Shares (as such term is defined in the section “Interests of Metromile Directors and Executive Officers in the Merger-Metromile Additional Shares”) will be issued as of immediately prior to the first effective time and (c) in accordance with the INSU Merger Agreement, as of the first effective time, each Metromile Additional Share will be converted into the right to receive Lemonade common stock in accordance with the exchange ratio.
If the transactions contemplated by the merger agreement, including the mergers, do not constitute an “Acceleration Event” (as such term is defined in the INSU Merger Agreement), then, pursuant to, and in accordance with the terms of the INSU Merger Agreement, if, (a) at any point following the first effective time and prior to February 9, 2023, the closing share price of Lemonade common stock over any 20 trading days within any 30 trading day period is greater than the quotient of (i) $15.00 divided by (ii) the exchange ratio, then, (b) as soon as practicable (but in any event within 10 business days) after such satisfaction, Lemonade will issue, on a ratable basis to the persons eligible to receive such Metromile Additional Lemonade Additional Shares (as such term is defined in the section “Interests of Metromile Directors and Executive Officers in the Merger-Metromile Additional Shares”).
Organizational Documents and Directors and Officers of the Surviving Company
Subject to the requirements described under “—Indemnification; Directors’ and Officers’ Insurance,”:
● | at the first effective time, the certificate of incorporation and bylaws of Metromile, as in effect immediately prior to the first effective time, will continue to be the certificate of incorporation and bylaws of the surviving corporation of the first merger until, subject to the terms of the merger agreement, thereafter changed or amended as provided therein or by applicable legal requirements; |
● | at the second effective time, the certificate of formation of Acquisition Sub II, as in effect immediately prior to the second effective time, will be amended and restated in its entirety to read as the certificate of formation of the Surviving Company; and |
● | at the second effective time, the limited liability company agreement of Acquisition Sub II, as in effect immediately prior to the second effective time, will be amended and restated in its entirety to read as the limited liability company agreement of the Surviving Company. |
From and after the first effective time, the directors and officers of Acquisition Sub I immediately prior to the effective time will become the initial directors and officers of Metromile as the surviving corporation of the first merger.
From and after the second effective time, the directors and officers of Acquisition Sub II immediately prior to the second effective time will become the initial directors and officers of the Surviving Company as the surviving limited liability company of the second merger.
Representations and Warranties
The merger agreement contains customary and, in certain cases, reciprocal, representations and warranties by Lemonade, the Acquisition Subs and Metromile that are subject, in some cases, to specified exceptions and qualifications contained in confidential disclosure letters and qualified by certain information filed by the parties with the SEC, excluding, in each case, any disclosures set forth in any risk factor section or “forward-looking statements” sections.
The reciprocal representations and warranties relate to, among other things:
● | organization, good standing and qualification to do business and subsidiaries’ organization, good standing and qualification to do business; |
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● | capitalization; |
● | corporate authority and approval relating to the execution, delivery and performance of the merger agreement; |
● | the absence of any violation of organizational documents, any conflict with or violation of applicable legal requirements, any violation of or default under contracts, or any lien on the properties, rights or assets of a party or its subsidiaries as a result of the execution and delivery of the merger agreement and completion of the mergers; |
● | the proper filing of reports, schedules, forms, documents and financial statements required by the SEC; |
● | the maintenance of internal controls and procedures; |
● | the absence of certain material changes or events in the respective businesses of each of Lemonade and Metromile; |
● | the absence of undisclosed liabilities; |
● | investigations, litigations and proceedings; |
● | the absence of any need for action by governmental authorities in order to complete the merger, except as may be required by the Securities Act, the Exchange Act, the DGCL, the HSR Act or other applicable competition laws, applicable state securities takeover and “blue sky” laws or Nasdaq Capital Market or NYSE rules and regulations; |
● | the inapplicability of state anti-takeover statutes; |
● | compliance with applicable legal requirements and the holding of necessary permits; |
● | broker’s and finder’s fees; |
● | tax matters, including the Intended Tax Treatment; and |
● | information provided by a party for inclusion in this proxy statement/prospectus. |
The merger agreement also contains additional representations and warranties by Metromile relating to, among other things, the following:
● | Metromile’s required stockholder approval; |
● | intellectual property, information technology and data privacy and security; |
● | real property leased by Metromile; |
● | Metromile’s significant contracts and agreements, including reinsurance contracts; |
● | regulatory matters, including compliance with (i) anti-corruption laws (ii) money laundering related laws and (iii) economic sanctions/trade laws; |
● | employee benefit plans and employment and labor practices; |
● | compliance with environmental laws and regulations; |
● | insurance policies, insurance procedures and insurance producers; |
● | insurance matters relating to Metromile’s subsidiaries that conduct the business of insurance (each, a “Metromile insurance subsidiary”), including required licenses, authorization, compliance with insurance laws, authority to issue insurance |
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contracts, jurisdiction of commercial domicile, capital or surplus requirements imposed by governmental entities and permitted accounting practices in respect of the preparation of statutory statements; |
● | reinsurance matters; |
● | opinion of Metromile's financial advisor; |
● | provision of copies of statutory statements in respect of Metromiles’ insurance subsidiaries; and |
● | the absence of ownership (as defined in Section 203(c) of the DGCL) of shares of Lemonade common stock by Metromile and its subsidiaries. |
The merger agreement also contains additional representations and warranties by Lemonade relating to, among other things, the following:
● | the absence of ownership (as defined in Section 203(c) of the DGCL) of shares of Metromile common stock by Lemonade and its subsidiaries; and |
● | ownership and operation of the Acquisition Subs. |
The representations and warranties will not survive the mergers. Many of the representations and warranties contained in the merger agreement are qualified by a “materiality” standard or by a “material adverse effect” standard.
Material Adverse Effect
A material adverse effect, with respect to Lemonade or Metromile, as applicable, means any fact, circumstance, condition, event, change, development, occurrence, result, effect, action or omission that, individually or in the aggregate, (i) prevents, materially impairs, materially impedes or materially delays the consummation of the mergers and the other transactions contemplated by the merger agreement on a timely basis and in any event on or before the end date or (ii) has had, or would reasonably expected to have a material adverse effect on the business, financial condition or results of operations of the party and its subsidiaries, taken as a whole,; provided, however, that with respect to clause (ii)only, no fact, circumstance, condition, event, change, development, occurrence, result, effect, action or omission that results from or arises out of any of the following shall, to such extent, be deemed to constitute, or be taken into account in determining the occurrence of, a material adverse effect:
● | general economic, political, business, industry financial or market conditions affecting the industry in which the Company and its Subsidiaries operate; |
● | a pandemic (including the SARS-CoV-2 virus and COVID-19 disease), pandemic measure, epidemic, plague, or other outbreak of illness or public health event, hurricane, flood, tornado, earthquake, wildfire or other natural disaster, catastrophe event or act of God; |
● | changes in applicable legal requirements or the interpretation thereof; |
● | changes in GAAP, SAP or any other applicable accounting standards or principles or the interpretation thereof; |
● | any outbreak, continuation or escalation of any military conflict, declared or undeclared war, armed hostilities, or acts of foreign or domestic terrorism (including cyber-terrorism) in countries in which, or in the proximate geographic region of which, the Company or its Subsidiaries operate; |
● | a failure by the party or any of its subsidiaries to meet any internal or external projections or forecasts or any decline in stock price (but excluding, in each case, the underlying causes of such failure or decline, as applicable, which may themselves constitute or be taken into account in determining whether there has been or would be a material adverse effect to the extent otherwise permitted and not otherwise excluded by the definition of material adverse effect); |
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● | the public announcement, pendency or consummation of the mergers and the other transactions contemplated by the merger agreement; |
● | any action expressly required to be taken by the party pursuant to the terms of the merger agreement or at the express written direction or consent of the other party; |
provided, further, that any fact, circumstance, condition, event, change, development, occurrence, result, effect, action or omission relating to or aeising out of the first five bullet points above occurance of a material advese effect to the extent such fact, circumstance, condition, event, change, development, occurrence, result, effect, action or omission has a disproportionate adverse impact on the party and its subsidiaries as compared to other participants that operate in the industry in which the party and its subsidiaries operate.
A “pandemic measure” means any quarantine, “shelter in place,” “stay at home,” workforce reduction, social distancing, shut down, closure, sequester or any other Legal Requirement, Order, directive, guideline or recommendation by any governmental entity, in each case, in connection with or in response to COVID-19 or any other pandemic or epidemic.
Conduct of Business Prior to the Completion of the Mergers
Metromile has also agreed that, except (i) as may be required by applicable legal requirements, (ii) as expressly permitted or required by the merger agreement, (iii) as set forth in Metromile’s disclosure schedule, or (iv) unless Lemonade approves in writing, Metromile will not, and will not permit its subsidiaries to:
● | amend its organizational documents; |
● | split, combine, subdivide, change, exchange, amend the terms of or reclassify any shares of Metromile’s capital stock or other equity interests of Metromile or any of its subsidiaries; |
● | declare, set aside, make or pay any dividend or other distribution on any shares of its capital stock or equity interest, other than dividends or distributions to the extent paid by any wholly owned subsidiary of a party to such party or to another wholly owned subsidiary of such party; |
● | acquire (by merger, consolidation, operation of law, acquisition of stock, other equity interests or assets, formation of a joint venture or otherwise) (a) any other entity, (b) any equity interest in any other entity, (c) any business owned by a third party or (d) assets in a single transaction or series of related transactions for an aggregate purchase price in excess of $250,000, except, (i) acquisitions by Metromile from any of its wholly owned subsidiaries or among any of its wholly owned subsidiaries; (ii) the purchase of equipment, supplies and inventory in the ordinary course of business, or (iii) inbound licenses of intellectual property in the ordinary course of business; provided that the issuance of any insurance contract by a Metromile insurance subsidiary will not be considered the acquisition of a business; |
● | issue, sell or grant any additional shares of its capital stock or other equity interests, any securities convertible into or exchangeable for any such shares, or any options, warrants or rights to acquire any such shares, other than (a) shares of Metromile common stock issuable upon exercise of Metromile stock options or the vesting or settlement of Metromile RSUs, in each case outstanding as of the date of the merger agreement in accordance with the terms of the applicable award, (b) pursuant to the Company ESPP in the ordinary course of business and such exercise or settlement is in accordance with the merger agreement’s terms, (c) in connection with the exercise of Metromile warrants and (d) the issuance of the Metromile Additional Shares; |
● | sell, assign, transfer, lease or license to any third party, or encumber, or otherwise dispose of (by merger, consolidation, operation of law, division or otherwise), any of Metromile’s intellectual property or material assets, other than (a) sales of inventory, goods or services in the ordinary course of business or of obsolete equipment or assets in the ordinary course of business; (b) pursuant to written contracts or commitments existing as of the date of the merger agreement and set forth in Metromile’s disclosure schedule; (c) as security for any borrowing permitted by the terms of the merger agreement; or (d) licenses granted to customers or other third parties in the ordinary course of business, including any licenses granted in the operation of the the EBS business; |
● | directly or indirectly repurchase, redeem or otherwise acquire any shares of Metromile’s or any of its subsidiaries’ capital stock or equity interests, or any other securities or obligations convertible into or exchangeable for any shares of Metromile’s |
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or any of its subsidiaries’ capital stock or equity interests, except (a) shares of Metromile common stock repurchased from employees or consultants or former employees or consultants pursuant to the exercise of repurchase rights binding on Metromile and existing prior to the date of the merger agreement, (b) shares of Metromile common stock accepted as payment for the exercise price of options to purchase Metromile common stock pursuant to Metromile’s stock incentive plans or for withholding taxes incurred in connection with the exercise, vesting or settlement of Metromile stock options or Metromile RSUs, as applicable, in accordance with the terms of the applicable award and (c) in connection with the exercise of Metromile warrants; |
● | incur, redeem, repurchase, prepay, defease, or cancel or guarantee any indebtedness for borrowed money, issue or sell any debt securities or rights to acquire any debt securities or make any loans or advances or capital contributions to any person other than in the ordinary course of business or (b) incur any lien on any of its material property or assets, except for permitted liens securing indebtedness as expressly permitted under the merger agreement; |
● | (a) adopt, terminate or amend in any material respect any Metromile employee benefit plan, (b) increase, or accelerate the vesting or payment of, the compensation or benefits of any director, individual independent contractor or current or former employee with an annual compensation of $200,000 or above, other than as contemplated in Metromile’s disclosure schedule, (c) grant any rights to severance, retention, change in control, transaction or termination pay to any current or former employee with an annual compensation of $200,000 or above, (d) hire or promote any employee with an annual compensation of $200,000 or above or (e) terminate any employee of Metromile or any Metromile subsidiary with an annual compensation of $200,000 or above other than for cause; except, in each case, for (1) amendments to Metromile employee benefit plans determined by Metromile in good faith to be required to comply with applicable legal requirements, (2) as otherwise contemplated by the merger agreement, (3) with respect to the annual renewal process for any Metromile employee benefit plans that are not reasonably expected to result in a material cost increase to Metromile or any Metromile subsidiary, (4) in connection with an employee hire (A) to replace departing employees with an annual compensation of less than $200,000, (B) to fill open positions as set forth in Metromile’s disclosure schedule, (C) who has already accepted an offer of employment and is set forth in Metromile’s disclosure schedule or (D) otherwise in the ordinary course of business, or (5) for increases in compensation or benefits made in the ordinary course of business for any employee with an annual compensation of less than $200,000 |
● | amend or terminate certain material contracts or material property leases (except for terminations pursuant to the expiration of the existing term of any material contract and amendments in the ordinary course of business and except with respect to reinsurance contracts) or waive, release or assign any materials rights under any material contracts or material property leases (other than any reinsurance contract); |
● | enter into any contract or agreement that would constitute a material contract or material property lease, except for renewals of existing material contracts in the ordinary course of business or contracts entered into or renewed in connection with the EBS business and except for reinsurance contracts); |
● | enter into any reinsurance contract that does not meet the criteria set for in Metromile’s disclosure schedule; |
● | change any methods of financial accounting or accounting practices in any material respect other than as required by changes in GAAP or Sap or as required by applicable legal requirements; |
● | make, change or revoke any material tax election, change or adopt any tax accounting period or material method of tax accounting, amend any material tax return if such amendment would reasonably be expected to result in a material tax liability, file any material tax return prepared in a manner materially inconsistent with past practice, settle or compromise any material liability for taxes or any tax audit, claim, or other proceeding relating to a material amount of taxes, enter into any “closing agreement” within the meaning of Section 7121 of the Code (or any similar state, local or non-U.S. legal requirement) if such agreement would reasonably be expected to result in a material tax liability or have a material impact on taxes, request any tax ruling from any governmental entity, surrender any right to claim a material refund of taxes, or, other than in the ordinary course of business, agree to an extension or waiver of the statute of limitations with respect to a material amount of taxes; |
● | sell, transfer, assign, license, or otherwise dispose of to (by merger, consolidation, operation of law, division or otherwise, or mortgage, encumber or exchange any material intellectual property owned, or purported to be owned, by Metromile or any of its subsidiaries, including, for the avoidance of doubt, any sale, transfer, assignment, license, or other disposition of, or |
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mortgage, encumbrance or exchange of any such material intellectual property to or with any affiliate of Metromile (other than non-exclusive licenses granted in the ordinary course of business), or modify, amend, cancel, terminate, waive, release or assign any Metromile IP license or any rights, claims, obligations or benefits thereunder or enter into any contract that would have been a Metromile IP license had it been entered into prior to the first effective time, in each case, with respect to any nonmaterial Metromile IP license, except, in each case, in the ordinary course of business and for licenses granted in connection with the EBS Business; |
● | (a) make any capital expenditure not contemplated in the capital expenditure budget set forth in the Metromile disclosure schedule or (b) incur any cash expenditure s or obligations or liabilities except cash expenditures, obligations or liabilities incurred (i) in the ordinary course of business or (ii) in connection with the transactions contemplated by the merger agreement; |
● | enter into any arrangement with respect to the voting of any of Metromile’s capital stock or other equity interests (including any voting trust), other than in connection with the granting of revocable proxies in connection with any meeting of Metromile stockholders; |
● | adopt a plan of (a) complete or partial liquidation or (b) dissolution, merger, consolidation, division, restructuring, recapitalization or other reorganization; |
● | commence, settle or compromise any litigation or proceeding, except (a) ordinary course claims and related legal proceedings under or with respect to any insurance contract and (b) those that (i) involve solely monetary remedies with a value not exceeding $75,000, with respect to any individual litigation, claim, suit, action or matter, or $250,000 in the aggregate to be paid by Metromile and its subsidiaries, (ii) do not impose any restriction on Metromile’s business or the business of its subsidiaries, (iii) do not relate to any stockholder litigation in connection with the merger agreement or the mergers and (v) do not include an admission of liability or fault on the part of Metromile or any of its subsidiaries; |
● | materially reduce the amount of insurance coverage under the material commercial insurance policies of Metromile and its subsidiaries or fail to use reasonable best efforts to renew or maitain any such material existing insurance policies; |
● | (a) amend any material permits in a manner that adversely impacts Metromile’s ability to conduct its business in any material respect or (b) terminate or allow to lapse any material permits; |
● | fail to make any payments that become due with respect to any of Metromile’s material registered intellectual property or otherwise abandon, cancel or permit to lapse any material Metromile’s material registered intellectual property, other than in its reasonable business judgment or in the ordinary course of business, or authorize the disclosure to any third party of any material trade secret in a way that results in loss of trade secret protection, other than in the ordinary course of business; |
● | except in the ordinary course of business and for contracts entered into in connection with the EBS Business, enter into any individual contract under which Metromile or any of its subsidiaries (a) grants or agrees to grant any right to material intellectual property, other than non-exclusive licenses, or (b) agrees to pay any royalties in excess of $150,000 with respect to any intellectual property; |
● | except as expressly required by applicable legal requirements or Metromile’s organizational documents, convene (a) any special meeting of Metromile’s stockholders other than the Metromile special meeting or (b) any other meeting of Metromile’s stockholders to consider a proposal that would reasonably be expected to impair, prevent or delay the consummation of the transactions contemplated by the merger agreement; |
● | enter into any new line of business; |
● | except for in the ordinary course of business, (a) alter or amend in any existing financial, underwriting, claims, claims handling, risk retention, reserving, investment or actuarial practice, guideline or policy or any material assumption underlying an actuarial practice or policy, except as may be required by GAAP, SAP, any governmental entity or applicable legal requirements or (b) enter into any contract or commitment with any insurance regulatory authority; or |
● | authorize, approve, enter or commit to do any of the foregoing. |
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Lemonade has also agreed that, except (i) as may be required by applicable legal requirements, (iii) as expressly permitted or required by the merger agreement, (iv) as set forth in Lemonade’s disclosure schedule, or (v) unless Metromile approves in writing, Lemonade will not, and will not permit its subsidiaries to:
● | amend its or the Acquisition Subs’ organizational documents in a manner that would be adverse in any material respect to the holders of Metromile common stock (after giving effect to the mergers) relative to other holders of Lemonade common stock; |
● | split, combine, subdivide, amend the terms of or reclassify any shares of Lemonade’s capital stock; |
● | directly or indirectly repurchase, redeem or otherwise acquire any shares of Lemonade common stock, except (a) shares of Lemonade common stock repurchased from employees or consultants or former employees or consultants of Lemonade pursuant to the exercise of repurchase rights binding on Lemonade and existing prior to the date of the merger agreement, or (b) shares of Lemonade common stock accepted as payment for the exercise price of Lemonade stock options or for withholding taxes incurred in connection with the exercise, vesting or settlement of equity awards, as applicable, in accordance with the terms of the applicable award; |
● | adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization, other than transactions between Lemonade and any direct or indirect wholly owned subsidiaries or between direct or indirect wholly owned subsidiaries; |
● | declare, set aside, make or pay any dividend or other distribution on any shares of its capital stock or the capital stock or other equity interest of any subsidiary of Lemonade, other than dividends or distributions only to the extent paid by any wholly owned subsidiary to Lemonade or another wholly owned subsidiary; or |
● | authorize, approve, enter or commit to do any of the foregoing. |
Metromile has also agreed to work in good faith to implement certain actions, principles and goals set forth on the Metromile disclosure schedule. The parties have also agreed that (a) in connection with implementing such actions, principles and goals, Metromile will not be required under any circumstance to take any action that would, or would reasonably be expected to, violate any applicable legal requirement, including any applicable antitrust law and (b) any breach by Metromile in respect of taking any such action or implementing all or any portion of such principles or to achieve all or any of such goals will not be taken into account for any purpose under the merger agreement, including for purposes of determining whether any condition to closing has been satisfied, whether any party may terminate the merger agreement, or whether the applicable termination fee in accordance with the merger agreement and described under “—Termination of the Merger Agreement.” may be payable, whether Metromile may exercise any of its rights under the merger agreement or whether any party may be liable to another party pursuant to the merger agreement under any circumstance.
COVID-19 Measures
The parties have also agreed that Metromile, Lemonade and their respective subsidiaries may, in response to COVID-19 and in consultation with the other party, take reasonable measures (including as a response to any pandemic measure) deemed advisable or necessary to prevent imminent financial loss or damage to the businesses of such party and their respective subsidiaries, and any such action will not be deemed itself a breach of the merger agreement. Nothing contained in the merger agreement is intended to give either Lemonade or Metromile, directly or indirectly, the right to controls or direct the other party’s, or the other party’s respective subsidiaries’, businesses or operations prior to the closing.
No Solicitation of Acquisition Proposals
Except as expressly permitted by the merger agreement and described under “—No Change of Recommendation—Permitted Change of Recommendation—Superior Proposal” and “—No Change of Recommendation—Permitted Change of Recommendation—Intervening Event,” Metromile has agreed that it will not, and will cause its subsidiaries not to and will not authorize or permit and
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will not otherwise direct its and their respective representatives to, except as otherwise permitted by the merger agreement, directly or indirectly:
● | solicit, initiate or knowingly encourage, induce, assist or knowingly facilitate any inquiries regarding, or the submission or announcement by any person of, any proposal or offer that constitutes, or would reasonably be expected to lead to, an acquisition proposal (as defined below); |
● | furnish any non-public information regarding Metromile or any of its subsidiaries or afford access to Metromile’s or its subsidiaries’ representatives, books, record or property, in each case, in connection with or for the purpose of soliciting, initiating, knowingly encouraging or knowingly facilitating, or in response to, any inquiry, proposal or offer that constitutes or would reasonably be expected to lead to an acquisition proposal; |
● | engage in, enter into, continue or otherwise participate in any discussions or negotiations with any person with respect to any acquisition proposal or any inquiry, proposal or offer that would reasonably be expected to lead to an acquisition proposal; |
● | approve, adopt, recommend, agree to or enter into, or propose to approve, adopt, recommend, agree to or enter into, any letter of intent, memorandum of understanding or similar document, agreement, commitment, or agreement in principle with respect to any acquisition proposal; or |
● | resolve or agree to do any of the foregoing. |
Notwithstanding the restrictions described above, prior to obtaining approval of the Metromile merger proposal, Metromile and its representatives may (i) contact the person or any of its representatives who has made such acquisition proposal solely to clarify the terms of such acquisition proposal so that the Metromile board may reasonably inform itself about such acquisition proposal and (ii) engage or otherwise participate in discussions or negotiations with, and provide information to, any person or its representatives that has made a bona fide written acquisition proposal after the date of the merger agreement that did not result from any breach of the foregoing restrictions by Metromile, its subsidiaries, or their representatives, as applicable, if:
● | prior to taking such action, the Metromile board of directors determines in good faith, after consultation with Metromile’s outside legal counsel and financial advisor, that such acquisition proposal either constitutes a superior proposal or would reasonably be expected to lead to, a superior proposal and that failure to engage in such discussions or negotiations, or provide such information, would reasonably be expected to be inconsistent with the Metromile board’s fiduciary duties under applicable legal requirements; and |
● | prior to providing any information regarding Metromile or any of its subsidiaries to such third party in response to such acquisition proposal, Metromile receives from such third party (or there is then in effect with such party) an executed confidentiality agreement with nondisclosure provisions at least as restrictive of such third party as those contained in the non-disclosure agreement are to Lemonade, as applicable, and which does not prohibit the compliance of Metromile, as applicable, with the merger agreement’s no solicitation provisions (it being understood that such confidentiality agreement need not contain any standstill provisions). |
Metromile has also agreed that prior to or substantially concurrently with providing any non-public information to such third party, Metromile will make such non-public information available to Lemonade.
Metromile has further agreed that, unless and only to the extent that the Metromile board of directors determines in good faith, after consultation with Metromile’s outside legal counsel and Metromile’s financial advisor that failure to take such action would reasonably be expected to be inconsistent with the Metromile board of director’s fiduciary duties under applicable legal requirements (in which case, it may enable such persons to submit and pursue an acquisition proposal), it will not, and will cause its affiliates not to, release any third party from, or waive, amend or modify any provision of, or grant permission under, or fail to enforce, any standstill provision in any agreement to which Metromile or any of its affiliates, as applicable, is a party.
An “acquisition proposal” means any offer, indication of interest or proposal (other than an offer or proposal made or submitted by or on behalf of Lemonade or any of its subsidiaries) contemplating or otherwise relating to an alternative transaction (as defined below).
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An “alternative transaction” means any transaction or series of related transactions (other than the mergers) involving:
● | any merger, consolidation, amalgamation, share exchange, business combination, joint venture, reorganization or other similar transaction involving Metromile; |
● | any acquisition by any person or group of persons of beneficial or record ownership of 20% or more of the outstanding voting power of Metromile, or any transaction in which Metromile issues securities representing 20% or more of the outstanding voting power of Metromile; |
● | any sale, exchange, transfer, acquisition or disposition of 20% or more of the consolidated assets, including equity securities, of Metromile and its subsidiaries, taken as a whole, or of any business or businesses (or the assets of any business or businesses) that constitute or account for 20% or more of the consolidated net revenues or net income of Metromile and its subsidiaries, taken as a whole; |
● | any tender offer or exchange offer that, if consummated, would result in any person or group of persons acquiring beneficial or record ownership of 20% or more of the voting power of Metromile; or |
● | any combination of the foregoing types of transaction if the sum of the percentage of the voting power of Metromile, as applicable, or of the consolidated net revenues, net income or assets of Metromile and its subsidiaries, taken as a whole, involved is 20% or more. |
A “superior proposal” means any bona fide, unsolicited written acquisition proposal made after the date of the merger agreement that:
● | if consummated, would result in any person (or such person’s direct or indirect stockholders) or group of persons directly or indirectly becoming the beneficial owner of (a) any business or businesses that constitute or account for 50% or more of the net revenues, net income or assets of Metromile, or (b) 50% or more of the outstanding total voting power of the equity securities of Metromile; and |
● | the Metromile board of directors determines in good faith, after consultation with its outside legal counsel and financial advisor, is reasonably capable of being consummated on the terms proposed and which, taking into account all financial and legal aspects thereof, including the timing, likelihood of consummation, confidentiality, legal, regulatory, financing and other aspects of such acquisition proposal would be more favorable to the holders of shares of common stock of Metromile from a financial point of view (including taking into account payment by Metromile of the termination fee) than the transactions contemplated by the merger agreement (after giving effect to any revisions to the terms of the merger agreement committed in writing by Lemonade Lemonade in response to such acquisition proposal pursuant to the merger agreement). |
Existing Discussions or Negotiations; Notice Regarding Acquisition Proposals; Clarification of Acquisition Proposals
Metromile has agreed that it will, will cause its subsidiaries and its and their representatives to, immediately cease and cause to be terminated any existing solicitation of, or discussions or negotiations with any person (other than Lemonade) that was ongoing at the execution of the merger agreement and any access any such persons may have to any physical or electronic data room relating to any potential acquisition proposal.
Metromile has also agreed that if it receives an acquisition proposal (or notice from any person that it intends to make an acquisition proposal) or any inquiry or request for information with respect to an acquisition proposal or that is reasonably likely to lead to an acquisition proposal, then Metromile will promptly (and in any event, within 24 hours after its receipt of such acquisition proposal or request) notify Lemonade in writing of such acquisition proposal or request (which notification must include the identity of the person making or submitting such request or acquisition proposal and an unredacted copy of any such written request or proposal (or, if not in writing, the material terms and conditions thereof)), together with copies of any proposed transaction agreements. Metromile must keep Lemonade reasonably informed in writing, on a current basis (and, in any event, within 24 hours), of the status of such acquisition proposal or request, including informing Lemonade of any material change to the terms of such proposal, and the status of any negotiations, including any change in its intentions as previously notified.
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Change of Recommendation
Metromile has agreed that, except as otherwise set forth in the merger agreement, the Metromile board of directors, will not:
● | withhold, withdraw, modify, amend or qualify (or publicly propose to do so), in a manner adverse to Lemonade and the Acquisition Subs, the Metromile board of directors’ recommendation to Metromile stockholders to adopt the merger agreement |
● | approve, recommend or declare advisable (or publicly propose to do so) any acquisition proposal; |
● | fail to publicly announce, within five business days after a tender exchange offer relating to the equity securities of Metromile has been commenced by any third party (and in no event later than one (1) business day prior to the date of the Metromile special meeting, as it may be postponed or adjourned pursuant to the merger agreement), a statement disclosing that the Metromile board of directors recommends rejection of such tender or exchange offer, with the Metromile board of directors taking of no position or a neutral position in respect of the acceptance of any such tender or exchange offer constituting a failure to publicly announce that the Metromile board of directors recommends rejection of such tender or exchange offer; |
● | if requested in writing by Lemonade, fail to issue, within ten business days after an acquisition proposal is publicly announced (and in no event later than one (1) business day before the date of the Metromile special meeting, as it may be postponed or adjourned pursuant to the merger agreement), a press release reaffirming the Metromile board of directors’ recommendation to Metromile stockholders to adopt the merger agreement provided that Lemonade may make any such request once with respect to each particular acquisition proposal or once with respect to each amendment (to the financial or any other material terms) made thereto (any actions described in this bullet point and the preceding three bullet points each, a “change of recommendation”); |
● | cause or permit Metromile, as the case may be, to enter into any contract, letter of intent, memorandum of understanding, agreement in principle or other arrangement or understanding (other than a confidentiality agreement entered into in compliance with the merger agreement) contemplating or relating to an acquisition transaction; |
● | take any action to make the provisions of any anti-takeover or similar statute or regulation inapplicable to any acquisition proposal or counterparty thereto; or |
● | publicly propose to do any of the foregoing. |
Permitted Change of Recommendation—Superior Proposal
However, Metromile, at any time prior to its stockholders voting on the Metromile merger proposal, may make a change of recommendation related to an acquisition proposal if Metromile receives from a third party a bona fide written acquisition proposal that has not been withdrawn and that did not result from a breach of the merger agreement’s no solicitation provisions, if, prior to making such change of recommendation:
● | Metromile’s board of directors determines in good faith, after consultation with Metromile’s outside legal counsel and financial advisor, that such acquisition proposal constitutes a superior proposal and that failure to take such action would reasonably be expected to be inconsistent with the Metromile’s board of directors’ fiduciary duties under applicable legal requirements; |
● | Metromile delivers to Lemonade a written notice at least four (4) business days in advance stating that the recipient’s board intends to make a change of recommendation; |
● | during such four (4) business day period, if requested by Lemonade, Metromile engages in good faith negotiations with Lemonade regarding a possible amendment of the merger agreement so that the acquisition proposal that is the subject of the superior proposal notice ceases to be a superior proposal; and |
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● | after the expiration of such four (4) business day period, the Metromile board of directors determines in good faith, after consultation with its outside legal counsel and financial advisor, after taking into account any amendments to the merger agreement that the other party has committed to in writing, that such acquisition proposal continues to constitute a superior proposal. |
If there is any change and/or amendment, whether communicated orally or in writing, to the financial or other material terms of such acquisition proposal, Metromile must deliver to Lemonade an additional notice, and a new negotiation period will commence.
Permitted Change of Recommendation—Intervening Event
In addition, Metromile, at any time prior to its stockholders voting on the Metromile merger proposal, may make a change of recommendation if and only in response to an intervening event (as defined below) arising prior to making such change of recommendation:
● | the Metromile board of directors determines in good faith, after consultation with its outside legal counsel and financial advisor, that, in light of such intervening event, a failure to effect a change of recommendation would be reasonably expected to be inconsistent with the Metromile board of directors’ fiduciary duties to its stockholders under applicable legal requirements; |
● | Metromile delivers to Lemonade a written notice at least four (4) business days in advance stating that the Metromile board of directors intends to make a change of recommendation; |
● | during such four (4) business day period, if requested by Lemonade, Metromile engages in good faith negotiations with Lemonade regarding a possible amendment of the merger agreement that obviates the need for such change of recommendation; and |
● | after the expiration of such four (4) business day period, Metromile determines in good faith, after consultation with its outside legal counsel and financial advisor and, after taking into account any amendments to the merger agreement that Lemonade has committed to in writing, that in light of such intervening event, a failure to make a change of recommendation would be reasonably expected to be inconsistent with the Metromile board of directors’ fiduciary duties to its stockholders under applicable legal requirements. |
An “intervening event” means any state of fact, event, change, effect, circumstance, occurrence or development, or combination thereof, that arises following the date of the merger agreement and that was neither known to nor reasonably foreseeable to the Metromile board of directors prior to the execution and delivery of the merger agreement and such fact, event change, effect, circumstance, occurrence or development, or combination thereof, is not specifically related to:
● | the receipt, existence of or terms of an acquisition proposal or a superior proposal or any inquiry or communications relating thereto, any matter relating thereto or consequences thereof; and |
● | in each case in and of itself, any changes in the market price or trading volume of the Metromile common stock or the fact that Metromile meets, fails to meet or exceeds any internal or published projections, forecasts or estimates of its revenue, earnings or other financial performance or results of operations for any period (except that any underlying cause of any of the foregoing may be taken into account unless excluded pursuant this or the other bullet points). |
Special Meeting
As promptly as reasonably practicable after the registration statement on Form S-4 of which this proxy statement/prospectus forms a part is declared effective by the SEC (and, subject to certain extensions permitted under the merger agreement, in any event within 60 days thereafter), Metromile must take all actions necessary to convene the Metromile special meeting of the holders of shares of Metromile common stock to vote on a proposal to adopt the merger agreement, as well as a customary proposal regarding adjournment of such meeting. Except as described above with respect to a change of recommendation, Metromile must use reasonable best efforts to solicit proxies in favor of the Metromile merger proposal.
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Metromile may postpone or adjourn the Metromile special meeting if Lemonade provides its prior written consent (not to be unreasonably withheld, conditioned or delayed) and:
● | to the extent reasonably necessary to ensure that any supplement or amendment to this proxy statement/prospectus which the Metromile board of directors has determined in good faith, after consultation with Lemonade and its outside counsel, is required by applicable legal requirements is disclosed and promptly disseminated within a reasonable amount of time (as determined by the Metromile board of directors in good faith after consultation with its outside counsel) to Metromile stockholders prior to such special meeting; |
● | if required by applicable legal requirements or a request from the SEC or its staff; or |
● | if, as of the time for which the Metromile special meeting, as applicable, is scheduled, there are insufficient shares of Metromile common stock represented to constitute a quorum necessary to conduct the business to be conducted at the Metromile special meeting. |
In addition, Metromile may, and if Lemonade so requests (which Lemonade may do up to three (3) times, for up to five (5) business days each) must, postpone or adjourn the Metromile special meeting in order to solicit additional proxies in favor of the Metromile merger proposal if on the date for which the Metromile special meeting is scheduled, there would be insufficient votes to obtain approval of the Metromile merger proposal, whether or not a quorum is present. In such case, except where the Metromile board of directors has made a change of recommendation in compliance with the merger agreement, Metromile must use reasonable best efforts to solicit and obtain such proxies in favor of such proposal as soon as reasonably practicable.
However, without Lemonade’s consent (not to be unreasonably withheld, conditioned or delayed), (a) no single adjournment or postponement may be for more than five (5) business days, except as may be required by applicable legal requirements, and, subject to certain exceptions, all such adjournments and postponements together may not postpone Metromile special meeting for more than twenty (20) business days or, in the case of the third bullet point above and the immediately foregoing paragraph, less than five (5) business days prior to the end date and (b) Metromile may not change the record date for determining the stockholders entitled to notice of and to vote at the Metromile special meeting.
Regulatory Approvals
Under the merger agreement, Lemonade, the Acquisition Subs, and Metromile have each agreed to cooperate with each other and to use (and to cause their respective affiliates to use), and Lemonade will cause each person who is deemed by a governmental authority to “control” Lemonade or will be deemed by a governmental authority to “control” any Metromile insurance subsidiaries following the closing (each such person, a “control person”) to cooperate with the parties hereto and to use and cause their respective affiliates to use, their respective reasonable best efforts to fulfill all conditions applicable to such party pursuant to the merger agreement and to consummate the transactions contemplated by the merger agreement, including using reasonable best efforts to: (i) prepare and file (and to cooperate with each other in preparing and filing) the regulatory filings and obtain (and to cooperate with each other in obtaining) regulatory approvals, consents, registrations, permits, and authorizations from any governmental entity as promptly as reasonably practicable (and in any event no later than the end date), subject to the limitations described below and (ii) obtain all necessary consents, approvals or waivers from third parties.
Lemonade agreed, that except as set forth in the Lemonade disclosure schedules, neither Lemonade nor any of its applicable affiliates will, and Lemonade will cause each of the control persons not to, at any time prior to the closing, file any application with or request for approval or non-disapproval by any governmental entity with respect to any inter-affiliate transaction between Metromile or any of its affiliates, on the one hand, and any of the post-closing affiliates of any of them (including Lemonade and any of its affiliates or control persons), on the other hand, in each case that would require approval or non-disapproval under applicable legal requirements.
Lemonade and Metromile agreed, in consultation and cooperation with each other, to prepare and file (i) the notifications required under the HSR Act within twenty (20) business days after the date of the merger agreement, and (ii) as promptly as reasonably practicable after the date of the merger agreement (but in no event later than as required by applicable legal requirements), all other filings required or advisable with respect to any other antitrust laws or applicable legal requirements (or pre-file with regard to any governmental entity that requires such pre-filing prior to any formal filing). Lemonade also agreed to file, and to cause each control person to file, within twenty (20) business days after the date of the merger agreement, a “Form A” Approval of Acquisition of Control with the Delaware Department of Insurance and the California Department of Insurance with respect to the acquisition of control of the Metromile insurance subsidiaries. Each party will promptly notify the other party and provide copies to the other party
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of any substantive written notice or other written communication from any governmental authority in connection with any current or pending governmental authorizations (other than those that are administrative or ministerial in nature). The parties agreed to use their respective reasonable best efforts to respond as promptly as reasonably practical to any inquiries or requests for additional information from any state attorney general, antitrust authority or other government entity pursuant to or related to the transactions contemplated by the merger agreement. The “Form A” filings were submitted on November 18, 2021.
In connection with seeking or obtaining approvals or consent for the mergers, neither Metromile nor any of its subsidiaries or affiliates will not, without the prior written consent of Lemonade (not to be unreasonably withheld, conditioned or delayed), offer, propose, negotiate, agree or consent to any accommodation, concession, commitment, condition, or remedy (financial or otherwise) to or with any governmental entity or any third party. Without the prior written consent of the other party, neither Lemonade or any of its affiliates or control person, on the one hand, nor Metromile, on the other hand, will enter into any agreement relating to the transactions contemplated by the merger agreement with any governmental entity or take any other action that would reasonably be expected to materially delay the closing or the expiration or termination of any waiting period under the HSR Act or any other applicable legal requirements.
If any administrative or judicial action or proceeding, including any proceeding by a private party, is instituted (or threatened to be instituted) challenging any transaction contemplated by the mergers as violative of any antitrust law or other applicable legal requirements, each of Lemonade and Metromile will, and Lemonade will cause each control person to, use reasonable best efforts to contest and resist any such action or proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by the merger agreement. Subject to the proviso below, Lemonade will, and will cause its affiliates and the control persons to, take or refrain from taking, and agree or commit to take or refrain from taking, any and all actions, or suffer to exist any limitation, action, restriction, condition or requirement, as applicable, in each case that are necessary to avoid each and every impediment under any applicable legal requirement that may be asserted by, or judgment, decree and order that may be entered by or with, any governmental entity with respect to this agreement or other transactions contemplated hereby this agreement so as to enable the closing to occur as promptly as practicable, including any of the foregoing as is necessary, proper or advisable to (a) obtain all approvals, consents, clearances, expirations from any governmental entities necessary, proper or advisable to consummate the transactions contemplated by this agreement, (b) resolve any objections that may be asserted by any governmental entity with respect to the transactions contemplated by this agreement and (c) prevent the entry of, and have vacated, lifted, reversed or overturned, any judgment, decree or order of any governmental entity that would prevent, prohibit, restrict or delay the consummation of the transactions contemplated by the merger agreement; provided that, notwithstanding anything to the contrary contained in the merger agreement, in no event will Lemonade or any of its affiliates or the control persons be required to take any action, including entering into any consent decree, hold separate order or other arrangement, that (when taken together with all other such actions) would have, or would reasonably be expected to have, a material adverse effect on (i) the business, financial condition or results of operations of (A) Metromile and its subsidiaries, taken as a whole and (B) Lemonade and its subsidiaries, taken as a whole, or (ii) the aggregate economic benefits that Lemonade reasonably expects to receive from the transactions contemplated by the merger agreement.
Each of Lemonade and Metromile agrees that, prior to the earlier of the first effective time and the termination of the merger agreement pursuant to the merger agreement, it will not, and will ensure that none of its subsidiaries or affiliates will, consummate, enter into any agreement providing for, or authorize, announce, commit to or approve, any investment, acquisition, divestiture, business combination or other transaction that would reasonably be expected to materially delay, materially impede or prevent the consummation of the transactions contemplated by the merger agreement.
Each party will consult and coordinate with each other with respect to interactions with and filings submitted to the government, except where prohibited by applicable legal requirements or any governmental entity, and subject to the provisions of the non-disclosure agreement. Additionally, each party is required to (a) consult with the other in good faith prior to taking a position with respect to any filing required or advisable pursuant to the merger agreements, (b) permit the other to review and discuss in advance, and consider in good faith the views of the other in connection with, any analyses, appearances, presentations, memoranda, letters, responses to requests, briefs, white papers, arguments, opinions and proposals before making or submitting any of the foregoing to any governmental entity by or on behalf of any party in connection with any such filing or any legal proceeding in connection with the merger agreement or the transactions contemplated hereby; (c) coordinate with the other in preparing and exchanging such information; (d) promptly provide the other party’s counsel with copies of all filings, notices, analyses, presentations, memoranda, letters, responses to requests, briefs, white papers, opinions, proposals and other submissions (and a summary of any oral presentations) made or submitted by such party with or to any governmental entity in connection with any filing required by the applicable provisions of the merger agreement or the transactions contemplated thereby; and (e) consult with the other party in advance of any meeting, video conference, or teleconference with any governmental entity and, to the extent not prohibited by the
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governmental entity or, in connection with any proceeding by a private party, with any other person, and, to the extent not prohibited by the governmental entity or other person, give the other party the opportunity to attend and participate in such meetings, video conferences, and teleconferences.
Access to Information
Subject to certain limitations, prior to the first effective time, Metromile will afford Lemonade and its representatives reasonable access, during normal business hours upon prior notice, to Metromile’s and its subsidiaries’ personnel, properties, contracts, filings, books and records and, during such period, will furnish promptly to Lemonade all reasonably available information concerning Metromile’s business as Lemonade may reasonably request in each case for the purposes of integration planning and the consummation of the transactions contemplated by the merger agreement.
Publicity
Except for in the case of any press release or other public announcement or disclosure in connection with any change in recommendation in compliance with the merger agreement, Lemonade and Metromile must consult with one another prior to issuing, and provide each other with the opportunity to review and comment upon, any public announcement or statement with respect to the merger agreement or the mergers and may not issue any such public announcement or statement prior to such consultation, except as may be required by applicable legal requirements or by the Nasdaq Capital Market or the NYSE rules and regulations (in which event Lemonade or Metromile, as applicable, must endeavor, on a basis reasonable under the circumstances, to provide a meaningful opportunity to the other party to review and comment upon such public announcement in advance, and must give due consideration to all reasonable additions, deletions or changes suggested thereto by Lemonade or Metromile, as applicable). Notwithstanding the foregoing:
● | Lemonade may make public announcements concerning the merger agreement or the mergers that consist of information previously disclosed in previous public announcements made by Lemonade in compliance with the publicity provisions of the merger agreement; and |
● | Lemonade may make any public statements to the press, analysts, investors or those participating in investor calls or industry conferences. |
In addition, this publicity covenant will not apply to any press release or public annoucement or disclosure in connection with any change in recommendation by the Metromile board of directors.
Lemonade and Metromile agreed to issue the previously agreed upon form of joint press releases announcing the execution and delivery of the merger agreement promptly following the execution of the merger agreement.
Employee Benefits Matters
For 12 months following the closing of the merger, Metromile employees who continue employment with Lemonade or any of its subsidiaries will receive (a) base salary that is substantially comparable in the aggregate to those provided prior to such continuing employees immediately prior to the closing, (b) target cash incentive compensation opportunities that are substantially comparable in the aggregate to those provided to similarly situated employees of Lemonade and its affiliates and (c) employee benefits that are the same, in the aggregate, as those provided to similarly situated employees of Lemonade and its affiliates.
Lemonade will use reasonable best efforts to (a) cause prior service to Metromile or its subsidiaries to be recognized for purposes of eligibility and vesting under Lemonade benefit plans, (b) waive any and all evidence of insurability requirements, pre-existing condition limitations, exclusions or waiting periods with respect to participation and coverage requirements under Lemonade benefits plans, to the extent waived, satisfied, or not included under the analogous Metromile benefit plans, and (c) provide credit to Metromile continuing employees for deductibles, co-payments or out of pocket expenses incurred with respect to any Metomile medical plan during the same plan year of such plan to any Lemonade medical plan when such employees begin participation in a Lemonade medical plan.
Metromile will take all necessary actions with respect to the Metromile, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”) so that (a) any offering period in effect as of the last day of the current offering period will be shortened by a new “exercise date” in respect of such offering period that is no later than the last day of the current offering period (the “Offering Period End Date”) and on the
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Offering Period End Date, cause the exercise of each outstanding purchase right under the ESPP, subject to certain exceptions and (b) as of the Offering Period End Date, the ESPP will be suspended.
Certain Tax Matters
Lemonade and Metromile intend that the mergers, taken together, should qualify as a “reorganization” within the meaning of Section 368(a) of the Code (the “Intended Tax Treatment”). The merger agreement is intended to be a “plan of reorganization” for purposes of Treasury Regulations Section 1.368-2(g) and 1.368-3(a), to which the Lemonade, the Acquisition Subs and Metromile are parties under Section 368(b) of the Code, and each of Lemonade, the Acquisition Subs and Metromile have adopted it as such.
Both prior to and following each of the first effective time and second effective time, (x) Lemonade will not make (or permit Acquisition Sub II to make) any election to classify Acquisition Sub II as a corporation for U.S. federal income tax purposes, and (y) Lemonade, the Acquisition Subs and Metromile will use their respective commercially reasonable efforts, and will cause their respective subsidiaries to use their commercially reasonable efforts, to take or cause to be taken any action necessary for the mergers, taken together, to qualify for the Intended Tax Treatment, including (i) reasonably refraining from any action that such party knows, or is reasonably expected to know, is reasonably likely to prevent the mergers, taken together, to qualify for the Intended Tax Treatment and (ii) not taking any tax reporting position inconsistent with the intended tax treatment for U.S. federal (and applicable state and local) income tax purposes, unless otherwise required pursuant to a change in applicable tax law or a “determination” within the meaning of Section 1313(a) of the Code (or corresponding or similar provision of state or local tax law).
Each of Lemonade and Metromile shall reasonably cooperate with one another and their respective counsel and use its commercially reasonable efforts to obtain an opinion that the mergers, taken together, should qualify for the Intended Tax Treatment from Latham & Watkins LLP and Kirkland & Ellis LLP (or, in each case, such other nationally recognized tax counsel reasonably satisfactory to Lemonade and Metromile), respectively, and in each case, including by executing and delivering customary tax representation letters (not to be inconsistent with the merger agreement and dated as of the date of such opinion) as Latham & Watkins LLP and Kirkland & Ellis (or, in each case, such other nationally recognized tax counsel reasonably satisfactory to Lemonade and Metromile) may reasonably request in form and substance reasonably satisfactory to Latham & Watkins LLP and Kirkland & Ellis LLP (or, in each case, such other nationally recognized tax counsel reasonably satisfactory to Lemonade and Metromile). Each of Lemonade, the Acquisition Subs and Metromile further acknowledges and agrees that it is not a condition to the closing that the mergers, taken together, qualify for the Intended Tax Treatment or such opinions from Latham & Watkins LLP and Kirkland & Ellis LLP (or, in each case, such other nationally recognized tax counsel reasonably satisfactory to Lemonade and Metromile) be delivered to Lemonade and Metromile, respectively.
Indemnification; Directors’ and Officers’ Insurance
For at least six (6) years following the First Effective time:
● | The Surviving Company must indemnify and hold harmless, and provide advancement of expenses to, all current or former directors and officers of Metromile or any of its subsidiaries and any person who becomes a director or officer of Metromile or any of its subsidiaries prior to the first effective time (such individuals, the “indemnified parties”) to the fullest extent permitted by applicable legal requirements; and |
● | Metromile as the surviving corporation must maintain in effect the provisions in the organizational documents of Metromile and each of its subsidiaries and other agreements of Metromile or any of its subsidiaries with any indemnified party, in each case, regarding exculpation, elimination or limitation of liability, indemnification of officers, and directors or other fiduciaries and advancement of expenses that are in existence on the date of the merger agreement (including acts or omissions in connection with the approval of the merger agreement and the consummation of the mergers and the related transactions) and set forth in Metromile’s disclosure schedule, and no such provision may be amended, modified or repealed in any manner that would materially and adversely affect the rights or protections thereunder of any such indemnified party in respect of acts or omissions occurring or alleged to have occurred at or prior to the first effective time without the consent of such indemnified party. |
Furthermore, for at least six (6) years following the first effective time, the Surviving Company must maintain in effect Metromile’s existing directors’ and officers’ liability insurance policy (the “D&O Policy”) for claims arising from facts or events that occurred at or prior to the effective time (including with respect to the approval of the merger agreement and the consummation of the mergers) and covering each of Metromile’s current directors and officers on terms with respect to coverage and amounts that are no
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less favorable than those terms in effect on the date of the merger agreement. However, in no event will the Surviving Company be required to expend in any one (1) year an amount in excess of 300% of the current annual premium paid by Metromile for such insurance. Therefore, in lieu of the foregoing obligation, Metromile may, or if Metromile is unable to, Lemonade may on its behalf, purchase, prior to the effective time, a six- year “tail” prepaid policy on the D&O Policy with an annual cost not exceeding such 300% of the current annual premium paid by Metromile for such insurance.
Certain Additional Covenants
The merger agreement also contains additional covenants, including, among others, covenants relating to the filing of this proxy statement/prospectus, regulatory filings and approvals (which are described under entitled “The Merger—Regulatory Approvals”), the delisting of shares of Metromile common stock from the Nasdaq Capital Market and the deregistration of Metromile under the Exchange Act (which are described under “The Merger—Listing of Lemonade Common Stock; Delisting and Deregistration of Metromile Common Stock”), reporting requirements under Section 16 of the Exchange Act, notification of certain events and regulatory matters, coordination with respect to litigation relating to the mergers and the termination of certain agreements.
Conditions to the Completion of the Mergers
The obligations of each of Lemonade and Metromile to complete the mergers are subject to the satisfaction or waiver, as of the closing, of each of the following conditions:
● | the registration statement on Form S-4 of which this proxy statement/prospectus forms a part must have become effective in accordance with the provisions of the Securities Act, no stop order must have been issued by the SEC and remain in effect with respect to the Form S-4 and no proceedings for that purpose may have been commenced or threatened in writing by the SEC and not withdrawn; |
● | approval by Metromile stockholders of the Metromile merger proposal must have been obtained; |
● | (a) any waiting period (or any agreed upon extensions thereof in accordance with the applicable provisions of the merger agreement or commitment not to consummate the mergers for any period of time) applicable to the consummation of the mergers under the HSR Act must have expired or been terminated and there will be no agreement (agreed upon in accordance with the applicable provisions of the merger agreement) pending or in effect between Lemonade and any governmental entity not to close and (b) any governmental authorization identified in the Metromile disclosure schedules must have been made or obtained and remain in full force and effect; |
● | the shares of Lemonade common stock to be issued pursuant to the mergers, including the shares of Lemonade common stock to be issued upon the exercise of converted Metromile stock options and upon vesting of converted Metromile RSUs, must have been approved for listing (subject to notice of issuance) on the NYSE; and |
● | no law or order preventing, enjoining or making illegal the consummation of the mergers may have been issued by a court of competent jurisdiction or other governmental entity of competent jurisdiction and remain in effect. |
The obligation of Lemonade to complete the mergers is subject to the satisfaction or waiver, at or prior to the closing, of each of the following conditions:
● | Certain representations and warranties of Metromile regarding capitalization must have been true and accurate, other than de minimis inaccuracies, at and as of the date of the merger agreement and must be true and accurate, other than de minimis inaccuracies, at and as of the closing date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty must be true and accurate, other than de minimis inaccuracies, as of such particular date or period of time); |
● | Certain representations and warranties of Metromile regarding (a) Metromile’s incorporation and good standing, (b) capitalization, (c) corporate authority and approval, (d) Metromile’s required stockholder approval, (e) non-violation of Metromile’s or its subsidiaries’ organizational documents, (f) takeover statutes, (g) opinion of Metromile’s financial advisor, (h) brokers and (i) Metromile’s insurance subsidiaries must have been true and accurate in all material respects at and as of the closing date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty must be so true and accurate |
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in all material respects as of such particular date or period of time), without giving effect to any materiality or material adverse effect qualifications contained therein; |
● | Certain representations and warranties of Metromile regarding Metromile’s insurance subsidiaries must have been true and accurate at and as of the closing date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty must be so true and accurate in all material respects as of such particular date or period of time); |
● | Metromile’s remaining representations and warranties must have been true and accurate in all respects at and as of the closing date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty must be so true and accurate in all respects as of such particular date or period of time), except where the failure to be true and accurate, individually or in the aggregate, has not constituted or resulted in a material adverse effect, without giving effect to any materiality or material adverse effect qualifications contained therein. However, reference to material adverse effect will be given effect with respect to certain representations and warranties of Metromile regarding absence of certain changes; |
● | Metromile’s covenants required to be complied with or performed at or prior to the closing must have been complied with and performed in all material respects; |
● | Since the date of the merger agreement, there must not have occurred any effects that, individually or in the aggregate, have constituted or resulted in, a material adverse effect for Metromile; and |
● | Lemonade must have received a certificate, dated as of the closing date and executed by the Chief Executive Officer or Chief Financial Officer of Metromile, confirming that the conditions described in the preceding six bullet points have been satisfied. |
The obligation of Metromile to complete the mergers are subject to the satisfaction or waiver, at or prior to the closing, of each of the following conditions:
● | Certain representations and warranties of Lemonade regarding capitalization must have been true and accurate, other than de minimis inaccuracies at and as of the closing date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty must be true and accurate, other than de minimis inaccuracies, as of such particular date or period of time); |
● | Certain representations and warranties of Lemonade regarding (a) Lemonade’s and the Acquisition Subs’ incorporation and good standing, (b) capitalization, (c) corporate authority and approval, (d) non-violation of Lemonade’s or its subsidiaries’ organizational documents, (e) takeover statutes and (f) brokers must have been true and accurate in all material respects at and as of the closing date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty must be so true and accurate in all material respects as of such particular date or period of time), without giving effect to any materiality or material adverse effect qualifications contained therein; |
● | Lemonade’s remaining representations and warranties must have been true and accurate in all respects at and as of the closing date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty must be so true and accurate in all respects as of such particular date or period of time), except where the failure to be true and accurate, individually or in the aggregate, has not constituted or resulted in a material adverse effect, without giving effect to any materiality or material adverse effect qualifications contained therein. However, reference to material adverse effect will be given effect with respect to certain representations and warranties of Lemonade regarding absence of certain changes; |
● | Lemonade’s covenants required to be complied with or performed at or prior to the closing must have been complied with and performed in all material respects; |
● | Since the date of the merger agreement, there must not have occurred any effects that, individually or in the aggregate, have constituted or resulted in a material adverse effect for Lemonade; and |
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● | Metromile must have received a certificate, dated as of the closing date and executed by the Chief Executive Officer or Chief Financial Officer of Lemonade, confirming that the conditions described in the preceding five bullet points have been satisfied. |
Frustration of Closing Conditions
None of Lemonade, the Acquisition Subs or the Metromile may rely on the failure of any closing condition to be satisfied as a condition precedent to any right or obligation of such party hereunder if such failure was caused by such party’s breach of the merger agreement.
Termination of the Merger Agreement
The merger agreement may be terminated and the mergers abandoned:
● | by mutual written consent of Lemonade and Metromile at any time prior to the effective time; |
● | by either Lemonade or Metromile, if the mergers have not been consummated on or prior to the end date (however, (a) if all of the conditions to closing, other than conditions related to the receipt of required regulatory approvals and the absence of restraints under applicable legal requirements) have been satisfied or waived or are capable of being satisfied at such time, the end date may be extended to November 8, 2022, (b) if the satisfaction of the last to be satisfied or waived of the conditions set forth in the conditions to the completion of the mergers (other than those conditions that by their nature are to be satisfied at the closing) occurs less than two (2) business days prior to the end date, the end date will be deemed extended to the extent necessary to permit the closing to occur, and (c) a party may not terminate the merger agreement pursuant to this provision if such party’s material breach of any of its obligations under the merger agreement was the primary cause of, or primarily resulted in, the failure of the closing to have occurred by the end date); |
● | by either Lemonade or Metromile, if a governmental authority of competent jurisdiction has entered or issued a final and non-appealable order or adopted or enacted a law that is final and non-appealable that permanently prevents, enjoins or makes illegal the consummation of the mergers (however, (a) the party seeking to terminate the agreement must have used reasonable best efforts to prevent the entry of and to remove such relevant legal restraint, and (b) a party may not terminate the merger agreement pursuant to this provision if the material breach by such party (or any affiliate of such party) of any of such party’s obligations under the merger agreement shall have materially contributed to such order or law; |
● | by Lemonade, if Metromile has failed to include the Metromile board of directors’ recommendation to metromile stockholders to adopt the merger agreement in this proxy statement/prospectus or made a change of recommendation, prior to Metromile obtaining its required stockholder approval; |
● | by Lemonade, if Metromile breaches the merger agreement no solicitation or special meeting provisions in any material respects; |
● | by either Lemonade or Metromile, if the approval by Metromile stockholders of the Metromile merger proposal has not been obtained after a vote on approval of such proposal has been taken at the Metromile special meeting (including any adjournment thereof); or |
● | by either Lemonade or Metromile, if the other party has breached any representation, warranty or covenant in the merger agreement and such breach (a) would result in the failure of conditions to closing and (b) is not curable by, or is not cured by, the earlier of the end date and the date that is 30 days following written notice describing such breach (however, the terminating party may not exercise this termination right if it is then in material breach of any representation, warranty or agreement contained in the merger agreement). |
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Termination Fee
Metromile will be obligated to pay to Lemonade the termination fee if the merger agreement is terminated:
● | (a) by Lemonade if Metromile has failed to include the Metromile board of directors’ recommendation to Metromile stockholders to adopt the merger agreement in this proxy statement/prospectus or made a change of recommendation prior to approval of the Metromile merger proposal, (b) by Lemonade if Metromile has breached in any material respect the applicable no solicitation of acquisition proposals and special meeting provisions of the merger agreement, (c) by either Lemonade or Metromile if the mergers have not been consummated on or prior to close of business on the end date, or (d) by either Lemonade or Metromile due to the failure of Metromile to obtain approval by Metromile stockholders of the Metromile merger proposal, in each of the previous cases of clauses (c) and (d), at a time when Lemonade would have been entitled to terminate the merger agreement if Metromile has failed to include the Metromile board of directors’ recommendation to Metromile stockholders to adopt the merger agreement in this proxy statement/prospectus or has made a change of recommendation, prior to Metromile obtaining its required stockholder approval; |
● | by either Lemonade or Metromile if the mergers have not been consummated on or prior to close of business on the end date; |
● | by either Lemonade or Metromile due to the failure of Metromile to obtain approval by Metromile stockholders of the Metromile merger proposal; |
● | by Lemonade, subject to certain exceptions, if any of Metromile’s covenants in respect of the no solicitation or special meeting provisions contained in the merger agreement shall have been breached such that the conditions to the completion of the mergers would not be satisfied; or |
● | for the three immediately preceding bullet points, (x) at or prior to the termination, an intention to make an acquisition proposal shall have been publicly announced or an acquisition proposal for Metromile has been publicly disclosed, publicly announced, or otherwise publicly commenced, submitted or made at least five (5) business days prior to the Metromile special meeting (or at least five (5) business days prior to such termination, in the case of an applicable termination other than pursuant to clause (d) in the first bullet point above) and (y) within 12 months after termination of the merger agreement, either (i) an alternative transaction with respect to Metromile is consummated or (ii) a definitive agreement relating to an alternative transaction is entered into by Metromile (except that the parties have agreed that in the case of a definitive agreement being entered into as described in this clause (ii), each reference to “20%” in the definition of alternative transaction will be deemed to be a reference to “50%”). |
The termination fee will be payable by Metromile only once and not in duplication even though the termination fee may be payable by Metromile pursuant to all of the circumstances described above.
Post-Termination Liability
Except in the case of any actual, common law fraud or willful breach, if Lemonade receives the termination fee, then the receipt of the termination fee will be Lemonade’s sole and exclusive remedy against Metromile, its affiliates and its and their respective representatives in connection with the merger agreement.
Amendment and Waiver
The merger agreement may be amended at any time prior to the first effective time by an instrument in writing signed on behalf of each of the parties to the merger agreement, except that if the Metromile merger proposal is approved, no amendment may be made which by applicable legal requirements or Nasdaq Capital Market rule or regulation requires further approval of Metromile stockholders without the further approval of such Metromile stockholders.
Except as otherwise provided in the merger agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition therein may be waived by the party or parties entitled to the benefits thereof only by a written instrument signed by the party granting such waiver. Any such waiver will not be applicable or have any effect except in the specific instance in which it is given. No failure on the part of any party to exercise any power, right, privilege or remedy under the merger agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under the merger agreement, will operate as a
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waiver of such power, right, privilege or remedy. No single or partial exercise of any such power, right, privilege or remedy will preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
Assignment
The merger agreement is not assignable by any party to the merger agreement, in whole or in part, by operation of law or otherwise, without the express prior written consent of the other parties thereto.
Third-Party Beneficiaries
Lemonade, the Acquisition Subs and Metromile have agreed that their respective representations and warranties set forth in the merger agreement are solely for the benefit of the other parties thereto, in accordance with and subject to the merger agreement’s terms. The merger agreement is not intended to, and does not, confer upon any person other than Lemonade, the Acquisition Subs and Metromile and their respective successors, legal representatives and permitted assigns any rights or remedies, express or implied, thereunder, including the right to rely upon the representations and warranties set forth in the merger agreement, except with respect to the sections regarding indemnification and directors’ and officers’ insurance and, after the effective time, the provisions of the merger agreement relating to payment of the merger consideration, any cash in lieu of fractional shares of Lemonade common stock, and any dividends or other distributions, which provisions inure to the benefit of, and are enforceable by, holders of Metromile common stock and Metromile equity awards as of immediately prior to the effective time to the extent necessary to receive the consideration and amount due to such persons thereunder. The representations and warranties in the merger agreement are the product of negotiations among the parties. Any inaccuracies in such representations and warranties are subject to waiver by the parties in accordance with the merger agreement without notice or liability to any other person.
Jurisdiction; Specific Performance
Each of Lemonade, the Acquisition Subs and Metromile has consented to the exclusive personal jurisdiction of the Delaware Court of Chancery (or if the Delaware Court of Chancery does not have jurisdiction, any federal court within the State of Delaware) in any legal actions or proceedings relating to the merger agreement or any of the transactions contemplated thereby.
Each of Lemonade, the Acquisition Subs and Metromile has also agreed that irreparable damage would occur in the event that any of the provisions of the merger agreement were not performed or were threatened to be not performed, or were otherwise breached. Accordingly, and in addition to any other remedy that each may be entitled to, including monetary damages, Lemonade, the Acquisition Subs and Metromile have agreed that each will be entitled to an injunction or injunctions to prevent breaches of the merger agreement and to enforce specifically the terms and provisions of the merger agreement. Each of Lemonade, the Acquisition Subs and Metromile has also irrevocably waived any requirement for the securing or posting of any bond in connection with such injunctions.
VOTING AND SUPPORT AGREEMENTS
The following description sets forth the principal terms of the voting and support agreements, which is substantially in the form attached as Annex C hereto and incorporated by reference in this proxy statement/prospectus. The rights and obligations of Lemonade and certain stockholders of Metromile (the “Metromile supporting stockholders”) are governed by the express terms and conditions of the voting and support agreements and not by this summary or any other information contained in or incorporated by reference into this proxy statement/prospectus. This description does not purport to be complete and is qualified in its entirety by reference to the complete text of the form of the voting and support agreements. You are encouraged to read the form of voting and support agreements carefully and in its entirety, as well as this proxy statement/prospectus and the documents incorporated by reference herein, before making any decisions regarding any of the proposals described in this proxy statement/prospectus.
Contemporaneously with the execution of the merger agreement, Lemonade and the Metromile supporting stockholders entered into the voting and support agreements. Pursuant to the voting and support agreements, each Metromile supporting stockholder irrevocably and unconditionally agreed, among other things, that at any meeting of stockholders of Metromile, including the Metromile special meeting, or at any adjournment thereof, or in any other circumstance in which the vote, consent or other approval of the stockholders of Metromile is sought, that such Metromile supporting stockholder will (a) appear at such meeting or otherwise cause such Metromile supporting stockholder’s shares to be counted for the purpose of establishing a quorum; and (b) vote all of such Metromile supporting stockholder’s shares of Metromile common stock (i) in favor of the adoption of the merger agreement and the approval of the mergers and the other transactions contemplated by the merger agreement; (ii) in favor of any adjournment of such
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meeting recommended by Metromile with respect to any Metromile special meeting to the extent permitted or required under the special meeting provisions of the merger agreement; (iii) against any acquisition proposal; (iv) against any merger agreement or merger (other than the merger agreement and the mergers), consolidation, combination, sale of substantial assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by Metromile, and (v) against any action or agreement that would reasonably be expected to (A) materially impede, frustrate, interfere with, delay, postpone, prevent or otherwise impair the mergers or the other transactions contemplated by the merger agreement, (B) result in a breach of any covenant, representation, warranty or any other obligation or agreement of Metromile under the merger agreement, (C) result in a breach in any respect of any covenant, representation, warranty or other obligation or agreement of such Metromile supporting stockholder under the voting and support agreements, (D) result in any of the conditions precedent set forth in the merger agreement not being fulfilled or (E) except as expressly contemplated by the merger agreement, change in any manner the dividend policy or capitalization of, including the voting rights of any class of capital stock of Metromile.
Under the voting and support agreements, subject to certain exceptions, each of the Metromile supporting stockholders have agreed, prior to the expiration date (as defined below), not to transfer, pledge, hypothecate, encumber, assign or otherwise dispose (whether by sale, merger, consolidation, liquidation, dissolution, dividend, distribution or otherwise) of any of its shares of Metromile common stock or the beneficial ownership thereof.
Under the voting and support agreements, each Metromile supporting stockholder agreed that they will not, and will use their reasonable best efforts to cause their representatives not to, directly or indirectly:
● | solicit, initiate, knowingly encourage or knowingly facilitate any inquiries regarding, or the submission or announcement by any person (other than Lemonade or its subsidiaries) of, any proposal or offer that constitutes, or would reasonably be expected to lead to, any acquisition proposal; |
● | furnish any non-public information regarding Metromile or any of its subsidiaries (other than to Lemonade and its subsidiaries), in connection with, or for the purpose of soliciting, initiating, knowingly encouraging or knowingly facilitating, or in response to, any inquiry, proposal or offer that constitutes or would reasonably be expected to lead to an acquisition proposal; |
● | engage in, enter into, continue or otherwise participate in any discussions or negotiations with any person (other than Lemonade or its representatives) with respect to any acquisition proposal or any inquiry, proposal or offer that would reasonably be expected to lead to any acquisition proposal; |
● | approve, adopt, recommend, agree to or enter into, or propose to approve, adopt, recommend, agree to or enter into, any letter of intent, memorandum of understanding or similar document, agreement, commitment, or agreement in principle with respect to any acquisition proposal; or |
● | resolve or agree to do any of the foregoing. |
The voting and support agreements also contains provisions providing that each of the Metromile supporting stockholders may not take any action that would make any representation or warranty of such Metromile supporting stockholder contained in the voting and support agreements untrue or in any way restrict, limit or interfere with the performance of such Metromile supporting stockholder’s obligations under the voting and support agreements or the transactions contemplated by the merger agreement. In addition, each of the Metromile supporting stockholders agreed to waive any appraisal or dissenters’ rights that it may have in connection with the mergers.
The voting and support agreements shall terminate upon the earliest of (such time, the “expiration date”): (a) the mutual agreement of Lemonade and the applicable Metromile supporting stockholder, (b) the first effective time and (c) the termination of the merger agreement in accordance with its terms.
As of November 8, 2021, the Metromile supporting stockholders beneficially owned an aggregate of 14,440,121 shares of Metromile common stock, representing approximately 11.3% of the outstanding shares of Metromile common stock.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF METROMILE
The following tables summarize our consolidated financial data and other data. We derived the selected consolidated income statement data and the selected consolidated statement of cash flow data for the years ended December 31, 2020 and 2019, and the selected consolidated balance sheet data as of December 31, 2020 and 2019 from our audited consolidated financial statements included elsewhere in this Proxy Statement/Prospectus. We derived the selected unaudited consolidated income statement data and the selected unaudited consolidated statement of cash flow data for the nine months ended September 30, 2021 and 2020, and the selected unaudited consolidated balance sheet as of September 30, 2021 and 2020 from our unaudited consolidated financial statements included elsewhere in this Proxy Statement/Prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected consolidated financial data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Proxy Statement/Prospectus.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements combine the separate historical financial information of Lemonade and Metromile after giving effect to the mergers 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 September 30, 2021 for purposes of the unaudited pro forma condensed combined balance sheet and as of January 1, 2020 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, 2020, included in Lemonade’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 8, 2021; |
● | Metromile’s separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2020, included herein; |
● | Lemonade’s separate unaudited historical consolidated financial statements and accompanying notes as of and for nine months ended September 30, 2021, included in Lemonade’s Quarterly Reports on Form 10-Q for the fiscal quarter ended September 30, 2021 filed with the SEC on November 9, 2021; |
● | Metromile’s separate unaudited historical condensed consolidated financial statements and accompanying notes as of and for the nine months ended September 30, 2021 included herein; and |
● | other information pertaining to Metromile and Lemonade contained in or incorporated by reference into this proxy statement/prospectus. See the section titled “Selected Consolidated Historical Financial Data of Metromile” included elsewhere in this proxy statement/prospectus. |
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 proxy statement/prospectus. 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 entity’s 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, and reflective of adjustments necessary to reflect Lemonade’s financial condition and the results of operations as if Lemonade completed the transaction on September 30, 2021 and January 1, 2020, respectively. These adjustments are based on preliminary estimates and may be different from the acquisition accounting that will be made by Lemonade upon consummation of the transaction, and these differences could be material.
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. The estimates of fair value are preliminary and are dependent upon certain valuations and other studies that have not progressed to a stage where there is sufficient information to make a definitive valuation. Accordingly, actual adjustments to the combined company’s financial statements following the mergers will differ, perhaps materially, from those
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reflected in the unaudited pro forma condensed combined financial statements because the assets and liabilities of Metromile will be recorded at their respective fair values on the date the mergers are is consummated, and the preliminary assumptions used to estimate these fair values may change between now and the completion of the mergers. Consequently, amounts preliminarily allocated to goodwill could change significantly from those allocations used in the unaudited pro forma condensed combined financial statements presented below. In addition, the unaudited pro forma condensed combined financial statements do not give consideration to the impact of possible revenue enhancements, expense efficiencies, synergies or asset dispositions that may result from the mergers.
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Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2021
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|
|
|
|
|
|
|
|
|
|
|
|
Transaction Accounting Adjustments |
|
|
|
|
|
||
|
|
|
|
|
|
Reclassification |
|
Pro Forma |
|
|
|
|
|
|
|
Lemonade |
|
Metromile |
|
Adjustments — |
|
Adjustments — |
|
|
|
Pro Forma |
|
|
|
Historical |
|
Historical |
|
Note 3 |
|
Note 6 |
|
|
|
Combined |
|
|
|
(in millions, except per share amounts) |
|
||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale, at fair value |
|
697.6 |
|
49.8 |
|
— |
|
— |
|
|
|
747.4 |
|
Short-term investments |
|
107.5 |
|
— |
|
— |
|
— |
|
|
|
107.5 |
|
Total investments |
|
805.1 |
|
49.8 |
|
— |
|
— |
|
|
|
854.9 |
|
Cash, cash equivalents and restricted cash |
|
319.6 |
|
210.7 |
|
0.1 |
|
— |
|
|
|
530.4 |
|
Premium receivable, net |
|
129.2 |
|
18.7 |
|
— |
|
— |
|
|
|
147.9 |
|
Reinsurance recoverable |
|
70.8 |
|
— |
|
— |
|
— |
|
|
|
70.8 |
|
Prepaid reinsurance premium |
|
150.2 |
|
— |
|
— |
|
— |
|
|
|
150.2 |
|
Prepaid expenses and other assets |
|
— |
|
7.9 |
|
(7.9) |
|
— |
|
|
|
— |
|
Deferred acquisition costs |
|
6.0 |
|
1.6 |
|
— |
|
(1.6) |
|
(B) |
|
6.0 |
|
Property and equipment, net |
|
10.8 |
|
13.0 |
|
— |
|
— |
|
|
|
23.8 |
|
Intangible assets |
|
0.6 |
|
29.5 |
|
— |
|
62.9 |
|
(A) |
|
93.0 |
|
Value of business acquired |
|
— |
|
— |
|
— |
|
0.7 |
|
(B) |
|
0.7 |
|
Goodwill |
|
— |
|
— |
|
— |
|
23.1 |
|
(H) |
|
23.1 |
|
Other assets |
|
29.4 |
|
0.8 |
|
7.8 |
|
— |
|
|
|
38.0 |
|
Total assets |
|
1,521.7 |
|
332.0 |
|
— |
|
85.1 |
|
|
|
1,938.8 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense |
|
74.0 |
|
70.8 |
|
— |
|
4.5 |
|
(C) |
|
149.3 |
|
Unearned premium |
|
203.2 |
|
17.4 |
|
— |
|
— |
|
|
|
220.6 |
|
Deferred revenue |
|
— |
|
4.6 |
|
— |
|
— |
|
|
|
4.6 |
|
Trade payables |
|
3.0 |
|
8.9 |
|
— |
|
— |
|
|
|
11.9 |
|
Notes payable |
|
— |
|
— |
|
— |
|
— |
|
|
|
— |
|
Warrant liability |
|
— |
|
6.7 |
|
— |
|
(6.0) |
|
(D) |
|
0.7 |
|
Funds held for reinsurance treaties |
|
97.1 |
|
— |
|
— |
|
— |
|
|
|
97.1 |
|
Deferred ceding commission |
|
36.1 |
|
— |
|
— |
|
— |
|
|
|
36.1 |
|
Ceded premium payable |
|
24.8 |
|
— |
|
— |
|
— |
|
|
|
24.8 |
|
Other liabilities and accrued expenses |
|
35.5 |
|
6.6 |
|
— |
|
8.8 |
|
(E), (G) |
|
50.9 |
|
Total liabilities |
|
473.7 |
|
115.0 |
|
— |
|
7.3 |
|
|
|
596.0 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
— |
|
— |
|
— |
|
— |
|
(F) |
|
— |
|
Additional paid-in capital |
|
1,539.5 |
|
755.2 |
|
— |
|
(447.1) |
|
(F) |
|
1,847.6 |
|
Accumulated deficit |
|
(491.6) |
|
(538.2) |
|
— |
|
524.9 |
|
(E), (F) |
|
(504.9) |
|
Accumulated other comprehensive income |
|
0.1 |
|
— |
|
— |
|
— |
|
|
|
0.1 |
|
Total stockholders’ equity |
|
1,048.0 |
|
217.0 |
|
— |
|
77.8 |
|
|
|
1,342.8 |
|
Total liabilities and stockholders’ equity |
|
1,521.7 |
|
332.0 |
|
— |
|
85.1 |
|
|
|
1,938.8 |
|
See accompanying notes to the unaudited pro forma condensed combined financial statements.
128
Unaudited Pro Forma Condensed Combined Statement of Operations and Comprehensive Loss
For the Nine Months Ended September 30, 2021
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Accounting |
|
|
|
|
|
||||||
|
|
|
|
|
|
Reclassification |
|
Pro Forma |
|
|
|
|
|
||||
|
|
Lemonade |
|
Metromile |
|
Adjustments — |
|
Adjustments — |
|
|
|
Pro Forma |
|
||||
|
|
Historical |
|
Historical |
|
Note 3 |
|
Note 7 |
|
|
|
Combined |
|
||||
|
|
(in millions, except per share amounts) |
|
||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earned premium |
|
|
51.6 |
|
|
47.3 |
|
— |
|
— |
|
|
|
|
98.9 |
|
|
Ceding commission income |
|
|
31.9 |
|
|
— |
|
24.0 |
|
— |
|
|
|
|
55.9 |
|
|
Net investment income |
|
|
1.0 |
|
|
0.1 |
|
— |
|
— |
|
|
|
|
1.1 |
|
|
Commission and other income |
|
|
2.9 |
|
|
— |
|
4.0 |
|
— |
|
|
|
|
6.9 |
|
|
Other revenue |
|
|
— |
|
|
28.0 |
|
(28.0) |
|
— |
|
|
|
|
— |
|
|
Total revenue |
|
|
87.4 |
|
|
75.4 |
|
— |
|
— |
|
|
|
|
162.8 |
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
47.0 |
|
|
62.4 |
|
— |
|
— |
|
|
|
|
109.4 |
|
|
Other insurance expense |
|
|
16.3 |
|
|
15.2 |
|
3.5 |
|
(2.3) |
|
(A), (B) |
|
|
32.7 |
|
|
Sales and marketing |
|
|
104.4 |
|
|
— |
|
85.4 |
|
— |
|
|
|
|
189.8 |
|
|
Sales, marketing and other acquisition costs |
|
|
— |
|
|
85.6 |
|
(85.6) |
|
— |
|
|
|
|
— |
|
|
Technology development |
|
|
35.4 |
|
|
11.9 |
|
— |
|
— |
|
|
|
|
47.3 |
|
|
Amortization of capitalized software |
|
|
— |
|
|
8.2 |
|
(8.2) |
|
— |
|
|
|
|
— |
|
|
Other operating expenses |
|
|
— |
|
|
39.5 |
|
(39.5) |
|
— |
|
|
|
|
— |
|
|
General and administrative |
|
|
49.5 |
|
|
— |
|
44.4 |
|
5.7 |
|
(C), (D) |
|
|
99.6 |
|
|
Interest expense |
|
|
— |
|
|
16.0 |
|
— |
|
— |
|
|
|
|
16.0 |
|
|
Impairment on digital assets |
|
|
— |
|
|
0.1 |
|
— |
|
— |
|
|
|
|
0.1 |
|
|
(Decrease) increase in fair value of stock warrant liability |
|
|
— |
|
|
8.1 |
|
— |
|
— |
|
|
|
|
8.1 |
|
|
Total expense |
|
|
252.6 |
|
|
247.0 |
|
— |
|
3.4 |
|
|
|
|
503.0 |
|
|
Loss before income taxes |
|
|
(165.2) |
|
|
(171.6) |
|
— |
|
(3.4) |
|
|
|
|
(340.2) |
|
|
Income tax expense |
|
|
5.8 |
|
|
— |
|
— |
|
— |
|
(F) |
|
|
5.8 |
|
|
Net loss |
|
|
(171.0) |
|
|
(171.6) |
|
— |
|
(3.4) |
|
|
|
|
(346.0) |
|
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investments |
|
|
(1.2) |
|
|
— |
|
— |
|
— |
|
|
|
|
(1.2) |
|
|
Foreign currency translation adjustment |
|
|
(0.5) |
|
|
— |
|
— |
|
— |
|
|
|
|
(0.5) |
|
|
Comprehensive loss |
|
|
(172.7) |
|
|
(171.6) |
|
— |
|
(3.4) |
|
|
|
|
(347.7) |
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders – basic and diluted |
|
$ |
2.80 |
|
$ |
(1.56) |
|
|
|
|
|
(G) |
|
$ |
(5.06) |
|
|
Weighted average common shares outstanding – basic and diluted |
|
|
61,086,238 |
|
|
109,988,189 |
|
|
|
|
|
(G) |
|
|
68,376,472 |
|
See accompanying notes to the unaudited pro forma condensed combined financial statements.
129
Unaudited Pro Forma Condensed Combined Statement of Operations and Comprehensive Loss
For the Year Ended December 31, 2020
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Accounting Adjustments |
|
|
|
|
|
||||||
|
|
|
|
|
|
Reclassification |
|
Pro Forma |
|
|
|
|
|
||||
|
|
Lemonade |
|
Metromile |
|
Adjustments — |
|
Adjustments — |
|
|
|
Pro Forma |
|
||||
|
|
Historical |
|
Historical |
|
Note 3 |
|
Note 7 |
|
|
|
Combined |
|
||||
|
|
(in millions, except per share amounts) |
|
||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earned premium |
|
|
77.3 |
|
|
12.5 |
|
— |
|
— |
|
|
|
|
89.8 |
|
|
Ceding commission income |
|
|
15.3 |
|
|
— |
|
14.9 |
|
— |
|
|
|
|
30.2 |
|
|
Net investment income |
|
|
1.5 |
|
|
0.5 |
|
— |
|
— |
|
|
|
|
2.0 |
|
|
Commission and other income |
|
|
0.3 |
|
|
— |
|
7.2 |
|
— |
|
|
|
|
7.5 |
|
|
Other revenue |
|
|
— |
|
|
22.1 |
|
(22.1) |
|
— |
|
|
|
|
— |
|
|
Total revenue |
|
|
94.4 |
|
|
35.1 |
|
— |
|
— |
|
|
|
|
129.5 |
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
54.7 |
|
|
21.2 |
|
— |
|
— |
|
|
|
|
75.9 |
|
|
Other insurance expense |
|
|
14.4 |
|
|
16.8 |
|
4.7 |
|
(2.8) |
|
(A), (B) |
|
|
33.1 |
|
|
Sales and marketing |
|
|
80.4 |
|
|
— |
|
4.6 |
|
— |
|
|
|
|
85.0 |
|
|
Sales, marketing and other acquisition costs |
|
|
— |
|
|
5.5 |
|
(5.5) |
|
— |
|
|
|
|
— |
|
|
Technology development |
|
|
19.4 |
|
|
8.2 |
|
— |
|
— |
|
|
|
|
27.6 |
|
|
Amortization of capitalized software |
|
|
— |
|
|
11.2 |
|
(11.2) |
|
— |
|
|
|
|
— |
|
|
Other operating expenses |
|
|
— |
|
|
17.0 |
|
(17.0) |
|
— |
|
|
|
|
— |
|
|
General and administrative |
|
|
46.3 |
|
|
— |
|
24.4 |
|
9.7 |
|
(C), (D) |
|
|
93.7 |
|
|
|
|
|
13.3 |
|
|
(E) |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
— |
|
|
6.1 |
|
— |
|
— |
|
|
|
|
6.1 |
|
|
Increase in fair value of stock warrant liability |
|
|
— |
|
|
69.3 |
|
— |
|
— |
|
|
|
|
69.3 |
|
|
Total expense |
|
|
215.2 |
|
|
155.3 |
|
— |
|
20.2 |
|
|
|
|
390.7 |
|
|
Loss before income taxes |
|
|
(120.8) |
|
|
(120.2) |
|
— |
|
(20.2) |
|
|
|
|
(261.2) |
|
|
Income tax expense |
|
|
1.5 |
|
|
(0.1) |
|
— |
|
— |
|
(F) |
|
|
1.4 |
|
|
Net loss |
|
|
(122.3) |
|
|
(120.1) |
|
— |
|
(20.2) |
|
|
|
|
(262.6) |
|
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investments |
|
|
0.1 |
|
|
— |
|
— |
|
— |
|
|
|
|
0.1 |
|
|
Foreign currency translation adjustment |
|
|
1.6 |
|
|
— |
|
— |
|
— |
|
|
|
|
1.6 |
|
|
Comprehensive loss |
|
|
(120.6) |
|
|
(120.1) |
|
— |
|
(20.2) |
|
|
|
|
(260.9) |
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders – basic and diluted |
|
$ |
(3.63) |
|
$ |
(13.51) |
|
|
|
|
|
(G) |
|
$ |
(6.46) |
|
|
Weighted average common shares outstanding – basic and diluted |
|
|
33,654,828 |
|
|
8,890,631 |
|
|
|
|
|
(G) |
|
|
40,652,405 |
|
See accompanying notes to the unaudited pro forma condensed combined financial statements.
130
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Description of Transactions
On November 8, 2021, Lemonade, Inc., a Delaware corporation (“Lemonade”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Lemonade, Citrus Acquisition Sub A, Inc., a Delaware corporation and a wholly owned subsidiary of Lemonade (“Acquisition Sub I”), Citrus Acquisition Sub B, LLC, a Delaware limited liability company and a wholly owned Subsidiary of Lemonade (“Acquisition Sub II,” and together with Acquisition Sub I, the “Acquisition Subs”) and Metromile, Inc., a Delaware corporation (the “Metromile”). Each of the board of directors of Lemonade and the board of directors of Metromile (the “Metromile Board”) have unanimously approved the Merger Agreement.
Pursuant to and on the terms and conditions set forth in the Merger Agreement, (i) Acquisition Sub I will merge with and into Metromile (the “First Merger”, and the effective time of the First Merger, the “First Effective Time”), with Metromile continuing as the surviving entity (the “Initial Surviving Corporation”) in the First Merger and (ii) the Initial Surviving Corporation will merge with and into Acquisition Sub II (the “Second Merger”, and together with the First Merger, the “Mergers”), with Acquisition Sub II continuing as the surviving entity in the Second Merger and as a wholly owned subsidiary of Lemonade.
At the First Effective Time, each share of common stock of Metromile, par value $0.0001 per share (the “Metromile Common Stock”), issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 0.05263 (the “Exchange Ratio”) shares of Lemonade common stock with cash being paid in lieu of any fractional shares of Lemonade common stock that Metromile stockholders would otherwise be entitled to receive in the first merger. Aside from accelerated vesting for certain time-based RSU awards and the cancellation of the performance-based RSU awards in connection with the mergers,each Metromile stock option and Metromile RSU award that is assumed by Lemonade will generally remain subject to the same vesting and other terms and conditions that applied to such award immediately prior to the effective time of the mergers.
The parties agreed that if the transactions contemplated by the merger agreement, including the mergers, constitute an “Acceleration Event” (as such term is defined in that certain Agreement and Plan of Merger and Reorganization, dated as of November 24, 2020 and as amended on January 12, 2021 and further amended on February 8, 2021, by and among the Company, INSU II Merger Sub Corp. and Metromile Operating Company (formerly known as MetroMile, Inc.) (the “INSU Merger Agreement”), (a) the terms and conditions set forth in Section 2.17(g) of the INSU Merger Agreement will apply to the transactions contemplated by the merger agreement, including the mergers, (b) the “Additional Shares” (as such term is defined in the INSU Merger Agreement) will be issued as of immediately prior to the First Effective Time and (c) in accordance with the INSU Merger Agreement, as of the First Effective Time, each Additional Share will be converted into the right to receive Lemonade common stock in accordance with the exchange ratio.
If the transactions contemplated by the merger agreement, including the mergers, do not constitute an “Acceleration Event” (as such term is defined in the INSU Merger Agreement), then, pursuant to, and in accordance with the terms of the INSU Merger Agreement, if, (a) at any point following the First Effective Time and prior to February 9, 2023, the closing share price of Lemonade common stock over any 20 trading days within any 30 trading day period is greater than the quotient of (i) $15.00 divided by (ii) the exchange ratio, then, (b) as soon as practicable (but in any event within 10 business days) after such satisfaction, Lemonade will issue, on a ratable basis to the persons eligible to receive such Additional Shares, a number of shares of Lemonade common stock in an amount equal to the product of (i) 10,000,000 multiplied by (ii) the exchange ratio.
For additional information about the Merger Agreement, see “Annex A — The Merger Agreement” The Company’s and the Metromile’s obligations to effect the Merger are subject to the satisfaction or, to the extent permitted by law, waiver of certain conditions precedent. For a description of these conditions, see “Conditions to the Completion of the Mergers”
2. Basis of Presentation
The above unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of operations and comprehensive loss for the nine months ended September 30, 2021 and for the year ended December 31, 2020 are derived from the historical financial statements of Lemonade and Metromile after giving effect to the merger. The unaudited pro forma condensed combined balance sheet as of September 30, 2021 gives pro forma effect to these transactions as if they had been completed on September 30, 2021. The unaudited pro forma condensed combined statements operations and comprehensive loss for the nine months ended September 30, 2021 and the year ended December 31, 2020 give
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pro forma effect to these transactions as if they had been completed on January 1, 2020. Certain amounts may not foot due to rounding to millions.
The transaction will be 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 restructuring costs associated with the business combination are expensed as incurred. The excess of merger consideration over the fair value of assets acquired and liabilities assumed, is allocated to goodwill. Subsequent to the completion of the merger, Lemonade and Metromile will finalize an integration plan, which may affect how the assets acquired, including intangible assets, will be utilized by the combined company.
A final determination of the merger consideration and estimated fair value of Metromile’s assets and liabilities, including goodwill, cannot be made prior to the completion of the merger, and will be based on the actual net tangible and intangible assets of Metromile that exist as of the date of completion of the transaction. Consequently, the merger consideration, estimated fair value adjustments, and amounts preliminarily allocated to goodwill, could change significantly from those allocations used in the unaudited pro forma condensed combined financial statements presented below. Lemonade has not completed a formal valuation study of Metromile’s assets and liabilities including identifiable intangible assets, at this preliminary stage and as the determination of the fair value of Metromile’s assets and liabilities, including the fair value of identifiable intangible assets, will not be made until the completion of the merger. Lemonade does not expect to complete a formal valuation study until the first reporting period subsequent to the completion of the merger. Accordingly, the unaudited pro forma adjustments, including the allocations of the merger consideration, have been made based on estimates solely for the purpose of providing unaudited pro forma condensed combined financial information.
At this preliminary stage, the estimated identifiable finite lived intangible assets include value of business acquired and internally developed technology. The weighted average useful life of the internally developed technology intangible is estimated to be 7 years. The value of business acquired (VOBA) is expected to be fully amortized in less than a year. There is significant uncertainty at this preliminary stage regarding the valuation of the identifiable intangible assets and the determination of the weighted average useful life, as such these items could change significantly from those used in the unaudited pro forma condensed combined financial information presented above and could result in a material change in the amortization of acquired intangible assets. The estimated indefinite lived identifiable intangible assets represent 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 information to conform to Lemonade’s presentation. Following the completion of the merger Lemonade will conduct a final review of Metromile’s accounting policies to determine if further differences in accounting policies require adjustment to conform to Lemonade’s accounting policies or if further reclassifications are considered necessary. As a result of this review, management 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., as set forth below (in millions).
Pro Forma Balance Sheet as of September 30, 2021:
● | Reclassification of $7.9 million from Prepaid expenses and other assets to Other assets and Cash, cash equivalents and restricted cash. |
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Pro Forma Statement of Operations and Comprehensive Loss for the nine months ended September 30, 2021:
● | Reclassification of $28.0 million from Other revenue to Ceding commission income and Commission and other income; |
● | Reclassification of $85.6 million from Sales, marketing and other acquisition costs to Sales and marketing and Other insurance expense; |
● | Reclassification of $39.5 million from Other operating expenses to General and administrative and Other insurance expense; and |
● | Reclassification of $8.2 million from Amortization of capitalized software to General and administrative. |
Pro Forma Statement of Operations and Comprehensive Loss for the year ended December 31, 2020:
● | Reclassification of $22.1 million from Other revenue to Ceding commission income and Commission and other income; |
● | Reclassification of $5.5 million from Sales, marketing and other acquisition costs to Sales and marketing and Other insurance expense; |
● | Reclassification of $17.0 million from Other operating expenses to General and administrative and Other insurance expense; and |
● | Reclassification of $11.2 million from Amortization of capitalized software to General and administrative. |
4. Preliminary Merger Consideration
Merger Consideration
The fair value of the preliminary Merger Consideration, or the purchase price, in the unaudited pro forma financial information is estimated to be approximately $308.1 million. This amount was derived based on the 128.2 million shares of Metromile common stock outstanding on December 10, 2021, the exchange ratio and a per share price of $43.21, which represents the closing price of Lemonade ordinary shares on December 10, 2021. The actual number of shares of Lemonade ordinary shares issued to Metromile stockholders upon closing of the Merger will be based on the actual number of shares of Metromile common stock (including equity-based awards) outstanding when the Merger closes, and the valuation of those shares will be based on the per share price of Lemonade ordinary shares at that time.
Replacement equity awards
The fair value of Metromile equity awards (i.e., RSUs and options) attributable to pre-combination service that will be assumed by Lemonade upon completion of the Merger will be considered part of the purchase price. Accordingly, the purchase price includes estimated fair values for Metromile equity awards of $4.8 million.
Additional Shares
The Additional Shares are considered to be contingent consideration under ASC 805. ASC 805 requires recognition of the fair value of this contingent consideration transferred in exchange for the acquired business. The management of the Company has made a preliminary conclusion that the Additional Shares are equity-classified instruments.
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For purposes of the pro forma financial information, the following table presents the components of the merger consideration (amounts in millions):
(1) | Based on the LMND closing stock price on December 10, 2021. |
A fluctuation in the market price of Lemonade Shares would affect the value of the preliminary merger consideration reflected in the unaudited pro forma condensed combined financial information with a corresponding change to goodwill (bargain purchase gain) related to the transaction, as illustrated in the table below:
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|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
Estimated |
|
Goodwill |
|
||
|
|
|
|
|
Merger |
|
(Bargain Purchase |
|
||
Change in Stock Price |
|
Stock Price |
|
Consideration |
|
Gain) |
|
|||
|
|
|
|
|
|
(in millions) |
|
|
(in millions) |
|
As presented in the pro forma condensed combined results |
|
$ |
43.21 |
|
$ |
308.1 |
|
$ |
23.1 |
|
10% increase in stock price |
|
|
47.53 |
|
|
339.1 |
|
|
54.1 |
|
30% increase in stock price |
|
|
56.17 |
|
|
401.3 |
|
|
116.3 |
|
10% decrease in stock price |
|
|
38.89 |
|
|
277.2 |
|
|
(7.8) |
|
30% decrease in stock price |
|
|
30.25 |
|
|
215.3 |
|
|
(69.7) |
|
5. Preliminary Fair Value Estimate of Assets to Be Acquired and Liabilities to Be Assumed
The table below represents an initial allocation of the preliminary consideration to Metromile’s tangible and intangible assets to be acquired and liabilities to be assumed based on Lemonade’s preliminary estimate of their respective fair values as of September 30, 2021:
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Upon closing of the mergers and the completion of a formal valuation study, the estimated fair value of the assets and liabilities will be updated, including the estimated fair value and useful lives of the identifiable intangible assets and allocation of the excess purchase price to goodwill. The calculation of goodwill, other identified intangible assets could be materially impacted by changing fair value measurements.
6. Adjustments to Unaudited Pro Forma Condensed Combined Statements of Financial Condition
Explanations of the adjustments to the unaudited pro forma condensed combined statement of financial condition are as follows:
(A) | To reflect the estimated fair value of acquired identifiable intangibles (i.e., Technology Asset and State 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 value of business acquired (VOBA) based on the preliminary fair value. |
(C) | Represents the adjustment to estimated fair value of unpaid loss and loss adjustment expense. |
(D) | Represents the adjustment to estimated fair value of warrant liability assumed. |
(E) | Represents the accrual of the estimated transaction costs of $13.3 million, of which $4.0 million attributable to Lemonade and $9.3 million attributable to Metromile. As of September 30, 2021, the amount of transaction costs incurred and recognized was immaterial for the periods presented herein. The transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. |
(F) | Represents the removal of historical equity and the establishment of the preliminary merger consideration. |
(G) | Represents the removal of deferred rent of $4.5 million as it does not meet the definition of a liability for Lemonade. The historical deferred rent balance represents the difference between cash rent payments and the recognition of straight-line rent expense in connection with Metromile’s corporate lease facilities. |
(H) | To reflect goodwill representing the excess of the preliminary merger consideration over the preliminary fair value of assets acquired and liabilities assumed. Goodwill is not expected to be deductible for U.S. federal income tax purposes. |
7. Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations
Explanations of the adjustments to the unaudited pro forma condensed combined statement of operations 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 additional compensation cost due to the issuance of replacement stock-based awards and accelerated vesting of certain RSUs in an amount of $4.8 million and $8.8 million for the nine and twelve months ended September 30, 2021 and December 30, 2020, respectively. |
(D) | 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 goodwill and VOBA) is reflected in the table below. The pro forma amortization adjustment is $0.9 million and $0.9 million for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively. The pro forma amortization adjustments include |
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the removal of historical amortization expense of $8.2 million and $11.2 million for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively. |
(E) | Reflects the impact of the estimated transaction costs of $13.3 million. The transactions costs are not expected to recur beyond 12 months following the closing of the transaction. |
(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, 2020. 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 for the nine months ended September 30, 2021 and for the year ended December 31, 2020. |
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COMPARATIVE SHARE INFORMATION
The following tables set forth:
● | historical per share information of Lemonade as of and for the nine-month period ended September 30, 2021 and as of and for the fiscal year ended December 31, 2020; |
● | historical per share information of Metromile as of and for the nine-month period ended September 30, 2021 and as of and for the fiscal year ended December 31, 2020; |
● | unaudited pro forma per share information of the combined company as of and for the nine-month period ended September 30, 2021 and as of and for the fiscal year ended December 31, 2020, respectively, after giving effect to the mergers. |
The historical information should be read in conjunction with the sections entitled “Selected Historical Consolidated Financial Data of Metromile,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Metromile” and “Selected Unaudited Pro Forma Condensed Combined Financial Information” contained elsewhere in this proxy statement/prospectus and the historical financial statements and related notes of each of Lemonade and Metromile contained elsewhere in this proxy statement/prospectus. The unaudited pro forma combined share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information and related notes included elsewhere in this proxy statement/prospectus. The unaudited pro forma combined net income per share information below does not purport (i) to represent what the actual results of operations of Lemonade would have been had the mergers been completed or (ii) to project Lemonade’s results of operations that may be achieved after the mergers. The unaudited pro forma book value per share information below does not purport to represent what the book value of Lemonade would have been had the mergers been completed nor the book value per share for any future period.
As of and for the nine-month period ended September 30, 2021
As of and for the fiscal year ended December 31, 2020
1. | Book value per ordinary share represents total equity, excluding preferred stock and shares subject to redemption, divided by outstanding shares of common stock. |
2. | Book value per share (basic and diluted) represents total equity, excluding preferred stock and shares subject to redemption, divided by weighted average common shares outstanding. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF METROMILE
References in this section to “we” or “our” in this section refer to Metromile, Inc.
Overview
We started Metromile based on the simple observation that the physical world is being increasingly digitized, that this digital data can be used to better estimate the future, and that the best opportunity to create value for everyday customers in an increasingly predictable world is to reinvent insurance, one of the largest and most important global markets.
At its core, insurance financially protects the insured customer from the occurrence of specific future events. If these events can be more accurately estimated, using data and data science, then the insurance provided can be more accurately priced — lower likelihood events would cause the price of insurance to go down and higher likelihood events would cause the price of insurance to go up. The proliferation of sensor data, from cars, mobile phones, and elsewhere, means we have a greater ability to estimate the likelihood of future events and, thus, help many customers who are overpaying for insurance save money.
We founded Metromile in 2011 to realize this opportunity and tackle the broken auto insurance industry. With data science as our foundation, we offer our insurance customers real time, personalized auto insurance policies, priced and billed by the mile, with rates based on precisely how and how much they actually drive, instead of using the industry standard approximations and estimates that make prices unfair for most customers.
Through our digitally native offering, built around the needs of the modern driver, we believe our per-mile insurance policies save our customers, on average, 47% over what they were paying their previous auto insurer. We base this belief on data our customers self-reported in 2018 with respect to premiums paid to providers before switching to Metromile.
We believe the opportunity for our personalized per-mile insurance product is significant. Federal Highway Administration data indicates that approximately 35% of drivers drive more than half the total miles driven. We believe there is a correlation between the number of miles driven and the number of insurable losses. An October 2016 report by the Insurance Information Institute noted that the increase in claims frequency appears directly linked to the increase in the number of miles driven. Notwithstanding the relationship between miles driven and claims, auto insurance premiums have historically been priced based on a driver’s “class” — and drivers are charged the same basic premium rate as others in their class no matter the actual miles driven. In the traditional pricing model, a driver’s age, credit score, accident history, and geography influence the premium paid more than the actual miles driven. Thus, the 35% of drivers who account for more than half the total miles driven are not paying premiums based on how often they are behind the wheel and increasing the potential for an insurable loss claim. We believe the traditional pricing model is inherently unfair to the majority of drivers — the 65% of drivers who drive less than half the miles driven — as they are effectively subsidizing the minority of drivers who are high-mileage drivers. By offering auto insurance using a per-mile rate and then billing each customer monthly based on their actual miles driven, we are able to provide significant savings to the 65% of drivers who drive less than half the miles driven. Customers can simply use their connected car or use The Pulse to share their data with us — which includes miles driven, and in certain states where permitted by insurance regulators (four of the eight in which we currently operate), driving habits, such as phone use, speeding, hard-braking, accelerating, cornering, and location. Our customers are able to choose when and how to drive and share this information with us to realize these data driven savings every day.
The U.S. auto insurance market is massive, dominated by insurers stuck on legacy technology infrastructure who offer antiquated services. U.S. personal auto insurers write approximately $250 billion of premiums each year, with no carrier currently achieving more than 20% market share. We believe we are strategically positioned to succeed as industry incumbents struggle to meet the significant structural changes underway in an increasingly digital world. The advent of mobile phones has revolutionized modern mobility, while connected and autonomous technologies are drastically changing consumer relationships with vehicles. As we scale and accumulate more data, we believe that we can deliver increasingly better service, pricing and experiences for customers across all stages of the policy lifecycle.
Additionally, with the per-mile insurance that Metromile provides, customers are incentivized to drive less and choose more environmentally friendly transportation methods. We found that after customers switch to per-mile insurance, they tend to decrease their overall miles driven. Not only does this equate to a lower bill, but also a significant reduction in carbon emissions.
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Recent Developments
On November 8, 2021, we entered into an Agreement and Plan of Merger (the “Agreement”) with Lemonade, Inc., a Delaware corporation (“Lemonade”), Citrus Merger Sub A, Inc., a Delaware corporation and a wholly-owned subsidiary of Lemonade (“Acquisition Sub I”) and Citrus Merger Sub B, LLC, a Delaware limited liability company and wholly owned subsidiary of Lemonade (“Acquisition Sub II”), pursuant to which (i) Acquisition Sub I will merge with and into Metromile (the “First Merger” and the effective time of the First Merger, the “First Effective Time”)), with Metromile continuing as the surviving entity (the “Initial Surviving Corporation”), and (ii) the Initial Surviving Corporation will merge with and into Acquisition Sub II (the “Second Merger”), with Acquisition Sub II continuing as the surviving entity as a wholly owned subsidiary of Lemonade (the First Merger, the Second Merger and the other transactions contemplated by the Agreement, collectively, the “Proposed Transaction”). The Proposed Transaction implies a fully diluted equity value of approximately $500 million, or an enterprise value of about $340 million net of unrestricted cash and cash equivalents as September 30, 2021. In accordance with the Agreement, at the First Effective Time, each share of our common stock issued and outstanding immediately prior to the First Effective Time will be converted into the right to receive 0.05263 (the “Exchange Ratio”) validly issued, fully paid and non-assessable shares of common stock of Lemonade, par value $0.00001 per share (“Lemonade Common Stock”). The Proposed Transaction is conditioned on customary closing conditions, including receipt of applicable regulatory approvals and approval of the Proposed Transaction by our stockholders, and is expected to close in the second quarter of 2022.
Contemporaneously with the execution of the Agreement, certain of our stockholders holding approximately 11.3% of the outstanding shares of the our common stock, including all members of our Board of Directors and certain of our officers (the “Stockholders”), entered into voting and support agreements (the “Voting and Support Agreements”) with Lemonade, pursuant to which the Stockholders agreed to, among other things, vote all of their shares of our common stock (“Voting Shares”) (i) in favor of the adoption of the Agreement and approval of the Proposed Transaction; (ii) in favor of any adjournment recommended by us with respect to any stockholders meeting to the extent permitted or required pursuant to the Agreement; (iii) against any alternative acquisition proposal or transaction; (iv) against any merger, sale of substantial assets or liquidation of Metromile; and (v) against any proposal, action or agreement that would reasonably be expected to impede, interfere with, delay or postpone, prevent or otherwise impair the Proposed Transaction.
For additional information related to the mergers, please see Note 1, Overview and Basis of Presentation and Note 18, Subsequent Events to our unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus and our Current Report on Form 8-K filed with the SEC on November 9, 2021.
Our Model
The traditional auto insurance industry is focused on charging customers static insurance rates based on a “class” of driver, which is determined based on a set of variables that approximate and estimate risk. The traditional approach requires little ongoing customer engagement and requires manual claims servicing, which results in lower gross margins. In contrast, our model is digitally native, automated, and built using predictive models. Our product provides customized rates for each individual driver, using telematics data and proprietary predictive models to assess risk and determine pricing for each customer, while billing customers based on their actual miles driven. We have automated the claims approval process, resulting in higher margins, and reduced fraud rates through real-time reporting from telematics devices, resulting in lower loss ratios.
We have experienced strong growth since inception; however, our focus has been on prioritizing unit economics rather than solely focusing on revenue growth through increased net losses. Our priority has been on developing a durable business advantage.
Total revenue increased from $8.0 million for the three months ended September 30, 2020 to $30.0 million for the three months ended September 30, 2021, and increased from $24.4 million for the nine months ended September 30, 2020 to $75.4 million for the nine months ended September 30, 2021. Our gross profit/(loss), defined as total revenue as adjusted for losses and LAE, policy servicing expense and other and amortization of capitalized software, and which is impacted by our reinsurance arrangements, increased from $(3.3) million for the three months ended September 30, 2020 to $(6.0) million for the three months ended September 30, 2021, and increased from $(8.9) million for the nine months ended September 30, 2020 to $(10.4) million for the nine months ended September 30, 2021. Our accident period contribution profit/(loss), a non-GAAP financial measure that excludes from gross profit/(loss) the results of prior period development on loss and LAE, decreased from $6.2 million for the three months ended September 30, 2020 to $(3.0) million for the three months ended September 30, 2021, and decreased from $14.0 million for the nine months ended September 30, 2020 to $(1.1) million for the nine months ended September 30, 2021, largely due to an increase in losses, despite an increase in direct written and earned premium for both periods. Accident period refers to the period in which the loss
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occurs, and estimates are made to determine the ultimate expected cost of that loss. These estimates are reassessed each subsequent period, and the movement from the initial estimate of that accident period is known as prior period development. We view accident period contribution margin as the most relevant metric of current product profitability and use accident period contribution margin to consistently evaluate the variable contribution to our business from insurance operations from period to period based on the most current product profitability. Contribution profit/(loss), a non-GAAP financial measure that includes the results of prior period development accident period contribution profit/(loss), decreased from $4.7 million for the three months ended September 30, 2020 to $(2.1) million for the three months ended September 30, 2021, and decreased from $11.1 million for the nine months ended September 30, 2020 to $(5.1) million for the nine months ended September 30, 2021 largely due to unfavorable prior period loss development. We use contribution profit/(loss) as a key measure of our progress towards profitability and to consistently evaluate the variable contribution to our business from insurance operations from period to period. See the section entitled “-Non-GAAP Financial Measures” for additional information regarding our use of accident period contribution profit/(loss) and contribution profit/(loss)and a reconciliation to the most comparable GAAP measure.
Reinsurance
We review our need to obtain reinsurance to help manage our exposure to property and casualty insurance risks.
The reinsurance arrangement covering the periods May 1, 2017 to April 30, 2018 and May 1, 2018 to April 30, 2019 covered 85% of our renewal policies and beginning May 1, 2019, the reinsurance arrangements expanded to also include new policies. Thus, from May 1, 2019 through April 30, 2021, we ceded a larger percentage of our premium than in prior periods, resulting in a significant decrease in our revenues as reported under GAAP. In addition, under the reinsurance agreements from various years, LAE was ceded at a fixed rate ranging from 3% to 6% of ceded earned premium. In February 2021, we commuted 67% of our reinsurance program, resulting in 34.2% of the book being ceded as of March 2021. As of September 30, 2021 we have commuted the remainder of our reinsurance programs to allow us to manage our surplus at the insurance carrier at a lower cost of capital. Going forward, and given the strength of our current balance sheet, we will continue to monitor our reinsurance needs, including new quota share arrangements, to maintain adequate capital levels at the insurance company level.
As we change our reinsurance arrangements, whereby the terms and structures may vary widely, our prior results, impacted by reinsurance, may not be a good indicator of future performance, including the fluctuations experienced in gross profit. Thus, we use accident period contribution profit/(loss) and contribution profit/(loss) as key measures of our performance.
Key Performance Indicators
We regularly review key operating and financial performance indicators to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. We believe these non-GAAP financial and operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP. See the section entitled
“- Non-GAAP Financial Measures” for additional information regarding our use of accident period contribution profit/(loss), contribution profit/(loss), accident period loss ratio and accident period LAE ratio and a reconciliation to the most comparable GAAP measures.
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The following table presents these metrics as of and for the periods presented:
Policies in Force
We define policies in force as the number of current and active policyholders as of the period end date. We view policies in force as an important metric to assess our financial performance because policy growth drives our revenue growth, increases brand awareness and market penetration, generates additional data to continue to improve the performance of our platform, and provides key data to assist strategic decision making for our company.
Direct Earned Premium per Policy
We define direct earned premium per policy as the ratio of direct earned premium divided by the average policies in force for the period, presented on an annualized basis. We view premiums per policy as an important metric because it is a reliable indicator of revenue earned in any given period, and growth in this metric would be a clear indicator of the growth of the business. However, as evidenced by the substantial reduction in miles driven during the COVID-19 pandemic, near-term fluctuations in miles driven can lead to fluctuations in direct earned premium. Thus, we refer to policies in force as a more stable indicator of overall growth. Direct earned premium excludes the impact of premiums ceded to reinsurers such that it reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Additionally, premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we use.
Direct Written Premium
We define direct written premium as the total amount of direct premiums on policies that were bound during the period. Direct written premium is a standard insurance metric and is included here for consistency. However, given that much of our premium is written and earned as customer miles are driven (i.e., customers are billed based on true use), unlike our competitors that write all premium up-front, we believe earned premium is a more meaningful comparison to other insurers. Direct written premium excludes mileage-based premium that has not yet been earned. It also excludes the impact of premiums ceded to reinsurers such that it reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Additionally, premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we use.
Direct Earned Premium
We define direct earned premium as the amount of direct premium that was earned during the period. Premiums are earned over the period in which insurance protection is provided, which is typically six months. We view direct earned premium as an important metric because it allows us to evaluate our growth prior to the impact of ceded premiums to our reinsurance partners. It is the primary driver of our consolidated GAAP revenues and represents the result of our sustained customer acquisition efforts. As with direct
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written premium, direct earned premium excludes the impact of premiums ceded to reinsurers to manage our business, and therefore should not be used as a substitute for net earned premium, total revenue, or any other measure presented in accordance with GAAP.
Gross Profit/(Loss)
Gross profit/(loss) is defined as total revenue minus losses and LAE, policy servicing expense and other, and amortization of capitalized software. Gross margin is equal to gross profit/(loss) divided by total revenue. Gross profit/(loss) includes the effects of reinsurance, thereby increasing volatility of this measure without corresponding changes in the underlying business or operations.
Contribution Profit/(Loss) and Accident Period Contribution Profit/(Loss)
Contribution profit/(loss), a non-GAAP financial measure, is defined as gross profit/(loss), excluding the effects of reinsurance arrangements on both total revenue and losses and LAE and excludes enterprise software revenues, investment income earned at the holding company, amortization of internally developed software, and devices, while including bad debt, report costs and other policy servicing expenses. Accident period contribution profit/(loss), a non-GAAP financial measure, further excludes the results of prior period development on losses and LAE. We believe the resulting calculations are inclusive of the variable costs of revenue incurred to successfully service a policy, but without the volatility of reinsurance. We use contribution profit/(loss) as a key measure of our progress towards profitability and to consistently evaluate the variable contribution to our business from insurance operations from period to period because it is the result of direct earned premiums, plus investment income earned at the insurance company, minus direct losses, direct LAE, premium taxes, bad debt, payment processing fees, data costs, underwriting reports, and other costs related to servicing policies. Accident period contribution profit/(loss) further excludes the results of prior period development on loss and LAE, thereby providing the most accurate view of the performance of our underlying insurance product, which drives our growth investment decisions and is a strong indicator of future loss performance.
See the section entitled “— Non-GAAP Financial Measures” for a reconciliation of total revenue to accident period contribution profit/(loss) and contribution profit/(loss).
Contribution Margin and Accident Period Contribution Margin
Contribution margin, a non-GAAP financial measure, is defined as contribution profit/(loss) divided by adjusted revenue. Adjusted revenue, a non-GAAP financial measure, is defined as total revenue, excluding the net effect of our reinsurance arrangements, revenue attributable to our enterprise segment, interest income generated outside of our insurance company, and bad debt expense. We view contribution margin as an important metric because it most closely correlates to the economics of our core underlying insurance product and measures our progress towards profitability. Accordingly, we use this non-GAAP financial measure to consistently evaluate the variable contribution to our business from insurance operations from period to period. Accident period contribution margin, a non-GAAP financial measure, is defined as accident period contribution profit/(loss) divided by adjusted revenue. We view accident period contribution margin as an important metric as it excludes the results of prior period development on loss and LAE, thereby providing the most meaningful view of the performance of our current underlying insurance product, which drives our growth investment decisions and is a strong indicator of future loss performance.
See the section entitled “— Non-GAAP Financial Measures” for a reconciliation of total revenue to contribution profit/(loss) and accident period contribution profit/(loss).
Direct and Accident Period Loss Ratio
We define direct loss ratio expressed as a percentage, as the ratio of direct losses to direct earned premium. Direct loss ratio excludes LAE. We view direct loss ratio as an important metric because it allows us to evaluate losses and LAE separately prior to the impact of reinsurance.
We define accident period loss ratio as direct loss ratio excluding prior accident period development on losses. We view accident period loss ratio as an important metric because it allows us to evaluate the expected ultimate losses, including losses not yet reported, for the most recent accident period.
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Direct and Accident Period LAE Ratio
We define direct LAE ratio expressed as a percentage, as the ratio of direct LAE to direct earned premium. We view the direct LAE ratio as an important metric because it allows us to evaluate losses and LAE separately prior to the impact of reinsurance. We actively monitor the direct LAE ratio as it has a direct impact on our results regardless of our reinsurance strategy.
We define the accident period LAE ratio as the direct LAE ratio excluding prior quarter development on LAE. We view accident period LAE ratio as an important metric because it allows us to evaluate the expected ultimate LAE, including LAE for claims not yet reported, for the most recent accident period.
Recent Developments Affecting Comparability
INSU SPAC transaction with INSU
In February 2021, we completed the INSU SPAC transaction, pursuant to which Metromile Operating Company (formerly MetroMile, Inc.) became our wholly owned direct subsidiary. The INSU SPAC transaction was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, although INSU was the legal acquirer, INSU is treated as the “acquired” company for financial reporting purposes and Metromile Operating Company is treated as the accounting acquirer. This determination was primarily based on the fact that Metromile Operating Company’s stockholders prior to the INSU SPAC transaction have a majority of our voting power, Metromile Operating Company’s senior management now comprise substantially all of our senior management, the relative size of Metromile Operating Company compared to our company, and that Metromile Operating Company’s operations comprise our ongoing operations. Accordingly, for accounting purposes, the INSU SPAC transaction is treated as the equivalent of a capital transaction in which Metromile Operating Company issued stock for our net assets, which are stated at historical cost, with no goodwill or other intangible assets recorded, and Metromile Operating Company’s financial statements became the Company’s financial statements.
In connection with the INSU SPAC transaction, we received approximately $310.0 million of cash, which we used to repay certain indebtedness as described herein. We expect to use our cash on hand for working capital and general corporate purposes. We may also use the proceeds for the acquisition of, or investment in, technologies, solutions, or businesses that complement our business.
COVID-19 Impact
In March 2020, the World Health Organization declared COVID-19 a global pandemic. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. We have taken measures in response to the ongoing COVID-19 pandemic, including closing our offices and implementing a work from home policy for our nationwide workforce; implementing additional safety policies and procedures for our employees; and suspending employee travel and in-person meetings. We may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, and stockholders.
For the three months ended September 30, 2021, we generated $28.5 million in direct earned premium, an increase of $1.8 million or 7%, as compared to $26.7 million for the three months ended September 30, 2020. For the nine months ended September 30, 2021, we generated $82.1 million in direct earned premium, an increase of $8.0 million or 11%, as compared to $74.1 million for the nine months ended September 30, 2020. This increase in both reporting periods was primarily due to a year-over-year increase in direct earned premium per policy, which is a reflection of miles driven. Based on internal data, average daily miles driven increased by 18% for the first nine months of 2021 as compared to the same period in 2020. We believe that the potential long-term impacts of COVID-19, as more companies embrace work from home policies, represent an opportunity for us to increase our customer base as drivers continue to look for value-driven insurance solutions that provide the same or a better quality product that aligns to their own driving behaviors.
The future impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the pandemic, impact on our customers and their spending habits, impact on our marketing efforts, and effect on our suppliers, all of which are uncertain. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our operations and the operations of our third-party suppliers, along with the related global slowdown in economic activity, may result in decreased revenues and increased costs. Impacts on our revenue and costs may continue through the duration of this crisis. It is possible that the COVID-19 pandemic, the measures taken by federal, state, or local
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authorities and businesses affected and the resulting economic impact may materially and adversely affect our business, results of operations, cash flows and financial positions as well as our customers.
Key Factors and Trends Affecting our Operating Performance
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:
Our Ability to Attract New Customers
Our long-term growth will depend, in large part, on our continued ability to attract new customers to our platform. Our growth strategy is centered around accelerating our existing position in markets that we already serve, expanding into new markets nationally across the United States, developing new strategic partnerships with key players in the automotive industry, and growing our enterprise software sales.
Our Ability to Retain Customers
Turning our customers to lifetime customers is key to our success. We realize increasing value from each customer retained as a recurring revenue base, which forms a basis for organic growth for our new product offerings and improves our loss ratios over time. Our ability to retain customers will depend on a number of factors, including our customers’ satisfaction with our products, offerings of our competitors and pricing of our products.
Our Ability to Expand Nationally Across the United States
Our long-term growth opportunity will benefit from our ability to provide insurance across more states in the United States. Today, we are licensed in 49 states and the District of Columbia, with licenses active in 46 states and the District of Columbia, and writing business in eight states. We plan to apply our highly scalable model nationally, with a tailored approach to each state, driven by the regulatory environment and local market dynamics. This will allow us to expand rapidly and efficiently across different geographies while maintaining a high level of control over the specific strategy within each state.
Our Ability to Introduce New and Innovative Products
Our growth will depend on our ability to introduce new and innovative products that will drive the organic growth from our existing customer base as well as from potential customers. Our insurance offerings as well as our technology platform offered to enterprise customers provides us with a foundation to provide a broad set of insurance products to consumers in the future.
Our Ability to Manage Risk Through Our Technology
Risk is managed through our technology, artificial intelligence, and data science, which we utilize to accurately determine the risk profiles of our customers. Our ability to manage risk is augmented over time as data is continuously collected and analyzed by our machine learning with the objective of lowering our loss ratios over time. Our success depends on our ability to adequately and competitively price risk.
Our Ability to Manage Risks Related to Severe Weather Events and Climate Change
Both seasonal and severe weather events impact the level and amount of claims we receive. These events, as well as climate change and its potential impact on weather patterns, include hurricanes, wildfires, coastal storms, winter storms, hailstorms, and tornados.
Components of Our Results of Operations
Revenue
Revenues are generated primarily from the sale of our pay-per-mile auto insurance policies within the United States, revenue related to policy acquisition costs recovered as part of the reinsurance arrangement, and through sales of our proprietary AI claims platform. Revenue excludes premiums ceded to our reinsurers (see the section entitled “— Reinsurance” for further information).
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Premiums Earned, net
Premiums earned, net represents the earned portion of our gross written premium, less the earned portion that is ceded to third-party reinsurers under any reinsurance agreements. Revenue from premiums is earned over the term of the policy, which is written for six-month terms. The premium for the policy provides for a base rate per month for the entire policy term upon the binding of the policy plus a per-mile rate multiplied by the miles driven each day (based on data from the telematics device, subject to a daily maximum).
Investment Income
Investment income represents interest earned from our fixed maturity and short-term investments less investment expenses and is recorded as the income is earned. Investment income is directly correlated with the size of our investment portfolio and with the market level of interest rates. The size of our investment portfolio is expected to increase in future periods, and therefore investment income is also expected to increase, as we continue to invest both customer premiums and equity proceeds into our investment portfolio.
Other Revenue
Other revenue consists of enterprise revenue, revenue related to policy acquisition costs recovered as part of a reinsurance arrangement with reinsurance partners, reinsurance profit commissions based on performance of the ceded business, gain on reinsurance commutation and policy commissions earned from NGI. We have developed technologies intended for internal use to service our insurance business and have started offering our technologies to third-party insurance carriers. Enterprise revenue represents revenues generated from the licensing of such internally developed software on a subscription basis, and sales of our professional services, which includes customization and implementation services for customers. We also earned revenues from policy acquisition costs recovered for policies newly ceded to our reinsurance partners, and we earn commissions for policies underwritten by NGI prior to becoming a full-stack insurance carrier in 2016.
Costs and Expenses
Our costs and expenses consist of losses and LAE, policy servicing expense and other, sales, marketing, and other acquisition costs, research and development, amortization of capitalized software, and other operating expenses.
Losses and LAE
Our losses and LAE consist of the net cost to settle claims submitted by our customers. Losses consist of claims paid, case reserves, as well as claims incurred but not reported, net of estimated recoveries from salvage and subrogation. LAE consists of costs borne at the time of investigating and settling a claim. Losses and LAE represents management’s best estimate of the ultimate net cost of all reported and unreported losses occurred through the balance sheet date. Estimates are made using individual case-basis valuations and statistical analyses and are continually reviewed and adjusted as necessary as experience develops or new information becomes known. These reserves are established to cover the estimated ultimate cost to settle insured losses.
Both losses and LAE are net of amounts ceded to reinsurers. We evaluate whether to enter into reinsurance contracts to protect our business from losses due to concentration of risk and to manage our operating leverage ratios, as well as to provide additional capacity for growth. Our reinsurance contracts have historically consisted of quota-share reinsurance agreements with our reinsurance partners under which risks are covered on a pro-rata basis for all policies underwritten by us. All reinsurance has been commuted as of September 30, 2021 (see the section entitled “— Reinsurance” for further discussion). These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying risks. Losses and LAE may be paid out over a period of years.
Various other expenses incurred during claims processing are allocated to losses and LAE. These amounts include claims adjusters’ salaries and benefits, employee retirement plan related expenses and stock-based compensation expenses (Personnel Costs); software expenses; and overhead allocated based on headcount (Overhead).
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Policy Servicing Expense and Other
Policy servicing expense and other includes personnel costs related to our technical operations and customer experience teams, data transmission costs, credit card and payment processing expenses, premium taxes, and amortization of telematics devices. Policy servicing expense and other is expensed as incurred.
Sales, Marketing and Other Acquisition Costs
Sales, marketing, and other acquisition costs includes spend related to advertising, branding, public relations, third-party marketing, consumer insights, reinsurance ceding commissions, and expense recognized due to return of onboarding allowance as part of reinsurance commutations. These expenses also include related personnel costs and overhead. We incur sales, marketing and other acquisition costs for all product offerings including our newly introduced software as a service (“SaaS”) platform which provides access to our developed technology under SaaS arrangements, along with professional services to third-party customers (“Enterprise business solutions”). Sales, marketing and other acquisition costs are expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned. We plan to continue investing in marketing to attract and acquire new customers, increase our brand awareness, and expand our Enterprise product offering. We expect that sales and marketing expenses will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue in the near-term. We expect that, in the long-term, our sales, marketing and other acquisition costs will decrease as a percentage of revenue as the proportion of renewals to our total business increases.
Research and Development
Research and development consist of costs that support our growth and expansion initiatives inclusive of website development costs, software development costs related to our mobile app and Enterprise business solution, and new product development costs. These costs include third-party services related to data infrastructure support; personnel costs and overhead for product design, engineering, and management; and amortization of internally developed software. Research and development costs are expensed as incurred, except for costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life. We expect that research and development expenses will increase in both absolute dollars and percentage of revenues in future periods in the near-term. We expect that, in the long-term, our research and development expenses will decrease as a percentage of revenue as these represent largely fixed costs.
Amortization of Capitalized Software
Amortization of capitalized software relates to the amortization recorded for the capitalized website and software development costs for the period presented.
Other Operating Expenses
Other operating expenses primarily relate to personnel costs and overhead for corporate functions, external professional service expenses and depreciation expense for computers, furniture, and other fixed assets. General and administrative expenses are expensed as incurred.
We expect to incur incremental operating expenses to support our global operational growth and enhancements to support our reporting and planning functions.
We expect to incur significant additional operating expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of the Nasdaq Capital Market, additional corporate, director and officer insurance expenses, greater investor relations expenses and increased legal, audit and consulting fees. We also expect to continue to increase the size of our accounting, finance, and legal teams to support our increased compliance requirements and the growth of our business. As a result, we expect that our other operating expenses will increase in absolute dollars and percentage of revenues in future periods in the near-term. We expect that, in the long-term, our other operating expenses will decrease as a percentage of revenue as these represent largely fixed costs.
Interest expense
Interest expense primarily relates to interest incurred on our long-term debt, the amortization of debt issuance costs.
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Impairment on digital assets
Impairment on digital assets relates to losses that occur when the fair value of the digital asset at the time of measurement (the balance sheet reporting date) is less than its carrying value.
Increase in fair value of stock warrant liability
Increase in fair value of stock warrant liability primarily relates to changes in the fair value of warrant liabilities.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and September 30, 2020:
The following table presents our consolidated statement of operations for the three months ended September 30, 2021 and 2020, and the dollar and percentage change between the two periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|||||
|
|
September 30, |
|
|
|
|
|
|||||
|
|
2021 |
|
2020 |
|
$Change |
|
% Change |
|
|||
Revenue |
|
(unaudited) |
|
|
|
|
|
|
||||
Premiums earned, net |
|
$ |
28,142 |
|
$ |
3,139 |
|
$ |
25,003 |
|
797 |
% |
Investment income |
|
|
30 |
|
|
81 |
|
|
(51) |
|
(63) |
% |
Other revenue |
|
|
1,829 |
|
|
4,731 |
|
|
(2,902) |
|
(61) |
% |
Total revenue |
|
|
30,001 |
|
|
7,951 |
|
|
22,050 |
|
277 |
% |
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
27,480 |
|
|
4,443 |
|
|
23,037 |
|
519 |
% |
Policy servicing expense and other |
|
|
5,674 |
|
|
4,119 |
|
|
1,555 |
|
38 |
% |
Sales, marketing and other acquisition costs |
|
|
12,332 |
|
|
28 |
|
|
12,304 |
|
43943 |
% |
Research and development |
|
|
5,130 |
|
|
1,832 |
|
|
3,298 |
|
180 |
% |
Amortization of capitalized software |
|
|
2,838 |
|
|
2,815 |
|
|
23 |
|
1 |
% |
Other operating expenses |
|
|
14,207 |
|
|
3,924 |
|
|
10,283 |
|
262 |
% |
Total costs and expenses |
|
|
67,661 |
|
|
17,161 |
|
|
50,500 |
|
294 |
% |
Loss from operations |
|
|
(37,660) |
|
|
(9,210) |
|
|
(28,450) |
|
309 |
% |
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
— |
|
|
1,513 |
|
|
(1,513) |
|
(100) |
% |
Impairment on digital assets |
|
|
117 |
|
|
— |
|
|
117 |
|
NM |
|
Decrease in fair value of stock warrant liability |
|
|
(11,020) |
|
|
(26) |
|
|
(10,994) |
|
42285 |
% |
Total other expense |
|
|
(10,903) |
|
|
1,487 |
|
|
(12,390) |
|
(833) |
% |
Loss before taxes |
|
|
(26,757) |
|
|
(10,697) |
|
|
(16,060) |
|
150 |
% |
Income tax benefit |
|
|
— |
|
|
(67) |
|
|
67 |
|
(100) |
% |
Net loss |
|
$ |
(26,757) |
|
$ |
(10,630) |
|
$ |
(16,127) |
|
152 |
% |
Revenue
Premiums Earned, net
Net premiums earned increased $25.0 million, or 797%, from $3.1 million for the three months ended September 30, 2020 to $28.1 million for the three months ended September 30, 2021, which was primarily attributable to a $22.7 million decrease in premiums ceded to our reinsurance partners, a $1.8 million increase in direct earned premium, and a $0.5 million decrease in bad debt expense which was due primarily to state mandated COVID-19 payment extensions. The decrease of $22.7 million in premiums ceded to our reinsurance partners was driven largely by reinsurance commutation settlements. Direct earned premium increased by $1.8 million from $26.7 million for the three months ended September 30, 2020 to $28.5 million for the three months ended September 30, 2021. Increase in direct earned premiums was primarily attributable to an increase in policies in force during the three months ended September 30, 2021 as well as increase in miles driven during the same period. We believe direct earned premium is the best measure of top-line revenue, as it excludes the impacts of reinsurance.
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Investment Income
Investment income decreased $51 thousand, or 63%, from $$81 thousand for the three months ended September 30, 2020 to $30 thousand for the three months ended September 30, 2021. The decrease was primarily due to a lower yield on fixed maturity investments resulting from reinvesting at lower rates, despite a higher level of invested assets.
Other Revenue
Other revenue decreased $2.9 million, or 61%, from $4.7 million for the three months ended September 30, 2020 to $1.8 million for the three months ended September 30, 2021. The decrease was primarily attributable to reinsurance commutation settlements in 2021 resulting in no reinsurance related revenue in the current period, including a $2.1 million decrease in revenues from policy acquisition costs recovered for policies onboarded into our reinsurance program as well as a decrease of $1.0 million due to reinsurance profit commission and brokerage rebates in the 2020 period that did not exist in 2021.
Costs and Expenses
Losses and LAE
Losses and LAE increased $23.1 million, or 519%, from $4.4 million for the three months ended September 30, 2020 to $27.5 million for the three months ended September 30, 2021. Ceded losses and LAE decreased $14.5 million as a result of commuting all of our reinsurance programs and thereby retaining more losses. Direct losses and LAE increased by $8.3 million due to an overall increase in claims cost, frequency, and severity. Losses in the third quarter of 2021 were primarily driven by Hurricane Ida and severe storms in several regions of the United States.
Policy Servicing Expense and Other
Policy servicing expense and other increased $1.6 million, or 38%, from $4.1 million for the three months ended September 30, 2020 to $5.7 million for the three months ended September 30, 2021. The increase was primarily attributable to telematics device write-offs as a result of our upgrade from the use of 3G technology and, to a lesser extent, an increase in our customer experience and other policy servicing personnel related expenses to support our growth objectives.
Sales, Marketing, and Other Acquisition Costs
Sales, marketing, and other acquisition costs increased $12.3 million from $0.03 million for the three months ended September 30, 2020 to $12.3 million for the three months ended September 30, 2021. This increase was driven by an increase of $8.0 million in our online and offline marketing campaigns. Additionally, as a result of reinsurance commutation in 2021, the 2020 period was increased $2.3 million less due to reinsurance ceding commission which serves as an offset to sales and marketing expense. The third quarter of 2020 includes the benefit of lower net expenses related to COVID-19, such as a decrease in personnel costs attributable to a reduction in force in response to the COVID-19 pandemic.
Research and Development
Research and development increased $3.3 million, or 180%, from $1.8 million for the three months ended September 30, 2020 to $5.1 million for the three months ended September 30, 2021. The increase was primarily attributable to an increase in personnel related expenses to support our growth objectives.
Amortization of Capitalized Software
Amortization of capitalized software was relatively flat, increasing by 1%, from $2.82 million for the three months ended September 30, 2020 to $2.84 million for the three months ended September 30, 2021. The increase was primarily related to the amortization of our website development costs and capitalized costs related to internal use software.
Other Operating Expenses
Other operating expenses increased $10.3 million, or 262%, from $3.9 million for the three months ended September 30, 2020 to $14.2 million for the three months ended September 30, 2021. The increase was primarily driven by an increase of $5.1 million in
148
employee stock-based compensation expense and a $4.9 million increase in general and administrative costs as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of the Nasdaq Capital Market, additional corporate, director and officer insurance expenses, and increased legal, audit and consulting fees. Also attributing to the change was an increase in fulfillment costs associated with telematics device packaging, shipping and other related expenses.
Interest Expense
Interest expense decreased $1.5 million, or 100%, from $1.5 million for the three months ended September 30, 2020 to $0.0 million for the three months ended September 30, 2021. The decrease was primarily attributable to lower debt principal balance during the third quarter of 2021 as debt was paid off during the first quarter of 2021 and no outstanding debt remains on the balance sheet.
Impairment on digital assets
Impairment on digital assets in the 2021 period relates to subsequent losses arising from changes in the fair market value on acquired digital assets initially accounted for at cost. For more information, see Note 6, Digital Assets to our unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus.
Decrease in fair value of stock warrant liability
Fair value of stock warrant liability decreased $11.0 million, from $(0.03) million for the three months ended September 30, 2020 to $(11.02) million for the three months ended September 30, 2021. The decrease was primarily driven by the change in fair value of our preferred stock warrants issued in April 2020 and exercised in February 2021 and public and private placement warrants as described in Note 2 of the unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus.
Comparison of the nine months ended September 30, 2021 and September 30, 2020:
The following table presents our consolidated statement of operations for the nine months ended September 30, 2021 and 2020, and the dollar and percentage change between the two periods:
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Revenue
Premiums Earned, net
Net premiums earned increased $37.9 million, or 406%, from $9.4 million for the nine months ended September 30, 2020 to $47.3 million for the nine months ended September 30, 2021, which was primarily attributable to a $29.9 million decrease in premiums ceded to our reinsurance partners, a $8.0 million increase in direct earned premium, and, to a far lesser degree, a decrease in bad debt expense which was due primarily to state mandated COVID-19 payment extensions in the 2020 period. The decrease of $29.9 million in premiums ceded to our reinsurance partners was driven largely by reinsurance commutation settlements. Direct earned premium increased by $8.0 million from $74.1 million for the nine months ended September 30, 2020 to $82.1 million for the nine months ended September 30, 2021. The increase in direct earned premiums was primarily attributable to an increase in policies in force during the nine months ended September 30, 2021 as well as increase in miles driven during the same period due, in part, to COVID-19 shelter-in-place restrictions in the comparative period, which generally began in March 2020. We believe direct earned premium is the best measure of top-line revenue, as it excludes the impacts of reinsurance.
Investment Income
Investment income decreased $0.4 million, or 83%, from $0.5 million for the nine months ended September 30, 2020 to $0.1 million for the nine months ended September 30, 2021. The decrease was primarily due to lower interest rates, partially offset by a higher average level of fixed maturity investments.
Other Revenue
Other revenue increased $13.5 million, or 93%, from $14.5 million for the nine months ended September 30, 2020 to $28.0 million for the nine months ended September 30, 2021. The increase was primarily attributable to a $19.4 million gain recognized on reinsurance commutation settlement in the first half of 2021, partially offset by a $6.0 million decrease in revenues from policy acquisition costs recovered for policies onboarded into our reinsurance program and reinsurance profit commission. A substantial portion of Enterprise business solutions revenue was from one customer who was an investor and therefore a related party, as described in Note 17 of the unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus.
Costs and Expenses
Losses and LAE
Losses and LAE increased $50.2 million, or 411%, from $12.2 million for the nine months ended September 30, 2020 to $62.4 million for the nine months ended September 30, 2021. Ceded losses and LAE decreased $26.5 million as a result of commuting all of our reinsurance programs and thereby retaining more losses. Direct losses and LAE increased by $23.4 million, driven by an overall increase in claims costs due to an increase in claims severity observed industry-wide and a reserve adjustment. Additionally, losses in the nine months ended September 30, 2021 include the impacts from Hurricane Ida and severe storms in several regions of the United States.
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Policy Servicing Expense and Other
Policy servicing expense and other increased $2.4 million, or 19%, from $12.8 million for the nine months ended September 30, 2020 to $15.2 million for the nine months ended September 30, 2021. The increase was primarily attributable to telematics device write-offs as a result of our upgrade from the use of 3G technology which accounted for $1.2 million of the increase and, to a lesser extent, an increase in our customer experience and other policy servicing personnel related expenses to support our growth objectives.
Sales, Marketing, and Other Acquisition Costs
Sales, marketing, and other acquisition costs increased $82.0 million from $3.6 million for the nine months ended September 30, 2020 to $85.6 million for the nine months ended September 30, 2021. Of this increase, $64.5 million was reinsurance-related including the commutation settlement and impact to the ceding commission offset. During the nine months ended September 30, 2021, we commuted all of our reinsurance programs. As a result of the commutations, we recorded a gain of $19.4 million recorded in Other Revenue as well as Sales, Marketing, and Other Acquisition Cost expense of $58.3 million related to a return of revenues from policy acquisition costs recovered for policies onboarded into our reinsurance program. Further resulting from the commutation settlement, was a decrease of $6.2 million in reinsurance ceding commission which serves as an offset to sales and marketing expense. Aside from reinsurance related impacts, as part of our typical marketing efforts, there was an increase of $15.3 million in both our online and offline marketing campaigns. On the sales side, there was a marginal increase in sales costs due to the use of independent agents for the first time in 2021. We expect such expenses, due to the expanded use of this channel, to continue to increase in the near future.
Research and Development
Research and development increased $5.2 million, or 78%, from $6.7 million for the nine months ended September 30, 2020 to $11.9 million for the nine months ended September 30, 2021. The increase was primarily attributable to employee personnel costs related to our expansion initiatives in the engineering and technology areas of approximately $3.0 million, an increase in stock compensation expense for related departments of $2.0 million, and a decrease of $0.7 million in capitalized software costs which serves as an offset to research and development expense.
Amortization of Capitalized Software
Amortization of capitalized software decreased $0.1 million, or 1%, from $8.3 million for the nine months ended September 30, 2020 to $8.2 million for the nine months ended September 30, 2021. The decrease was primarily related to the amortization of our website development costs and capitalized costs related to internal use software.
Other Operating Expenses
Other operating expenses increased $26.4 million, or 201%, from $13.1 million for the nine months ended September 30, 2020 to $39.5 million for the nine months ended September 30, 2021. The increase was primarily driven by an increase of $15.9 million in director’s, officers’, and employees’ stock-based compensation expense and a $10.2 million increase in general and administrative costs as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of the Nasdaq Capital Market, additional corporate, director and officer insurance expenses, and increased legal, audit and consulting fees.
Interest Expense
Interest expense increased $12.5 million, or 363%, from $3.5 million for the nine months ended September 30, 2020 to $16.0 million for the nine months ended September 30, 2021. The increase was primarily attributable to a $14.1 million non-recurring write off of unamortized debt issuance costs and debt prepayment fees related to debt payoff during the nine months ended September 30, 2021 as described in Note 9 of the unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus. As of September 30, 2021, all debt had been repaid and no outstanding debt remains on the balance sheet.
Impairment on digital assets
Impairment on digital assets in the 2021 period relates to subsequent losses arising from changes in the fair market value on acquired digital assets initially accounted for at cost. For more information, see Note 6, Digital Assets to our unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus.
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Increase in fair value of stock warrant liability
Fair value of stock warrant liability increased $7.5 million from $0.6 million for the nine months ended September 30, 2020 to $8.1 million for the nine months ended September 30, 2021. The increase was primarily driven by the change in fair value of our preferred stock warrants issued in April 2020 and exercised in February 2021 and public and private placement warrants as described in Note 2 of the unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus.
Non-GAAP Financial Measures
The non-GAAP financial measures below have not been calculated in accordance with GAAP, and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, accident period contribution profit/(loss) and contribution profit/(loss) should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that these non-GAAP measures fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.
Our management use these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (1) monitor and evaluate the performance of our business operations and financial performance; (2) facilitate internal comparisons of the historical operating performance of our business operations; (3) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (4) review and assess the operating performance of our management team; (5) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (6) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
The following table provides a reconciliation of total revenue to contribution profit/(loss) and accident period contribution profit/(loss) for the periods presented:
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Liquidity and Capital Resources
We are a holding company that transacts a majority of our business through operating subsidiaries. Through our insurance subsidiaries, we sell pay-per-mile auto insurance policies to customers and through our Enterprise subsidiary, we sell our insurance solution technology to third-party insurance carriers. From inception through completion of the INSU SPAC transaction, we financed our operations primarily through sales of insurance policies, sales of our Enterprise platform, and the net proceeds received from the issuance of preferred stock, debt, and sales of investments. As of September 30, 2021, we had $159.2 million in cash and cash equivalents and $49.8 million of marketable securities, compared to cash and cash equivalents of to $19.2 million and $24.7 million of marketable securities as of December 31, 2020. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our marketable securities consist of U.S. treasury securities, municipal securities, corporate debt securities, residential and commercial mortgage-backed securities, and other debt obligations.
Insurance companies in the United States are also required by state law to maintain a minimum level of capital and surplus. Insurance companies are subject to certain RBC requirements as specified by NAIC. These standards for property and casualty insurers are used as a means of monitoring the financial strength of insurance companies. Under these requirements, the amount of capital and surplus maintained by an insurance company is to be determined based on the various risk factors related to it. Such regulation is generally for the protection of the policyholders rather than stockholders. As of September 30, 2021 and December 31, 2020, our capital and policyholders’ surplus exceeded the minimum RBC requirements. We believe that our existing cash and cash equivalents, marketable securities, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our insurance premium growth rate, renewal activity, including the timing and the amount of cash received from customers, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of offerings on our platform, and the current uncertainty in the global markets resulting from the worldwide COVID-19 pandemic.
Our principal sources of liquidity are funds generated by operating activities, and available cash and cash equivalents, subject to the limitations set forth in the merger agreement related to the Proposed Transaction.
The following table summarizes our cash flow data for the periods presented:
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2021 was $(70.3) million, which was an increase of net cash used of $51.0 million from $19.3 million for the nine months ended September 30, 2020. Cash used during this period included $113.3 million from net loss for the nine months ended September 30, 2021, excluding the impact of changes in fair value of our outstanding warrants, depreciation expense and stock-based compensation and other non-cash expenses. Net cash provided by changes in our operating assets and liabilities increased by $49.9 million, which is primarily attributable to ceded reinsurance premiums, reinsurance recoverable on unpaid losses, accounts payable and accrued expense, prepaid reinsurance premium, premiums receivable which outpaced reinsurance recoverable on paid losses, and loss and LAE reserves which reflect a decrease in paid claims year over year.
Net cash used in operating activities for the nine months ended September 30, 2020 was $19.3 million. Cash used during this period included $12.5 million from net loss for the nine months ended September 30, 2020, excluding the impact of changes in fair value of our outstanding warrants, depreciation expense and stock compensation and other non-cash expenses. Net cash used by changes in our operating assets and liabilities decreased by $7.6 million, which is primarily attributable to ceded reinsurance premiums, reinsurance recoverable on unpaid losses, accounts payable and accrued expense, prepaid reinsurance premium, premiums receivable which outpaced reinsurance recoverable on paid losses, prepaid expenses and other, unearned premium reserve, and loss and loss adjustment expense reserves.
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Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2021 was $(43.3) million compared to net cash provided by investing activities of $4.6 million during the nine months ended September 30, 2020, which was primarily driven by a change from net proceeds to net payments for securities, as well as continued investment in our website and software development, partially offset by a decline in investment in telematics devices, leasehold improvements, and other equipment.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2021 was $273.5 million compared to $25.7 million in cash provided by financing activities for the nine months ended September 30, 2020. The increase in cash provided by financing activities is primarily due to cash received from the trust account and the private placements in connection with the closing of the INSU SPAC transaction in February 2021.
Contractual Obligations
The following is a summary of material contractual obligations and commitments as of September 30, 2021:
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|
|
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Total |
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2021 (remaining
|
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2022 – 2023 |
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2024 – 2025 |
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Thereafter |
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|||||
|
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(in millions) |
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|||||||||||||
Long-term debt |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Interest on long-term debt |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Operating Leases |
|
|
23.9 |
|
|
0.8 |
|
|
6.3 |
|
|
5.6 |
|
|
11.2 |
|
Purchase Commitments |
|
|
1.1 |
|
|
1.1 |
|
|
— |
|
|
— |
|
|
— |
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Total |
|
$ |
25.0 |
|
$ |
1.9 |
|
$ |
6.3 |
|
$ |
5.6 |
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$ |
11.2 |
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Financing Arrangements
Subordinated Note Purchase and Security Agreement
In April 2020, we entered into the Note Purchase Agreement with Hudson, which was amended in February 2021 to reflect the consummation of the INSU SPAC transaction by adding INSU as a guarantor and reflecting our new corporate structure. An executive of Hudson is on our board of directors and is a related party, as discussed in Note 17 of the unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus.
Under the Note Purchase Agreement, we could issue up to $50.0 million in aggregate principal amount of senior secured subordinated PIK notes due in 2025 (the “Notes”). The Note Purchase Agreement further provided for additional funds of up to an aggregate of $15.0 million over time from Hudson, the timing of which was subject to reinsurance settlement timing. Notes issued under the Note Purchase Agreement were due on the fifth anniversary of their issuance, starting in April 2025, and bore interest at the following rates: 2% per annum payable quarterly in arrears in cash, and a varying interest rate of 9.0% to 11.0% PIK interest. The PIK interest was based on the aggregate outstanding principal balance as follows: (i) 11.0% if the outstanding balance was less than $5.0 million; (ii) 10.0% if the outstanding balance was greater than or equal to $5.0 million but less than $10.0 million, and (iii) 9.0% if the outstanding balance was greater than or equal to $10.0 million. PIK interest represents contractually deferred interest that was added to the principal balance outstanding each quarter and due at maturity. The Notes were secured by substantially all of our assets. We had the right to prepay the Notes at any time subject to payment of a fee. As of December 31, 2020, $31.6 million aggregate principal amount of the Notes was outstanding, along with $0.9 million of capitalized PIK interest. Subsequent to December 31, 2020, we issued additional Notes having an aggregate principal amount of $2.0 million. As of March 30, 2021, there was approximately $36.6 million of principal and PIK interest outstanding under the Hudson debt facility, which we repaid on such date, along with the prepayment fee of $0.4 million. Accordingly, there are no longer any Notes outstanding.
As part of the entry into the original Note Purchase Agreement, we issued warrants for up to 8,536,938 of Series E convertible preferred shares, which we estimated to have a fair value of $12.5 million at issuance, which was recorded as a discount to the debt and is being amortized to interest expense over the term of the debt. These warrants were net exercised immediately prior to the Effective Time (as defined in the Merger Agreement) and are no longer outstanding.
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Paycheck Protection Program Loan
In April 2020, we were granted a loan under the Paycheck Protection Program offered by the Small Business Administration under the CARES Act, section 7(a)(36) of the Small Business Act for approximately $5.9 million. The balance outstanding for the Paycheck Protection Program loan was $5.9 million at December 31, 2020. We repaid this loan concurrent with the consummation of the INSU SPAC transaction and it is no longer outstanding.
2019 Loan and Security Agreement
In December 2019, we entered into a Loan and Security Agreement (the “2019 Loan and Security Agreement”) with us, as borrower, certain of our subsidiaries, as guarantors and certain affiliates of Multiplier Capital, LLC and other financial institutions, as lenders and agent, providing for a term loan in aggregate principal amount of $25.0 million. Minimum payments of interest were due monthly through December 2021. Beginning in January 2022, equal payments of principal would have been due monthly in an amount necessary to fully amortize the loan by June 5, 2024. An end of term payment of $0.6 million was due at maturity or date of any prepayment. The loan was secured by substantially all of our and the guarantor’s assets. Lender’s consent was required to be obtained regarding certain dispositions, and changes in business, management, or ownership including mergers and acquisitions, such as the INSU SPAC transaction, as more fully described in the 2019 Loan and Security Agreement. The balance outstanding net of debt issuance costs for the 2019 Loan and Security Agreement was $24.3 million as of December 31, 2020.
The loan could be prepaid in an amount equal to the outstanding principal, accrued interest, and the end of term fee, plus a prepayment charge of 3% if paid in the first two years after the effective date, 2% if paid in the third year after the effective date, or 1% if prepaid after the third year subsequent to the effective date. Accordingly, we prepaid this loan in connection with the consummation of the INSU SPAC transaction and is no longer outstanding.
At the time of origination, the lender was granted a warrant to purchase Series E convertible preferred stock, estimated to have a fair value of $0.5 million at issuance. These warrants were net exercised immediately prior to the Effective Time and are no longer outstanding.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity or cash flows.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to reserves for loss and LAE, premium write-offs, and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
See Note 1, Summary of Significant Accounting Policies, to our unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus for material changes to our critical accounting policies from the ones described under the section Critical Accounting Policies and Estimates of Management’s Discussion and Analysis of Financial Condition and Results of Operations and Summary of Significant Accounting Policies in the notes to the audited consolidated financial statements which are which are included in the Company’s Post-Effective Amendment No. 2 to Form S-1 filed with the SEC on August 27, 2021.
New Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies, to our unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus.
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BUSINESS OF METROMILE
References in this section to “we” or “our” in this section refer to Metromile, Inc.
Overview
We started Metromile based on the simple observation that the physical world is being increasingly digitized, that this digital data can be used to better estimate the future, and that the best opportunity to create value for everyday customers in an increasingly predictable world is to reinvent insurance, one of the largest and most important global markets.
At its core, insurance financially protects the insured customer from the occurrence of specific future events. If these events can be more accurately estimated, using data and data science, then the insurance provided can be more accurately priced — lower likelihood events would cause the price of insurance to go down and higher likelihood events would cause the price of insurance to go up. The proliferation of sensor data, from cars, mobile phones, and elsewhere, means we have a greater ability to estimate the likelihood of future events and, thus, help many customers who are overpaying for insurance save money.
We founded Metromile in 2011 to realize this opportunity and tackle the broken auto insurance industry. With data science as our foundation, we offer our insurance customers real time, personalized auto insurance policies, priced and billed by the mile, with rates based on precisely how and how much they actually drive, instead of using the industry standard approximations and estimates that make prices unfair for most customers.
Through our digitally native offering, built around the needs of the modern driver, we believe our per-mile insurance policies save our customers, on average, 47% over what they were paying their previous auto insurer. We base this belief on data our customers self-reported in 2018 with respect to premiums paid to providers before switching to Metromile.
We believe the opportunity for our personalized per-mile insurance product is significant. Federal Highway Administration data indicates that approximately 35% of drivers drive more than half the total miles driven. We believe there is a correlation between the number of miles driven and the number of insurable losses. An October 2016 report by the Insurance Information Institute noted that the increase in claims frequency appears directly linked to the increase in the number of miles driven. Notwithstanding the relationship between miles driven and claims, auto insurance premiums have historically been priced based on a driver’s “class” — and drivers are charged the same basic premium rate as others in their class no matter the actual miles driven. In the traditional pricing model, a driver’s age, credit score, accident history, and geography influences the premium paid more than the actual miles driven. Thus, the 35% of drivers who account for more than half the miles driven are not paying premiums based on how often they are behind the wheel and increasing the potential for an insurable loss claim. We believe the traditional pricing model is inherently unfair to the majority of drivers — the 65% of drivers who drive less than half the miles driven — as they are effectively subsidizing the minority of drivers who are high-mileage drivers. By offering auto insurance using a per-mile rate and then billing each customer monthly based on their actual miles driven, we are able to provide significant savings to the vast majority of drivers, the 65% of drivers who drive less than half the miles driven. Customers can simply use their connected car or use a Metromile Pulse device (“The Pulse”), to share their data with us — which includes miles driven, and in certain states where permitted by insurance regulators, driving habits, such as phone use, speeding, hard-braking, accelerating, cornering, and location. Our customers are able to choose when and how to drive and share this information with us to realize these data driven savings every day. See “— Our Technology Platform” for more information regarding The Pulse and data collection.
Our offering is also more appealing to the modern digital consumer beyond just the savings we offer. Customers sign up, access customer support, and file claims entirely through our mobile app. Claims are handled quickly and, in many cases, are fully automated. Our proprietary technology underpins these unique capabilities. We are built using data science at our core — we know how to acquire and unlock the predictive value of the data generated by the car, mobile phones, and elsewhere. This translates into a better experience, higher customer retention rates, lower cost of customer acquisition, less fraud, less servicing expense, and greater operating profits.
Our core technology capabilities have also unlocked a powerful new business for us — Metromile Enterprise, a cloud-based enterprise software solution for insurance carriers that provides them advanced claims automation and fraud detection tools, improving their operating margins, while earning us a share of their insurance premium as a service fee. With Metromile Enterprise already in market, we have started to realize returns on our earlier technology investments and expect to see this business help the large incumbents in the insurance industry transition into a more digital world, while helping us quickly grow our earnings.
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Today, we consider ourselves a leading digital insurance platform, providing unique and advantaged products to auto insurance customers in the United States and auto insurance companies in the United States and globally.
The U.S. auto insurance market is massive, dominated by insurers stuck on legacy technology infrastructure who offer antiquated services. U.S. personal auto insurers write approximately $250.0 billion of premiums each year, with no carrier currently achieving more than 20% market share. We believe we are strategically positioned to succeed as industry incumbents struggle to meet the significant structural changes underway in an increasingly digital world. The advent of mobile phones has revolutionized modern mobility, while connected and autonomous technologies are drastically changing consumer relationships with vehicles. As we scale and accumulate more data, we believe that we can deliver increasingly better service, pricing and experiences for customers across all stages of the policy lifecycle.
Through our core competencies in technology and operating as a full-stack insurance carrier, we are already achieving durable margin advantages that we believe will allow us to maintain a competitive edge in pricing and generate incremental cash to invest in future growth for the years and decades ahead. We believe our focus on technology will allow us to gain efficiencies through automation and the ability to scale.
We believe our customers are loyal. We measure this, in part, by our overall net promoter score (“NPS”) of 56 as of end of year 2020. The NPS metric is a management tool used to measure customer satisfaction and loyalty and indicates the percentage of customers rating their likelihood to recommend a product or service to a friend or colleague. After 51 days of joining Metromile, we ask each new customer the likelihood that they will recommend Metromile to a friend or colleague on a scale of 0 to 10. We also survey customers after the closure of a claim. Scores between 0-6 are considered detractors and scores between 9-10 are considered promoters. To arrive at Metromile’s NPS score in a given month, the percentage of detractors is subtracted from the percentage of promoters. Scores between 7-8 are considered passive and are counted toward the total number of respondents, thus decreasing the percentage of detractors and promoters and pushing the net score toward 0. By recommending our services to their friends and family, we believe our customers demonstrate their satisfaction and loyalty to our services. In addition to NPS, we believe that customer referrals also demonstrate customer loyalty. One out of four customers with our Ride Along app recommends our app to a friend or colleague, yielding a 25% referral rate. We believe our overall NPS of 55, along with our 25% referral rate through the Ride Along app, demonstrate our customer satisfaction and loyalty to Metromile.
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We have trained our predictive models to deliver what we believe is one of the most sophisticated pricing engines in the industry using the approximately three billion miles of customer driving data we have collected since our founding. Our data-driven approach is designed to improve the accuracy of risk-profiling customers while simultaneously reducing the likelihood of fraud and losses.
We built these models by carefully selecting our first markets, acquiring data and quickly iterating on our proprietary rating and underwriting models, building out our own customer service and claims functions, and reinventing as we gained new data and experience.
As our models have matured, we have also learned how to more efficiently and effectively acquire customers, as these models can also be applied to estimate the lifetime profitability of any potential new customer lead based on key indicators. We migrated from marketing in well-defined offline channels to using a variety of more cost-effective digital solutions for our customer funnel, where we can tailor ad targeting, content, and a quote funnel to each individual prospect.
We leverage a diverse mix of channel strategies to optimize our marketing efforts including search, display, and social marketing, as well as app acquisition, aggregators (like compare.com, The Zebra, and Everquote), our free app Ride Along (akin to a try before you buy experience) and key automotive original equipment manufacturer (“OEM”), partnerships. Our experience and financial profile equip us to excel in our next phase of growth across the United States.
We have an exciting and ambitious growth plan that we believe will help us quickly scale nationally. Our disciplined marketing strategy allows us to understand unit economics in each state before investing too far ahead of returns. Prior to initiating rapid growth in a state, we develop our rating and underwriting models, and introduce rates into the market with low marketing spend for the first few quarters as we test and measure key performance indicators. This introductory period allows us to refine our model and underwrite policies with an aim of achieving profitable growth. Once we obtain sufficient data and proof points, we accelerate marketing spend and quickly scale.
To further support our insurance customer growth, we are expanding our distribution network by partnering with leading automotive OEMs to identify low-mileage drivers. Our two existing partners are among the world’s top ten biggest car manufacturers, and we aim to partner with at least eight OEMs by 2022. These partners will be able to identify a low-mileage driver 30 days after they purchase a car and offer personalized co-branded marketing to those customers, highlighting their savings and driving a significant number of new customers to Metromile. We believe this exciting channel could generate millions of leads for us in the future with a low new customer acquisition cost.
Metromile Enterprise provides additional upside in the near-term. With four active deployments and a full pipeline, this software-as-a-service (“SaaS”) business is expected to become a meaningful contributor to revenue and operating profits over the years ahead. Each customer typically signs a multi-year agreement with significant prepaid revenue and service fees, allowing the business to fund its development and growth with customer capital.
We believe we have put together one of the best leadership teams in our industry who have significant experience with top technology and insurance companies. They will help us execute our ambitious growth plans through our unique approach to insurance. We believe that we have a truly differentiated value proposition that puts customers in the driver’s seat. Through data science, we have built an impactful business that we believe will help transform the insurance industry.
Our Technology Platform
Our proprietary technology platform is a key competitive advantage. Through the collection of high frequency telematics data, we have developed a platform capable of understanding moment-by-moment driving behavior. Using data science and machine learning, we build predictive models to accurately determine the risk profiles of our customers and offer fairer, more accurate pricing.
Our customer-friendly, intuitive interface paired with The Pulse creates a seamless user experience. The Pulse device easily plugs into the diagnostic port of our customer’s car and transmits data over wireless cellular networks. The Pulse device provides visibility into customer braking behavior at each intersection, miles driven, speed, acceleration, hard-braking, cornering, and location. In addition, through our OEM partnerships, we will be able to connect directly with vehicles and stream the same sensor data without a device. The more data we collect, the better our predictive models will become, allowing us to enhance our unit economics and value to consumers.
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The moment of truth for all insurers is when a customer submits a claim. In a traditional experience, a customer is required to go through many hurdles simply to get their car repaired after an accident, causing customer frustration. The fundamental cause of this high friction experience is that up to 17% of claims are fraudulent and insurers are forced to implement onerous processes and look at every claim with suspicion, where trust is eroded with the customer. Alternatively, our platform is capable of algorithmically reconstructing the accident scene and letting the majority of drivers have the claim nearly instantly approved. We create loyal customers by helping them get back on the road quickly and seamlessly.
We have been able to identify and reduce fraudulent claims by three times the rate of our industry peers. The structural costs associated with high fraud rates in the auto insurance industry are ultimately passed on to consumers. Our fraud detection advantage ultimately improves our loss ratio, which allows us to keep our costs lower and pass on additional savings to our customers.
The net result of our technology advantage is a fundamentally lower cost structure. Because premiums charged to the consumer ultimately reflect the underlying costs of the insurance business and its losses, we have developed a competitive advantage beyond our pricing model. Built from the ground-up with technology and sensors first, we have developed a durable competitive advantage with a highly efficient and streamlined operation, which we believe will yield higher returns to stockholders for years to come.
The Metromile app
From the outset, we believed the experience with an auto insurer should go beyond being a compulsory purchase, selected based solely on price. With our app, our customers benefit from rich functionality, tools, and features. Prospects are able to sign up within minutes or try Ride Along to estimate and earn more savings. Aligned with our first value of creating loyal customers, we aim to stay engaged with our customers every step of the way.
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Our app increases engagement and improves our relationship with customers by providing helpful features such as street sweeping notifications to help avoid parking tickets, get walking directions to their car, and monitor their car health. Everything needed to manage a policy can be done in the app, such as viewing policy information and documents, auto insurance ID cards, monthly billing summaries, and detailed trip maps. With an always-connected vehicle, we have a 92% stolen car recovery rate.
Ride Along
We launched Ride Along to help prospects understand if they are a fit for per-mile, and to provide additional savings to prospects by demonstrating that they are also safe drivers.
The significance of this specific technology offering also lends itself to the future growth potential of our company. The Ride Along feature serves not only as a platform to provide driving insights to customers but also as a customer acquisition source, by helping estimate savings and allowing prospects to earn additional discounts through safe driving.
Our Ride Along app enables viral growth as evidenced by a 20% conversion rate for prospects who use the app, a 25% referral rate to new customers, and the fact that 11% of abandoned quoters try Ride Along, all since it was launched in the second quarter of 2020.
Metromile Enterprise
Metromile Enterprise is a cloud-based enterprise software offering for third party insurance carriers that was built on top of our sophisticated automated claims technology. The service helps carriers automate the claims processes for both customers and claims agents while reducing the cost of fraudulent claims through advanced fraud detection features. The service works cooperatively with existing P&C insurance enterprise software platforms and is priced based on a percentage of the insurance premium the service is used to help manage.
Our automation and fraud detection capabilities have allowed Metromile’s auto insurance claims program to detect three times more fraud than the industry average, benefiting our loss ratio, while reducing our loss adjustment expense ratio by an estimated 20% due to advanced automation. We saw an opportunity in applying these capabilities to help the broader P&C insurance industry transform and better manage their claims processes and are excited by the progress we’ve made since launching Metromile Enterprise in 2019.
Metromile Enterprise is not just for telematics-based auto insurance programs — the software helps global P&C insurers improve customer experience and reduce claim costs across a variety of use cases in auto, home, renters, pet, workers compensation and other specialized P&C insurance programs.
This unique growing business allows us to diversify our revenue base into recurring, high-margin enterprise SaaS revenue, while actively participating in the digital transformation underway in the broader insurance markets, with minimal incremental cost. We expect continued growth from this business segment as we continue to sign and launch new deployments with carriers globally and other specialized P&C insurance. This proprietary growth engine will allow us to diversify our revenue base into recurring, high-margin enterprise SaaS revenues. We expect continued growth from our Metromile Enterprise business as we continue to scale more holistically.
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With respect to the platform’s specific feature set, our Metromile Enterprise offering consists of Report, Detect, Replay, and Streamline modules.
Report
The secret to success with predictive models lies in gathering rich, reliably structured data at first notice of loss (“FNOL”). The Report module is a smart digital FNOL solution for customer-facing data collection and call center representatives that creates opportunities for improved fraud detection, efficient downstream processing, and a “no-touch” claims experience.
Detect
Our Detect module is an artificial intelligence (“AI”) powered fraud detection tool trained to scan incoming claims in seconds and build a feedback loop with existing investigative experts. We help capture more fraud and cut costs by eliminating investigations on low probability claims.
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Portal
The Portal enables insurance carriers to offer their insureds a one-stop digital destination for filing claims, tracking updates on claims in progress and taking action on pending items. This solution helps improve claim handling efficiency and save claim adjuster time.
Replay
Replay is a software solution that ingests various types of telematics data and makes it easy to play back a trip to corroborate the reported facts of loss with hard data. The solution helps cut investigation costs and increases confidence in payout decisions.
Streamline
Streamline is a powered automation suite, enabled by sophisticated data science modeling, that reduces repetitive tasks done by claims handlers so that they can spend more time providing service for customers with more complex needs. The Streamline solution enables claims self-servicing to settle claims with efficiency.
Our platform architecture
We believe our platform provides us with a true competitive advantage. We built our technology from the ground-up with the secular shifts in insurance in mind. Our platform is built on a number of foundational architecture principles.
We are able to deliver a flexible and scalable platform where customer services can be added and evolved over time.
Through delivering micro-services, we ensure a constant evolution of the technology platform, both in terms of features supported as well as technology used. Micro-services also allow efficient scaling of the engineering organization, as it allows an ever-growing number of teams to work in parallel with the least dependency bottlenecks.
Our unified user interface is technology-agnostic and built on a back-end service that can enable a diverse range of clients.
This allows us to remain agnostic to mobile and web applications along with third-party integrations. We have the flexibility to isolate part of or all of our platform features for third-party integration both directly into a user experience and into the backend of a given platform. This provides us the opportunity to service different enterprises with different technology platforms.
Our offerings were created with the core ideas of resiliency and durability in mind to allow for uninterrupted scale.
All services are built to enable a distributed and horizontal scaling deployment. This not only supports our scalability but also provides resilience as distributed service instances can survive fault tolerances of individual instances or full zone fails.
We heavily leverage machine learning to underpin our business. From personalized pricing through to claims, our technology stack is critical to our success.
Industry and market opportunity
The U.S. auto insurance market is massive, fragmented, and ripe for disruption as pricing and risk identification remain key components to drive competitive demand. Additionally, shifting consumer preferences toward an online environment creates opportunity for new entrants with a focus on customer experience.
● | Massive market: In 2019, the U.S. personal auto insurance market generated in excess of $250 billion in premiums. |
● | Highly fragmented: Market share in the United States is fragmented with no carrier holding more than 20% market share. Additionally, 111 carriers generated greater than $100.0 million in premiums in 2019. |
● | Ripe for disruption: The auto insurance placement and claims process suffers from poor overall consumer experience, which is attributable to opaque and tiered pricing, lengthy sign-up processes, and arduous claims processes that are often long and repetitive. Additionally, traditional insurance carriers do not consider technology-driven developments to the auto |
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industry when pricing risk. With a developing driver model including autonomous features and new means of transportation, additional factors need to be considered. |
● | Limited use of technology: The insurance market has typically relied on a number of factors to provide pricing and risk assessment information. Statistics like age, credit score, accident history, and geography have often been deciding factors that categorize drivers into buckets and price them accordingly. Technological developments and data science provide new applications to better understand individual driver risk, such as actual miles driven and driving behaviors, and are able to adjust pricing models to consider these variable factors. While other auto insurance providers consider an individual’s prior accident history, we believe Metromile is distinguished by further adjusting to real-time driving behavior. This real-time capture, we believe, allows Metromile to better understand each driver’s risk in ways that backward-looking algorithms, such as “good-driver rewards,” are unable to. |
● | COVID-19 pandemic: Although the ultimate impacts of COVID-19 remain uncertain and consumer demand for auto insurance may be impacted in a recessionary or stationary environment, a recent survey published by Capgemini SE found that 44% of U.S. adults surveyed plan to use their cars more often and public transportation less often in the future. Further, the dramatic decline in miles driven during the second quarter of 2020 and the fact that legacy carriers were forced to react through ad hoc refund and rebate programs and were sued in class action lawsuits proves that the existing fixed priced insurance model is outdated. |
Metromile is well positioned by providing a product that solves fundamental issues with auto insurance and fairly prices policies to individual drivers. This is driven by Metromile’s view that auto insurance today is unfair to most consumers, as insureds are broadly categorized into the same buckets and charged similar rates while still holding varying driving habits and vehicular uses. The distinction between this broad classification and a more technology and data driven approach to assessing risk underpins Metromile’s vision to change how insureds are assessed and charged.
Several areas within the personal lines auto space are most significant to understanding this unique market opportunity. The first and most important is regarding the traditional insurance model where insurance products are built for a “class of driver” rather than individual insureds. This foundational concept of pricing risk gained traction in the 1990s when carriers discovered independent factors such as credit score were good indicators of an individual’s driving habits and risk classification. Using additional rating variables like credit expanded segmentation via proxy and moved the industry further away from evaluating individual risk. The widespread use of such factors became industry norm where the process of receiving an insurance quote is dictated by several key factors that place customers into classes associated with varying risk levels and premium payments. While still broadly used today, this results in a significant bifurcation of insureds within each class level where drivers that have the same gender, geographic location, vehicle make, accident history, and credit score receive similar quotes. Other factors, however, still vary between two similar applications, the most significant and quantifiable being miles driven. This creates a pricing imbalance where a small portion of drivers within a class create significant liabilities because of their frequent driving habits. Drivers who infrequently use their vehicles therefore are subsidizing the higher risk of their peers by paying similar rates while having fundamentally different risk profiles. We believe this results in approximately 65% of drivers overpaying for personal auto insurance and 35% of drivers underpaying, as the Federal Highway Administration data indicates that approximately 35% of drivers drive more than half the total miles driven. We believe there is a correlation between the number of miles driven and the number of insurable losses. An October 2016 report by the Insurance Information Institute noted that the increase in claims frequency appears directly linked to the increase in the number of miles driven. Thus, the 35% of drivers who account for more than half the miles driven are not paying premiums based on how often they are behind the wheel and increasing the potential for an insurable loss claim. We believe the traditional pricing model is inherently unfair to the majority of drivers — the 65% of drivers who drive less than half the miles driven — as they are effectively subsidizing the minority of drivers who are high-mileage drivers.
To address this issue, Metromile has leveraged technology to create accurate methods of measuring car usage and charging drivers on a “per-mile” basis. Our product development has maintained a unique focus on understanding individual driver habits to provide more granular insight into the likelihood of requiring a claim. Metromile’s position as one of the only large carriers to offer this approach to pricing — and the only carrier solely focused on low mileage drivers — underpins its opportunity to capture market share and change the industry’s approach to risk assessment.
An additional factor supporting this market opportunity is the large market size and significant fragmentation found in personal lines auto insurance. With over $250.0 billion in annual premiums in the United States, personal auto insurance is one of the largest lines globally. An outsized number of companies operate in the space, pricing customers with varying risk demographics and underwriting a book that meets operational and loss standards. In a market with a relatively commoditized product, pricing, customer
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experience and added factors becomes significant to attracting new customers. Metromile has created a new competitive advantage that drives customer volume by differentiating their core product from large and traditional carriers. This large amount of fragmentation mixed with Metromile’s unique approach supports its ability to readily attract new customers by providing a different approach to pricing.
The tech enabled landscape within the automotive and broader industries has also been a key point of focus for Metromile. As the usage of smartphones and technology that collects individual consumer data becomes more widespread, so too do the opportunities for insurance companies to collect more data and conduct analytics on it. This pairs with innovation in the auto space changing the true risk of operating a vehicle. Autonomous driving, driving assistance features on vehicles, or the decrease in vehicular usage due to ride-share applications have all made the personal lines auto insurance landscape more complex with respect to individual risk that cannot be captured by a collection of data points like credit score and age. This creates a fundamental need to gain insight into individual usage and leverage this data to paint a better picture of what true risk and therefore price looks like.
Competitive strengths
● | Structurally advantaged through data science. To date, we have collected approximately three billion miles of data through our core data engine. We built our engine from the ground up to realize a structural pricing and cost advantage in auto insurance. We collect our data through the next generation of connected vehicles, mobile and telematics devices to generate what we believe is the most granular and insightful data on driving behavior in the industry. We analyze data such as miles driven, speed, acceleration, hard-braking, cornering, and location to deliver market-leading intelligence. This enables us to provide highly personalized policies at scale and attractive unit economics. We currently deploy behavioral telematics, other than miles driven, in four of the eight states where we operate. We are building a durable competitive advantage through personalization, superior pricing, better fraud detection, approval automation and customer loyalty. The strength of our technological offering has even turned our infrastructure into a source of revenue. We offer our Metromile Enterprise services to a number of leading insurance carriers looking to digitize their platforms. |
● | Customer-oriented approach with member loyalty. We leverage our data advantage and technology to offer customers better experiences through our use of mobile technology. We were born as a digital-first entity and have invested meaningfully to develop a seamless mobile and online experience for customers long-underserved by the traditional auto insurance industry. Customers can quickly download and use our app and access our rich feature set, enabling a shorter time to receive a quote. They also receive real-time feedback on fuel consumption and driving behavior, while we are additionally automating claims through our AI enabled platform. We believe these features and customer experience have established member loyalty to our platform and cultivated a strong brand affiliation. As of June 30, 2021, our new policy life expectancy, which is the estimated number of years a customer will remain insured with Metromile based on the historical performance of our book, is 3.0 years, and Metromile’s one-year retention rate on new policies is 68.0%, which is the percentage of customers that remain with Metromile after two policy terms, and is inclusive of all cancellation reasons, whether initiated by the customer or by us. According to the California Department of Insurance, in 2019 in California, which is Metromile’s largest market, Metromile received 13 justified complaints, which was lower than the average number of justified complaints received by the 50 largest automobile carriers in terms of exposure counts (of which Metromile ranked 49th). Each exposure count represents an insured vehicle. In addition, in 2019 in California, Metromile ranked 49 out of 50 in terms of the ratio of justified complaints to exposure counts. In 2020, Metromile decreased its justified complaint count in California by nearly 50%. |
● | Full-Stack Insurance provider. In 2016, we became a full-stack carrier, enabling us to recapture economics from third-party providers. We have complete control over the entire process of writing a policy, from underwriting and investment discretion to the back-end processing that drives new customer acquisition and growth, leading to high capital-efficiency. Our premiums can grow with minimal increase in surplus, while mitigating large or tail losses. We partner with some of the leading reinsurers in the industry. We are licensed in 49 states and the District of Columbia, of which we are currently active in eight states. We aim to be a fully national provider of insurance across 49 states and the District of Columbia by 2022. |
● | Strategic partnerships in new channels. We are developing strategic partnerships with automotive giants that are helping us to win sustainable market share. Our OEM partners can help us identify low mileage drivers based on the data collected from a newly purchased vehicle and target new customer segments with our product. Access to customers that fit our target demographic who are at a decision point in insurance buying post vehicle purchase is highly valuable and allows us to showcase our unique value proposition to the right customers at the right time. And, by connecting directly to vehicles, these connected car owners can bypass needing our Pulse device. By 2022, we aim to expand the number of our OEM partners to |
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eight (we currently have two). This channel has demonstrated a track record of impressive growth and quality customers and we anticipate millions of leads per year through this channel at a low cost of acquisition. |
● | World-class talent. The Metromile team comprises a blend of experienced technology industry executives, the best data scientists and leading insurance industry veterans. Our diverse mix of talent has helped us look at the automotive insurance industry through an alternative lens. We pride ourselves on our unique DNA and fresh outlook. We focus on hiring the best talent from a wide array of backgrounds to provoke diversity of thought and ideas. Our leadership team exemplifies our foundation in data science. Metromile’s former Chairman David Friedberg previously worked at Google and founded and successfully scaled the Climate Corporation, culminating in a $1.1 billion acquisition of the business by Monsanto in 2013. Dan Preston first trained as a data scientist and joined Metromile as Chief Technology Officer in 2013 before becoming Chief Executive Officer in 2014. Prior to joining Metromile, Dan was the co-founder and Chief Technology Officer of AisleBuyer, a mobile retail innovator that was acquired by Intuit in April 2012. Paw Andersen, who joined Metromile in early 2019 as Chief Technology Officer, is a technologist with over 20 years of engineering leadership experience. He was most notably a senior leader of engineering in Uber’s Advanced Technology group, where he grew his team from 27 to 700. Outside of key leadership, Messrs. Friedberg and Preston have built a tremendous team of technologists, insurance experts and finance veterans culled from companies including Progressive, Salesforce, and PricewaterhouseCoopers to the most innovative startups. |
Our Operating Model
Our playbook for developing and growing markets is an iterative, deliberate methodology designed to ensure that all types of consumers, regardless of their “driver class,” receive competitive rates that deliver substantial savings, while pricing to accurately reflect their expected losses. Thus, as a market matures and achieves positive unit economics, we believe our ability to scale and deploy additional capital in that market increases. Our most mature markets have the largest market penetration and strongest unit economics, which is the result of a focused effort to both improve unit profitability and efficiency in Customer Acquisition Cost (“CAC”).
These efforts, in aggregate, have led to year-over-year improvements in direct loss ratio.
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Our revenue and gross profit are significantly impacted by our reinsurance program, the terms of which vary from year-to-year. Our reinsurance program includes an upfront policy fee paid to us by the reinsurers for each new policy entering into the program, as a way for us to recover policy acquisition costs. We record this as other revenue in the consolidated statements of operations. We then cede most of the premium earned on that policy to the reinsurance syndicate and earn back a share of the realized profit from the policy, over time, which is also recognized as other revenue.
Because our reinsurance program has varied year-to-year and the onboarding allowance portion of the program results in the recognition of more revenue during periods in which we sell more policies, we have seen a significant variance in our quarterly and annual revenue. Our other revenue and gross profit declined year-over-year, primarily due to the upfront policy fee we received from our reinsurers for new policies sold in 2019 relative to 2020. In the years ended December 31, 2019 and 2020, we had other revenue of $27.0 million and $22.1 million, respectively. Our gross profit declined from $(4.9) million to $(14.1) million for the same period. In the six months ended June 30, 2020 and 2021, we had other revenue of $9.8 million and $26.2 million, respectively. Gross profit decreased from $(5.5) million to $(4.4) million for the same period.
We use reinsurance to reduce the likelihood of paying a large obligation resulting from an insurance claim. Our reinsurance arrangements provide for the transfer of a portion of our risk portfolio to a third-party in exchange for a share of the insurance premium, e.g., we cede a portion of the premium paid per policy. As we cede risk and premium, we not only transfer risk of loss, but are able to underwrite additional policies and generate additional premiums.
Since May 2017, we have proportional reinsurance arrangements protecting our business. Proportional reinsurance means that premium and losses are calculated on a pro rata basis. To date, we have four reinsurance programs and a total of five reinsurance counterparties including Partner Re, Mapfre Re, Cincinnati Insurance Company, Horseshoe Re, and Topsail Re. See also Note 9, Reinsurance, to the Legacy Metromile Audited Financial Statements for information regarding Metromile’s reinsurers and its reinsurance programs. Each program has multiple reinsurance agreements varying based on the number of reinsurance counterparties participating in the respective reinsurance program. The reinsurance arrangements cover policies entering into the reinsurance arrangement during that contract year and continue coverage for a term ranging from six to nine years. During any fiscal year, we may be ceding premium under multiple reinsurance arrangements, which have varying terms.
The reinsurance arrangement includes an upfront policy fee paid by the reinsurers for each new policy entering into the reinsurance program as a way for us to recover policy acquisition costs. This upfront policy fee is renegotiated for each contract year and varies by contract year, relative to our policy acquisition costs. We record this upfront policy fee as other revenue in the consolidated statements of operations. During periods with increased policy sales, the amount recorded to other revenue will also increase, which is a key driver of gross profit. Correspondingly, periods of decreased policy sales will result in a decrease to the amounts recorded to other revenue.
The reinsurance arrangement covering the periods May 1, 2017 to April 30, 2018 and May 1, 2018 to April 30, 2019 covered 85% of our renewal policies and beginning May 1, 2019, the reinsurance arrangements expanded to also include new policies. Thus, since May 1, 2019, we have ceded a larger percentage of our premium than in prior periods, resulting in a significant decrease in our revenues as reported under GAAP. We expect to revise our reinsurance structure towards the end of 2021 into a more simplified structure with a reduced quota share, which over time, will reduce the amount of ceded premium, and we expect will reduce the overall cost of our reinsurance arrangements.
In addition, under the reinsurance agreements effective May 1, 2017 and May 1, 2018, LAE is ceded at a fixed rate of 3% of ceded earned premium. Under the reinsurance agreement effective May 1, 2019, LAE is ceded at a fixed rate of 6% of ceded earned premium and will be revalued effective May 1, 2021. Under the reinsurance agreement effective May 1, 2020, LAE is ceded at a fixed rate of 4.75 — 6.0% of ceded earned premium. For the reinsurance agreements effective May 1, 2017 and May 1, 2018, Metromile receives a 10.2% ceding commission, adjusted up or down based on loss ratios of the ceded business. For the reinsurance agreement effective May 1, 2019, Metromile receives a 10.0% ceding commission. For the reinsurance agreement effective May 1, 2020, Metromile receives a 10.0 — 11.75% ceding commission, adjusted up or down based on loss performance of the ceded business.
Because of the effect that our reinsurance program has on our revenue and gross profit, we believe contribution profit, a non-GAAP financial measure, is a more useful metric to evaluate the fundamentals underlying the profitability of our insurance operation. Contribution profit is calculated as direct earned premium, plus investment income earned at the insurance company, minus direct losses, direct loss adjustment expense, and variable costs associated with the servicing of policies. Contribution margin is contribution profit divided by direct earned premium plus investment income earned at the insurance company. See “Metromile’s Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for additional
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information regarding our use of contribution profit/(loss) and contribution margin and a reconciliation to the most comparable GAAP measures.
While our gross margin declined from (9.3)% for the year ended December 31, 2019 to (40.3)% for the year ended December 31, 2020, our contribution margin has steadily improved as our investments in technology and operations have been realized. Gross margin increased from (33.8)% for the six months ended June 30, 2020 to (9.6)% for the six months ended June 30, 2021.
Our average new customer lifetime as of year-end 2020 was estimated to be 3.4 years and our contribution margin was 12%. For a new customer, the one-year retention ratio at year-end 2020 was 69.4%, which is inclusive of all cancellation reasons, whether initiated by the customer or by us.
Metromile’s Growth Strategy
Scale our position in existing markets. We have an established presence in our existing markets — eight states in the United States that represent approximately 30% of the market for drivers. Our data engine is helping us to continuously learn more about our customers and their driving behaviors, which allows us to improve price competitiveness in new segments. As our data aggregates over time, we become more sophisticated in our pricing, analysis and predictions while our competitors remain broadly stagnant. Our financial profile improves as we scale and refine our local market knowledge. This improved financial profile frees up more capital to invest in furthering our technical advantages and growing our customer base.
Expand nationally across the United States. We will apply our highly replicable model of “active-on” nationally, with a tailored approach to each state, driven by the regulatory environment and local market dynamics. This will allow us to expand rapidly and efficiently across different geographies while maintaining a high level of control over the specific strategy within each state. We
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aim to be in 21 states by the end of 2021 and 49 states and the District of Columbia by the end of 2022. We do not yet have visibility on whether or not these 41 new markets will permit the use of behavioral telematics data to offer polices and premiums based on driving habits in addition to miles driven. As we expand into new markets, when appropriate, we plan to engage in discussion with state insurance regulators to expand our ability to use behavioral telematics, which we expect will evolve over time. Our data platform will continue to inform new and existing markets as we successfully scale.
Scale partnerships & key channels. Our existing channels have been continually optimized for lower CAC and heightened throughput. We market through a variety of channels, including direct-to-consumer advertisements, display, search, and social media marketing, search engine optimization, and customer referrals. Our products are customer-centric with an overall NPS of 56, and we benefit greatly from word-of-mouth marketing.
In addition to the existing growth engine, we have adopted new channels. First, we pioneered the Ride Along tool through our mobile app, which has helped us radically increase our quote purchasing — in the recent period since its launch, 11% of our abandoned quotes have tried Ride Along, while we enjoy a 25% referral rate in this channel and a 20% conversion rate.
Second, we have developed strategic partnerships with key players in the automotive industry. Through our relationships with OEM partners, we expect considerable success in growing our customer base, as we can effectively and accurately target low-mileage drivers. We estimate that this channel can deliver over one million leads per year at a low cost of acquisition.
Scale our Enterprise Software business. The investments we have made in our platform to develop key economic advantages have turned a traditional cost center into a source of accelerated value creation. We offer Enterprise Software and related services to other leading insurance carriers who want to leverage our technology to improve their operating performance. Enterprise customers can dramatically improve their loss adjustment expenses and losses due to fraud by using our solution. Our holistic set of services include fraud detection, digital customer portal, process automation and telematics enablement. Launched in 2019, Metromile Enterprise is scaling to be a substantial contributor to our financial results.
Cross-sell with new products and services. With active and loyal customers, we intend to build on that foundation to offer an expanded product offering. We believe that there is a compelling cross-sell opportunity for other insurance services including homeowners insurance, and renters insurance, and car maintenance. Through a mix of strong partners and new internal product development, we expect to bring these products to market in an intuitive manner, consistent with the experience Metromile customers expect from us.
Investments
Our portfolio of investable assets is primarily held in cash, short-term investments, and available-for-sale fixed maturity securities, including U.S. Treasury securities, corporate debt securities, commercial paper, and asset backed securities. We manage the portfolio in accordance with investment policies and guidelines approved by our Board, in consultation with legal counsel and as may be required to be approved by applicable regulatory authorities.
We have designed our investment policy and guidelines to provide a balance between current yield, conservation of capital, and liquidity requirements of our operations setting guidelines that provide for a well-diversified investment portfolio that is compliant with insurance regulations applicable to the states in which we operate.
Competition
We operate in a highly competitive segment of the insurance industry. Many of our primary and direct competitors have well-established national brands, a longer operating history, and market similar products, including at prices comparable to ours. Our competitors include large national insurance companies such as Progressive, Allstate, and Nationwide, as well as up-and-coming companies and new market entrants in the InsurTech industry, some of whom also utilize telematics and offer forms of usage-based insurance. Several of these established national insurance companies are larger than us and have significant competitive advantages over us, including increased name recognition, greater resources, access to additional capital, and more types of insurance coverage to offer the consumer, such as renters, homeowners, health and life, than we currently do. In particular, many of these competitors offer consumers the ability to purchase multiple other types of insurance coverage and “bundle” them together into one policy and, in certain circumstances, include an umbrella liability policy for additional coverage at competitive prices. We do not offer such “bundles” and are specialized in one type of insurance — personal automotive insurance. Moreover, as we expand into new lines of
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business and offer additional products, we could face intense competition from traditional insurance companies that are already established in such markets.
Competition is based on many factors, including the reputation and experience of the insurer, coverages offered, pricing and other terms and conditions, customer service, size, and financial strength ratings, among other considerations. We believe we compete favorably across many of these factors, and have developed a platform and business model based on data science, artificial intelligence, machine learning and a stand out customer experience that we believe will be difficult for incumbent insurance providers to emulate and utilize like we have.
Intellectual Property
We believe that our intellectual property rights are valuable and important to our business. We rely on trademarks, patents, copyrights, trade secrets, license agreements, intellectual property assignment agreements, confidentiality procedures, non-disclosure agreements, and electronic and physical security measures to establish and protect our proprietary rights. Though we rely in part upon these legal, contractual, and other protections, we believe that factors such as the skill and ingenuity of our employees and the functionality and frequent enhancements to our platform are large contributors to our success in the marketplace. We intend to pursue additional intellectual property protection on such enhancements to the extent we believe it would be beneficial and cost-effective.
As of January 31, 2021, we have five issued patents and three pending patent applications in the United States. The issued patents generally relate to determining the route and parking location of a vehicle, recording trip data associated with a vehicle, and estimating the usage of a vehicle based on refueling events. The issued patents are expected to expire between September 1, 2035 and January 11, 2036. We continually review our development efforts to assess the existence and patentability of new intellectual property.
We have trademark rights in our name, our logo, and other brand indicia, and have trademark registrations for select marks in the United States. We also have registered domain names for websites that we use in our business.
Although we believe our intellectual property rights are valuable and strong, intellectual property rights are sometimes subject to invalidation or circumvention. For additional information, see the sections titled “Risk Factors — Risks Related to Our Business — Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.”
Employees and Human Capital Resources
As of February 28, 2021, we had 259 full-time employees. None of our employees is represented by a labor union or covered by collective bargaining agreements. We have not experienced any work stoppages. We consider our relationship with our employees to be good.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards.
Facilities
Our corporate headquarters are located in San Francisco, CA, and consist of 26,164 square feet under a lease agreement that expires in April 2030. We maintain additional offices in Tempe, Arizona and Boston, Massachusetts. We lease all of our facilities and do not own any real property. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.
Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business activities, some of which, to date, have related to fraudulent insurance claims made against us. We are not presently a party to any extra contractual or non-claim related litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted
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with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Available Information
Our website address is www.metromile.com. We make available, free of charge through the Investor Relations portion of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website or connected thereto does not constitute part of, and is not incorporated by reference into, this prospectus.
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REGULATION
Insurance Regulation
Metromile is subject to insurance regulation in the jurisdictions in which we transact insurance through licensed insurance carrier and producer subsidiaries. Insurance regulatory authorities have broad administrative powers to regulate all aspects of an insurance carrier or producer’s business, including the powers to restrict or revoke licenses to transact business, and to levy fines and monetary penalties against insurers and insurance producers found to be in violation of applicable laws and regulations. Regulations to which the licensed insurance carrier and producer subsidiaries are subject include, but are not limited to:
● | prior approval of transactions resulting in a change of “control” (as such term is defined under the Insurance Holding Company System Registration Act of Delaware (the “Delaware Holding Company Act”)); |
● | prior approval of transactions resulting in a change of “control” (as such term is defined under the Insurance Holding Company System Regulatory Act of California (the “California Holding Company Act”)); |
● | state-mandated premium rebates, refunds, or reductions as a result of potentially lower risk exposure due to the Coronavirus pandemic and related emergency orders; |
● | approval of policy forms and premiums in each state in which the insurance carrier operates; |
● | approval of intercompany service agreements in Delaware and California; |
● | statutory and risk-based capital solvency requirements, including the minimum capital and surplus the insurance carrier must maintain pursuant to applicable laws and the CMA entered into as required by the Delaware Department of Insurance described above; |
● | establishing minimum reserves that the insurance carrier must hold to pay projected insurance claims; |
● | required participation by the insurance carrier in state guaranty funds; |
● | restrictions on the type and concentration of the insurance carrier’s investments; |
● | restrictions on the advertising and marketing of insurance; |
● | restrictions on the adjustment and settlement of insurance claims; |
● | restrictions on the use of rebates or other consideration to induce a policyholder to purchase insurance; |
● | restrictions on the sale, solicitation, and negotiation of insurance; |
● | restrictions on the sharing of insurance commissions and payment of referral fees with unlicensed persons; |
● | prohibitions on the underwriting of insurance on the basis of race, sex, religion, and other protected classes; |
● | restrictions on disparate treatment of similarly situated applicants and policyholders; |
● | restrictions on the ability to use telematics to underwrite and price insurance policies, particularly in California; |
● | restrictions on the use and weight of certain underwriting factors; |
● | restrictions on the ability of the insurance carrier to pay dividends to us or enter into certain related party transactions without prior regulatory approval; |
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● | rules requiring the maintenance of statutory deposits for the benefit of policyholders; |
● | privacy regulation and data security; |
● | regulation of corporate governance and risk management; |
● | periodic examinations of operations, finances, market conduct, and claims practices; and |
● | required periodic financial reporting. |
The business of insurance is principally regulated at the state level, and the laws and regulations to which the licensed insurance carrier and producer subsidiaries are subject vary depending on the state. Unless the context otherwise requires, references herein to “state” include any of the 50 states, the District of Columbia and the five U.S. territories. These rules are subject to change as state legislatures and regulatory agencies update their laws and regulations to address real and perceived issues and concerns. These laws and regulations are also subject to interpretation by courts. The NAIC and the National Council of Insurance Legislators (“NCOIL”) are the principal organizations tasked with establishing standards and best practices across the various states, the District of Columbia and five U.S. territories, and from time to time promulgate model rules and regulations that often are the basis for insurance rules and regulations adopted by such jurisdictions. We cannot predict precisely whether or when regulatory actions may be taken that could adversely affect us or the operations of the insurance carrier and producer subsidiaries. Interpretations of regulations by regulators may change and statutes, regulations, and interpretations may be applied with retroactive effect, particularly in areas such as accounting or reserve requirements.
Required Licensing
The U.S. insurance carrier, Metromile Insurance Company, is domiciled and admitted in the state of Delaware to transact certain lines of property and casualty insurance. In addition to Delaware (the domiciliary state) and California (currently, a commercial domicile for the insurance carrier), Metromile Insurance Company maintains licenses to transact insurance in all states except Tennessee, and currently writes policies in Arizona, California, Illinois, Oregon, New Jersey, Pennsylvania, Virginia, and Washington. No additional license applications are currently pending.
The licensed insurance producer subsidiary, Metromile Insurance Services LLC, must maintain an insurance producer license in every state in which it sells, solicits, or negotiates insurance. Metromile Insurance Services LLC currently holds a resident insurance producer license in California and a non-resident license in Arizona, Illinois, New Jersey, Oregon, Pennsylvania, and Virginia. No additional license applications are currently pending.
Insurance regulators have broad authority to restrict or revoke licenses of insurance carriers and producers who are found to be in violation of any applicable laws and regulations.
Licensing of Our Employees
Unless directly employed by the insurance carrier, any of our employees who sell, solicit, or negotiate insurance must be licensed insurance producers and must fulfill pre-licensing and annual continuing education and license renewal requirements. In certain states in which we operate, insurance claims adjusters are also required to be licensed and fulfill annual continuing education requirements.
Insurance Holding Company Regulation
We are a member of an “insurance holding company system” under the Delaware Holding Company Act and the California Holding Company Act as the parent company of a wholly owned regulated insurance subsidiary. Under the insurance holding company system rules and regulations, Metromile Insurance Company is required to register with the insurance departments of Delaware and California and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management, or financial condition of Metromile Insurance Company. Although the insurance carrier is currently commercially domiciled in California and therefore subject to certain provisions of the California Holding Company Act, this is not necessarily a permanent designation. The insurance carrier will remain commercially domiciled in California only for so long as during its three preceding fiscal years taken together it wrote an average of more direct premiums in California
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than it wrote in Delaware during the same period, and the California direct premiums written constitute 33 percent or more of its total direct premiums written everywhere in the U.S. for that three-year period.
As the ultimate controlling person in our insurance holding company system, we are required to file an annual enterprise risk report pursuant to both the Delaware Holding Company Act and the California Holding Company Act. The report discloses, among other things, any material activities or developments that could adversely affect the insurance holding company system and/or the domestic insurance carrier specifically. In some states, any person divesting control of an insurer must provide thirty (30) days’ written notice to the regulator and the insurer. In addition, most states require insurance holding company systems to make annual corporate governance disclosures.
Under the Delaware Holding Company Act and the California Holding Company Act, all inter-affiliate transactions within a holding company system must meet the following conditions: (i) the terms must be fair and reasonable; (ii) charges or fees for services performed must be fair and reasonable; and (iii) expenses incurred and payments received must be allocated to the insurer in conformity with customary insurance accounting practices consistently applied. The regulators in California and Delaware, respectively, often interpret these requirements differently, which can lead to delays in approval of affiliate agreements and unexpected terms or conditions. The insurance carrier generally must disclose any transaction between the insurance carrier and any other affiliate(s) to the insurance departments of Delaware and California and the insurance carrier must obtain prior approval from each such regulator before entering into certain material inter-affiliate transactions, including, but not limited to, management agreements, tax allocation agreements, service contracts, cost-sharing arrangements, extraordinary dividends, certain reinsurance transactions, and certain loan agreements.
Change of Control of the Insurance Carrier
Pursuant to both the Delaware Holding Company Act and the California Holding Company Act, a person must either (a) seek regulatory approval from the Commissioner of both states prior to acquiring direct or indirect “control” of a domestic insurer by filing a Form A Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer, or (b) obtain an exemption from such requirement from the relevant Commissioner if the transaction does not result in the actual change of “control” as defined in the state’s Holding Company Act. Because of the nature of the transaction described herein, the stockholders before and after the transaction, the continuity of management, and the fact that there will be no new owners of ten percent or more of the voting securities of the insurer, we applied for an exemption of this transaction from the Form A process in both Delaware and California, on the basis that this transaction does not effect a change in control. Delaware granted the exemption and approved the transaction in writing on January 21, 2021, including the execution of the CMA described above as a condition for approval.
The California Department of Insurance denied the application for an exemption, and we filed a Form A application in California. The entity acquiring control (as well as any controlling stockholders of such entity) were required to submit, along with other documents and disclosures, its financial statements, organizational charts and biographical affidavits for any officers, directors, and controlling stockholders of each applicable entity. Under the California Holding Company Act, the Commissioner of the California Department of Insurance could have disapproved the transaction if the Commissioner found any of the following: (i) after the change of control Metromile Insurance Company could not satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is presently licensed; (ii) the purchases, exchanges, mergers, or other acquisitions of control would substantially lessen competition in insurance in California or create a monopoly therein; (iii) the financial condition of an acquiring person might jeopardize Metromile Insurance Company’s financial stability, or prejudice the interests of its policyholders; (iv) the plans or proposals that the acquiring person has to liquidate the insurer, to sell its assets, or to merge it with any person, or to make any other major change in its business or corporate structure or management, are not fair and reasonable to policyholders; or (v) the competence, experience, and integrity of those persons who would control the operation of Metromile Insurance Company indicate that it would not be in the interest of policyholders or the public to permit them to do so. The California Department of Insurance approved the Form A Application in writing on January 26, 2021.
Both the Delaware Holding Company Act and The California Holding Company Act provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent or more of the voting securities of the domestic insurer. This disclaimer of control is different than the Form A exemption referenced above A person may rebut this statutory presumption of control by submitting a disclaimer of affiliation with the respective insurance department, disclosing all material relationships and bases for affiliation between the person and the insurer as well as the basis for disclaiming such affiliation. The state regulators, however, may also find that “control” exists in circumstances in which a person owns or controls less than ten percent of the voting securities of the domestic insurer.
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These change of control regulations may dissuade investors from acquiring a controlling stake in our company, including through transactions that some or all of our stockholders might consider to be desirable. Such regulations may also inhibit our ability to acquire another insurance company should we wish to do so in the future. See the section titled “Risk Factors — Risks Related to this Offering and Ownership of Our Common Stock — Applicable insurance laws may make it difficult to effect a change of control.”
ORSA
Pursuant to the ORSA Model Act, an insurance company with direct written and unaffiliated assumed premium of more than $500.0 million or that is part of an insurance group with direct written and unaffiliated assumed premium of more than $1.0 billion must maintain a risk management framework to assist the insurer with identifying, assessing, monitoring, managing, and reporting on its material and relevant risks. In addition, the insurer must regularly conduct an “own risk and solvency assessment” in accordance with NAIC’s ORSA Guidance Manual. Upon the request of the Commissioner of the Delaware Department of Insurance, and not more than once a year, any insurer subject to these requirements must submit an ORSA summary report, or any combination of reports that together contain the information described in the ORSA Guidance Manual, with respect to the insurer and the insurance group of which it is a member. Metromile Insurance Company was exempt from these requirements in 2019 and 2020 since it had direct written and unaffiliated assumed premium of less than $500.0 million for that year, but at some point Metromile Insurance Company could become subject to the ORSA requirements.
Restrictions on Paying Dividends
We are a holding company that transacts a majority of its business through operating subsidiaries. Consequently, our ability to pay dividends to stockholders and meet our debt payment obligations depends on the results of operations of our operating subsidiaries and on the ability of such subsidiaries to provide us with cash, whether in the form of dividends, distributions, loans, or otherwise. The payment of any extraordinary dividend by our regulated insurance subsidiary requires the prior approval (or no disapproval after thirty days’ notice) of the Commissioner of the Delaware Department of Insurance and the Commissioner of the California Department of Insurance.
“Extraordinary dividend” is defined under the Delaware Insurance Code as any dividend or distribution of cash or other property, whose fair market value together with that of other dividends or distributions made within the preceding twelve months, exceeds the greater of (a) ten percent of Metromile Insurance Company’s surplus as of December 31 of the preceding year, or (b) Metromile Insurance Company’s net income for the twelve-month period ending December 31 of the preceding year, but does not include pro rata distributions of any class of the insurance company’s own securities. In addition, Metromile Insurance Company may not declare or pay a dividend or other distribution from any source other than earned surplus without the Delaware Commissioner’s prior approval.
“Extraordinary dividend” is similarly defined under the California Insurance Code as any dividend or distribution that, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (a) ten percent of Metromile Insurance Company’s policyholder’s surplus as of December 31 of the preceding year, or (2) Metromile Insurance Company’s net income for the 12-month period ending the preceding December 31.
As of December 31, 2020, and March 31, 2021, Metromile Insurance Company was not permitted to pay any dividends to its holding company parent without approval of the Commissioner of the Delaware Department of Insurance. See the section titled “Risk Factors — Risks Related to Our Business — Failure to maintain our risk-based capital at the required levels could adversely affect our ability to maintain regulatory authority to conduct our business.”
In addition, insurance regulators have broad powers to prevent a reduction of statutory surplus to inadequate levels, and there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted. Delaware and/or California may in the future adopt statutory provisions more restrictive than those currently in effect.
Reserves
Metromile Insurance Company is required to hold admitted assets as reserves to cover projected losses under its policies, in accordance with actuarial principles. In accordance with the NAIC’s property and casualty statement instructions, Metromile Insurance Company must submit an annual Statement of Actuarial Opinion from a qualified actuary appointed by the company, certifying that its reserves are reasonable. The insurance departments of Delaware and California have the authority to dispute the reasonableness of the reserves certified by the actuary.
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Risk-Based Capital
Metromile Insurance Company is required to maintain minimum levels of risk-based capital to support its overall business operations and minimize the risk of insolvency. State insurance regulators use risk-based capital to set capital requirements, based on the size and degree of risk taken by the insurer, taking into account various risk factors including asset risk, credit risk, underwriting risk, and interest rate risk. As the ratio of an insurer’s total adjusted capital and surplus decreases relative to its risk-based capital, the risk-based capital laws provide for increasing levels of regulatory scrutiny and intervention.
Delaware adopted the model legislation promulgated by the NAIC pertaining to risk-based capital, and requires annual reporting by Delaware-domiciled insurers to confirm that the insurer is meeting its risk-based capital requirements. Delaware-domiciled insurers falling below a risk-based capital threshold may be subject to varying degrees of regulatory action. An insurance company with total adjusted capital that is less than 200% of its authorized control level risk-based capital is at a company action level, which would require the insurance company to file a risk-based capital plan that, among other things, contains proposals of corrective actions the company intends to take that are reasonably expected to result in the elimination of the company action level event. Additional action level events occur when the insurer’s total adjusted capital falls below 150%, 100% and 70% of its authorized control level risk-based capital. When total adjusted capital falls below 70%, a mandatory control event is triggered which results in the Delaware Department of Insurance placing the insurance company in receivership and assuming control of the operations of the insurer. As of September 2020, Metromile Insurance Company’s risk-based capital levels are above all of these regulatory action level thresholds. As part of its regulatory review and approval of this transaction, the Delaware Department of Insurance required us to enter into a Capital Maintenance Agreement (the “CMA”). The CMA requires us to ensure that the regulated insurance subsidiary, Metromile Insurance Company, has and will maintain total adjusted capital in an amount equal to at least 300% of the insurance company’s authorized control level risk based capital from the close of the transaction until a date to be determined by the regulator in mid-2025. Being required to maintain capital levels above the statutory requirement could put constraints on our ability to deploy capital to which our competitors are not subject.
Hazardous Financial Conditions
The Delaware Department of Insurance has the authority to deem Metromile Insurance Company to be in a hazardous financial condition such that the insurer’s continued operation may be hazardous to its policyholders, creditors, or the general public. A finding of a hazardous condition can be based upon a number of factors, including, but not limited to: (i) adverse findings in a financial, market conduct or other examination; (ii) failure to maintain adequate reserves in accordance with presently accepted actuarial standards of practice; (iii) net loss or negative net income in the last twelve month period or any shorter period of time; (iv) failure to meet financial and holding company filing requirements; (v) insolvencies with a company’s reinsurer(s) or within the insurer’s insurance holding company system; (vi) a finding of incompetent or unfit management of the insurer; (vii) a failure to furnish requested information or provide accurate information in relation to a response to an inquiry or filing of a financial statement; and (viii) any other finding determined by the commissioner to be hazardous to the insurer’s policyholders, creditors or the general public.
If the Delaware Department of Insurance finds Metromile Insurance Company to be in hazardous condition it has the authority, in lieu of placing the insurer into supervision, rehabilitation or liquidation, to enter into a memorandum of understanding with the insurer or issue an order to require the insurer to remedy the hazard. This would include, but is not limited to, ordering the insurer to: (i) increase its capital and surplus, (ii) suspend payment of dividends, (iii) limit or withdraw from certain investments, (iv) correct corporate governance deficiencies, and (v) take any other action necessary to cure the hazardous condition.
Periodic Examinations
Metromile Insurance Company is subject to on-site and remote or virtual visits and examinations by the state insurance regulatory authorities. Metromile Insurance Company is subject to market conduct examinations by insurance regulators, under which the regulator will examine its conduct towards policyholders including, but not limited to, complaint handling, marketing, claims, rate and form filing, nonrenewal and cancellation practices, and customer service. Metromile Insurance Company is also subject to a financial examination by the Delaware Department of Insurance every five years, under which it will review the company’s financials, including its relationships and transactions with affiliates. Metromile Insurance Company completed its first financial examination, covering the period January 1, 2013 through December 31, 2017, by the Delaware Department of Insurance, which was accepted, adopted, and filed effective January 22, 2019, with “no significant findings or material adjustments to the Company’s financial statements” (the “2017 Examination”). In addition, the Delaware Department of Insurance may conduct special or targeted examinations to address particular concerns or issues at any time. Specifically, by memorandum dated December 3, 2018, the Delaware Department of Insurance identified several exceptions that were noted during the course of the 2017 Examination which
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were not deemed significant enough to be included in its January 22, 2019 report. As a follow-up to the memorandum, the Delaware Department of Insurance conducted two targeted examinations to which Metromile Insurance Company provided responses that were accepted by the regulator. Insurance regulators of other states in which Metromile Insurance Company is licensed may also conduct examinations of the company, and such examinations have been completed by Illinois, Pennsylvania, Virginia, and Washington. Additionally, there is an ongoing examination by the California Department of Insurance. The results of each examination can give rise to fines and monetary penalties as well as regulatory orders requiring remedial, injunctive, or other corrective action.
Statutory Accounting Principles
A licensed insurance carrier’s financial statements must be completed in accordance with statutory accounting principles, or SAP. SAP was developed by U.S. insurance regulators as a method of accounting used to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with evaluating an insurer’s ability to pay all its current and future obligations to customers. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary jurisdiction.
Uniform statutory accounting practices are established by the NAIC and generally adopted by regulators in the various U.S. jurisdictions. These accounting principles and related regulations differ somewhat from GAAP principles, which are designed to measure a business on a going-concern basis. GAAP gives consideration to matching of revenue and expenses and, as a result, certain expenses are capitalized when incurred and then amortized over the life of the associated policies. Other assets such as goodwill are accounted for under GAAP financial statements but not SAP. As a result, the values for assets, liabilities, and equity reflected in financial statements prepared in accordance with GAAP may be different from those reflected in financial statements prepared under SAP.
Credit for Reinsurance
Metromile Insurance Company is currently a party to a number of reinsurance agreements under which it has ceded a portion of the risk it is insuring to various reinsurers. State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance that is ceded, so long as the assuming reinsurer satisfies the credit for reinsurance laws of the ceding insurer’s state of domicile. Once an insurance carrier has received credit for reinsurance it does not need to hold separate admitted assets as reserves to cover claims on the risks that it has ceded to the reinsurer. There are several different ways in which the credit for reinsurance laws may be satisfied by an assuming reinsurer, including being licensed in the state, being accredited in the state, or maintaining certain types of qualifying collateral. We ensure that all of Metromile Insurance Company’s reinsurers, and the related reinsurance and other agreements, qualify for credit for reinsurance so that Metromile Insurance Company is able to take full financial statement credit for its reinsurance.
Rate Regulation
Most states require personal property and casualty insurers to file rating plans, policy or coverage forms, and other information with the state’s regulatory authority. In certain cases, such rating plans, policy forms, or both must be approved prior to use.
We currently have products on file and approved in the following states: Arizona, California, Illinois, Oregon, New Jersey, Pennsylvania, Virginia, and Washington.
The speed with which an insurer can change rates in response to competition or increasing costs depends, in part, on whether the rating laws are (i) prior approval, (ii) file-and-use, or (iii) use-and-file. In states having prior approval laws, the regulator must approve a rate before the insurer may use it, and this process can often take multiple months. In states having file-and-use laws, the insurer does not have to wait for the regulator’s approval to use a rate, but the rate must be filed with the regulatory authority before being used. A use-and-file law requires an insurer to file rates within a certain period of time after the insurer begins using them. Many states, including California, have prior approval laws. Under all three types of rating laws, the regulator has the authority to disapprove a rate filing.
An insurer’s ability to adjust its rates in response to competition or to changing costs depends on an insurer’s ability to demonstrate to the regulator that its rates or proposed rating plan meet the requirements of the rating laws. In those states that significantly restrict an insurer’s discretion in selecting the business that it wants to underwrite, an insurer can manage its risk of loss by charging a rate that reflects the cost and expense of providing the insurance. In those states that significantly restrict an insurer’s ability to charge a rate that reflects the cost and expense of providing the insurance, the insurer can manage its risk of loss by being
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more selective in the type of business it underwrites. When a state significantly restricts both underwriting and pricing, it becomes more difficult for an insurer to maintain its profitability.
From time to time, the personal lines insurance industry comes under pressure from state regulators, legislators, and special-interest groups to reduce, freeze, or set rates at levels that do not correspond with our analysis of underlying costs and expenses. In particular, auto insurers have come under increasing pressure and in some states have been required to refund a portion of their premium to their policyholders due to decreasing auto claims arising from the COVID-19 pandemic. Whether this pressure continues to exist depends on the persistence of COVID-19 generally, and on other political, social, and health issues that may arise. State regulators may interpret existing law or rely on future legislation or regulations to impose new restrictions that adversely affect profitability or growth. We cannot predict with precision the impact on our business of possible future legislative and regulatory measures regarding insurance rates.
In addition, insurers are restricted in their ability to use telematics-based data to set premium rates in California, Metromile’s largest market. Proposition 103, which was passed by referendum in 1988, limits the factors that insurers can use to set auto insurance rates to, in decreasing order of importance: (i) the insured’s driving safety record; (ii) the number of miles he or she drives annually; (iii) the number of years of driving experience the insured has had; and (iv) those other factors that the Commissioner of the California Department of Insurance may adopt by regulation and that have a substantial relationship to the risk of loss. Under current California regulation, the use of telematics-based data beyond miles driven, including when, where or how the car is driven, is prohibited. In addition, other states in which Metromile operates, or may choose to operate in the future, similarly limit the use of telematics-based data beyond miles driven. Metromile Insurance Company is currently in discussions with the California Department of Insurance to revise its regulations to allow the use of telematics to a greater extent to underwrite and price insurance policies. Metromile cannot predict the outcome of these discussions, and there can be no assurance that the California Department of Insurance or other state regulators will revise regulations accordingly, if at all.
Insolvency/Guaranty Funds and Associations, Mandatory Pools, and Insurance Facilities
Most states require admitted property and casualty insurance companies to become members of insolvency or guaranty funds or associations for impaired or insolvent insurance companies, which each state funds through an annual assessment on all insurance companies doing business in the state. These funds cover payments of claims of state policyholders whose admitted insurance carriers have become insolvent. The annual assessments required in any one year will vary from state to state, and are subject to various maximum assessments per line of insurance. Our results of operations and financial condition could be adversely affected by any such assessments.
In addition, most states require private passenger automobile insurers to participate in mandatory pools, insurance facilities, or similar markets of last resort. These pools allocate to all licensed auto insurers those drivers who are required by law to have automobile insurance but because of their risk profile cannot obtain coverage from the voluntary markets. Allocations are based on market share in each state.
Investment Regulation
Metromile Insurance Company is subject to Delaware’s rules and regulations governing the investment of its assets. Delaware’s laws generally require that an insurance company invest in a diverse portfolio, and limit its investments in certain asset categories. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in certain circumstances, Metromile Insurance Company would be required to dispose of those investments.
Trade Practices
Insurance companies and producers are subject to regulation on how they may sell, solicit, or negotiate insurance and conduct their business, with state laws prohibiting certain unfair trade practices. Such practices include, but are not limited to, false advertising, making false statements to regulators, unfair discrimination including against protected classes, and rebating premium to policyholders above certain de minimis amounts. Metromile and its affiliates set business conduct policies and provide training to ensure employee-agents and other customer service personnel are aware of these prohibitions and understand that they are required to conduct their activities in compliance with these laws. In addition, the NAIC and several states, including California, Connecticut, and New York,
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have indicated an increased desire and intent to examine scoring and other models used for rating and underwriting. We are not currently able to predict with precision what impact these laws, initiatives, or actions in this respect might have on our business.
Unfair Claims Practices
Insurance companies, third-party administrators, and individual claims adjusters are generally prohibited by state laws from engaging in unfair claims practices. Unfair claims practices include, but are not limited to, misrepresenting pertinent facts or insurance policy provisions, failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies, failing to adopt reasonable standards for the investigation and settlement of a claim, and attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled. Metromile and its affiliates set business conduct policies to make claims adjusters aware of these prohibitions and to require them to conduct their activities in compliance with these laws.
Commission Sharing
Insurance producers cannot share insurance commissions with any person for selling, soliciting, or negotiating insurance unless such person holds an insurance producer license. There is a well-recognized, limited exception to this prohibition on commission sharing for the payment of referral fees to unlicensed persons, provided that the fee is a flat fee that is not contingent on the purchase of insurance and the referral does not involve the discussion of the terms or conditions of the policy.
Data Privacy
The use of non-public personal information in the insurance industry is subject to regulation under the privacy provisions of the Gramm-Leach-Bliley Act and the NAIC Insurance Information and Privacy Act, to the extent adopted and implemented by the various state legislatures and insurance regulators, including through the California Financial Information Privacy Act. Pursuant to these laws and regulations, among other things, an insurance carrier or producer must disclose its privacy policies to all of its applicants and policyholders and must also provide either an opt-in or opt-out, depending on the state, to the sharing of non-public personal information with unaffiliated third parties.
We are also subject to the CCPA, which took effect on January 1, 2020, and its implementing regulations which took effect in August 2020. The CCPA and related regulations give California residents the right to access and request deletion of their personal information, opt out of certain personal information sharing, and receive detailed disclosures about how their personal information is used and shared. The CCPA exempts certain information that is collected, processed, sold or disclosed pursuant to the California Financial Information Privacy Act, the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, or the federal Driver’s Privacy Protection Act, which also apply to us. However, the definition of “personal information” in the CCPA is broad and encompasses other information that we process beyond the scope of these exemptions. In addition, on November 3, 2020, Californians approved Proposition 24, a ballot measure that created the California Privacy Rights Act (CPRA). As of January 1, 2023, the CPRA will add new obligations on Metromile Insurance Company’s use, protection, and disclosures regarding personal information. We are not currently able to predict with precision what impact these laws and regulations might have on our business.
Cybersecurity
Under the Gramm-Leach-Bliley Act, insurance companies and producers must also establish a program of administrative, technical, and physical safeguards designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of customer information, and protect against unauthorized access to or use of customer information that could result in substantial harm or inconvenience to the customers.
Additionally, in response to the growing threat of cyber-attacks in the insurance industry, certain jurisdictions have begun to consider and adopt new cybersecurity regulations. On October 24, 2017, the NAIC adopted the Insurance Data Security Model Law, intended to serve as model legislation for states to enact to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. Alabama, Connecticut, Delaware, Iowa, Louisiana, Maine, Michigan, Mississippi, New Hampshire, North Dakota, Delaware, Indiana, South Carolina and Virginia, have adopted versions of the Insurance Data Security Model Law, each with a different effective date and some substantive differences. In addition, certain other states, including New York, have adopted their own cybersecurity laws with material differences from the NAIC Model Law. The CCPA also indirectly requires businesses to implement and maintain reasonable security procedures and practices appropriate to the nature of the personal information processed. Metromile Insurance Company takes steps to comply with financial industry
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cybersecurity regulations and believes it complies in all material respects with their requirements. Its board of directors oversees cybersecurity risk management and delegates oversight of its information security program to executive officers and a chief information security officer, who is responsible for the day-to-day management of our information security program and provides updates to the audit committee of the board of directors at each of its meetings. Metromile Insurance Company’s incident response team reports material information security incidents to executive officers, who in turn report them to the Board.
Federal Regulation
The regulation of insurance companies is principally a matter of state law, and the federal government does not directly regulate the transaction of insurance. However, federal statutes, regulations, and other initiatives do have an impact on the insurance industry. In particular, the Federal Insurance Office (FIO) was established within the U.S. Department of the Treasury (“Treasury”) by the Dodd-Frank Act in July 2010 to monitor and coordinate the regulation of the insurance industry across the United States.
Although the FIO has limited direct regulatory authority over insurance companies or other insurance industry participants, it does represent the U.S. on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors (“IAIS”). In addition, the FIO serves as an advisory member of the Financial Stability Oversight Council, assists the secretary of the Treasury with administration of the Terrorism Risk Insurance Program, monitors trends in the insurance industry, and advises the secretary of the Treasury on important national and international insurance matters. The FIO has the ability to make a recommendation to the Financial Stability Oversight Council to designate an insurer as “systemically significant,” subjecting the insurer to regulation by the Federal Reserve as a bank holding company, which could lead to higher capital requirements.
In addition, a number of federal laws affect and apply to the insurance industry, including various privacy laws, false advertising laws, anti-money laundering laws, the FCRA, and the economic and trade sanctions implemented by the Office of Foreign Assets Control (“OFAC”). OFAC has imposed civil penalties on persons, including insurance and reinsurance companies, arising from violations of its economic sanctions program.
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INTERESTS OF LEMONADE DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGERS
As of the date of this proxy statement/prospectus, Lemonade directors and executive officers do not have interests in the mergers that are different from, or in addition to, the interests of other Lemonade stockholders generally.
Lemonade’s “named executive officers” are:
● | Daniel Schreiber, Co-Founder, Co-Chief Executive Officer, Chairman of the Board; |
● | Shai Wininger, Co-Founder, Co-Chief Executive Officer, President, Secretary and Director; |
● | Tim Bixby, Chief Financial Officer; |
● | Adina Eckstein, Chief Operating Officer; |
● | John Peters, Chief Insurance Officer; and |
● | Jorge Espinel, Chief Business Development Officer. |
Lemonade’s “directors” are:
● | Daniel Schreiber; |
● | Shai Wininger; |
● | Joel Cutler; |
● | Michael Eisenberg; |
● | Irina Novoselsky; |
● | Silvija Martincevic; and |
· |
Caryn Seidman-Becker. |
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INTERESTS OF METROMILE DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGERS
Interests of the Company’s Directors and Executive Officers in the Merger
In considering the recommendations of the Metromile board of directors with respect to the mergers, Metromile’s stockholders should be aware that the directors and executive officers of Metromile have certain interests, including financial interests, in the mergers that may be different from, or in addition to, the interests of Metromile’s stockholders generally. The Metromile board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement, and in making its recommendation that Metromile’s stockholders adopt the merger agreement. See the section of this proxy statement entitled “The Merger — Background of the Merger” and the section of this proxy statement entitled “The Merger — Recommendation of the Metromile Board of Directors; Metromile’s Reasons for the Merger.” These interests are described in more detail below, and certain of them are quantified in the narrative and the tables below.
Treatment of Metromile Equity Awards
Stock Options. Except as set forth in the immediately following sentence, each Metromile stock option, whether vested or unvested, that is outstanding and unexercised immediately prior to the first effective time will, as of the effective time, be assumed by Lemonade and automatically converted into a stock option to acquire a number of shares of Lemonade common stock (rounded down to the nearest whole share) equal to the product of (i) the number of shares subject to the Metromile stock option and (ii) the exchange ratio, with an exercise price per share of Lemonade common stock (rounded up to the nearest whole cent) equal to (A) the per share exercise price of the Metromile stock option divided by (B) the exchange ratio. Each outstanding and unexercised Metromile stock option held by any individual who was not employed by or providing services to Metromile as of November 8, 2021, will, as of the effective time, be converted into the right to receive an amount in cash, without interest, equal to the Option Consideration. Any such Metromile stock option that has an exercise price per share that is greater than or equal to the per Metromile share cash consideration will be cancelled for no consideration.
Aside from the foregoing adjustments, each Metromile stock option assumed by Lemonade will generally remain subject to the same vesting and other terms and conditions that applied to such award immediately prior to the effective time.
Restricted Stock Unit Awards. Except as set forth in the immediately following sentence, each Metromile RSU award that is outstanding immediately prior to the effective time will, as of the effective time, be assumed by Lemonade and automatically converted into a Lemonade RSU award covering a number of shares of Lemonade common stock equal to (i) the number of shares of Metromile common stock underlying such Metromile RSU award multiplied by (ii) the exchange ratio. Each outstanding Metromile RSU award held by Metromile’s non-employee directors and each Metromile RSU award that is outstanding and vests based on the achievement of one or more performance criteria will be cancelled and converted automatically into the right to receive an amount in cash, without interest, equal to the the RSU Consideration. For purposes of the foregoing, the determination of actual performance with respect to any performance-based Metromile RSU awards and the number of shares underlying the Metromile RSU award that vest as of the effective time as a result of such performance will be made by Metromile prior to the effective time in accordance with the terms and conditions of the applicable award agreement.
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Aside from the foregoing adjustments, each Metromile RSU award that is assumed by Lemonade will generally remain subject to the same vesting, settlement and other terms and conditions that applied to such awards immediately prior to the effective time.
In connection with the execution of the merger agreement, David Friedberg, one of Metromile’s non-employee directors, entered into a side letter with Metromile with respect to his outstanding time-based Metromile RSU award pursuant to which the aggregate number of shares that are eligible to vest under such award shall be reduced to 150,000 shares (with the balance of unvested shares forfeited and cancelled for no consideration effective as of December 6, 2021).
Quantification of Payments. As described above, all Metromile RSU awards held by our non-employee directors will vest and be settled for the per Metromile share cash consideration (in the case of any performance-based Metromile RSU awards, based on actual performance), and as described further below, all or a portion of the equity awards held by our executive officers that are assumed by Lemonade will vest if the executive officer incurs a termination of employment by Lemonade without cause or resigns for good reason (each of which we refer to as a “qualifying termination”) during a specified period of time following the effective time. For an estimate of the amounts that would be payable to each of Metromile’s named executive officers on settlement of their unvested Metromile equity awards in connection with a qualifying termination, see “— Quantification of Payments and Benefits to Metromile’s Named Executive Officers” below. The estimated aggregate amount that would be payable to Metromile’s three executive officers who are not named executive officers upon vesting of their unvested Metromile equity awards if the mergers were consummated on December 8, 2021 and they were to experience a qualifying termination on that date is $2,108,369. The estimated aggregate amount that would be payable to Metromile’s six non-employee directors for their unvested Metromile equity awards if the effective time occurred on December 8, 2021 is $464,078.
Employment Agreements with Executive Officers
Each of Daniel Preston, Metromile’s Chief Executive Officer and Regi Vengalil, Metromile’s Chief Financial Officer is party to an employment agreement with Metromile that provides for enhanced severance benefits in the event of a qualifying termination within three months prior to or within twelve months following a change in control. The mergers will constitute a change in control for purposes of these employment agreements.
The employment agreements provide that, upon a qualifying termination, Messrs. Preston and Vengalil would be entitled to:
● | cash severance equal to 18 months of base salary and 12 months of base salary, respectively, payable in installments in the form of continuation of base salary payments; |
● | payment of the cost of health care coverage in effect at the time of termination of employment for a period of 18 months and 12 months, respectively, of the executive officer’s premiums under the Consolidated Omnibus Budget Reconciliation Act of 1985 (which we refer to as “COBRA”) to continue such coverage; and |
● | accelerated vesting of any then-unvested time-based Metromile RSU awards. |
Payments and benefits under each of the employment agreements are subject to the applicable executive officer’s execution and non-revocation of a general release of claims in favor of Metromile.
In connection with the execution of the merger agreement, Mr. Preston entered into an offer letter with Lemonade that supersedes and replaces his offer letter with Metromile. See “—New Compensation Arrangements with Lemonade” for additional information.
The estimated aggregate amount that would be payable to Mr. Vengalil under his employment agreement if the mergers were to be completed and Mr. Vengalil was to experience a qualifying termination on December 8, 2021 is $2,283,490.
Retention Program
Two of Metromile’s executive officers who are not named executive officers are eligible to receive retention benefits from Lemonade following the consummation of the mergers consisting of a lump sum cash payment equal to six months’ of base salary, payable (as applicable) upon the occurrence of the effective time, three months following the effective time, or on December 31, 2022, subject to continued employment.
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The estimated aggregate amount that would be payable to Metromile’s two executive officers who are not named executive officers under their respective retention agreements (assuming for this purpose that the mergers are completed on December 8, 2021 is $300,000.
Severance Program
In connection with the execution of the merger agreement, the Metromile board approved a severance program (which we refer to as the “Metromile Severance Program”), pursuant to which Metromile employees, including executive officers, will be eligible to receive certain severance payments and benefits upon qualifying termination, in each case, within the 12-month period following the date on which the effective time occurs.
Each of Metromile’s executive officers other than Mr. Preston and Mr. Vengalil is eligible to participate in the Metromile Severance Program, and upon a qualifying termination during the 12-month period following the date on which the effective time occurs would be eligible to receive the following:
● | severance pay equal to six months of base salary, payable in installments over the six-month period following such qualifying termination; |
● | acceleration of any outstanding and unvested equity or equity-based awards held by a terminated employee that would have vested during the six-month period following the date of such qualifying termination had such employee remained employed by Lemonade during such period; and |
● | continuation of coverage under COBRA for a period of six months. |
For an estimate of the value of the payments and benefits described above that would be payable to Metromile’s named executive officers upon a qualifying termination in connection with the mergers under the Metromile Severance Program, see “— Quantification of Payments and Benefits to Metromile’s Named Executive Officers” below. The estimated aggregate amount that would be payable to Metromile’s two executive officers who are not named executive officers and who are eligible for benefits under the Metromile Severance Program if the mergers were to be completed and they were to experience a qualifying termination on December 8, 2021, is $518,561.
New Compensation Arrangements with Lemonade
In connection with the execution of the merger agreement, Mr. Preston entered into an offer letter with Lemonade. Mr. Preston’s offer letter provides for (i) $450,000 in annual base salary, (ii) a grant of a Lemonade RSU award covering 100,000 shares of Lemonade common stock, which will vest over a four-year period, with 25% of such restricted stock units vesting on the one year anniversary of the effective time and 6.25% of such restricted stock units vesting on each quarterly anniversary thereafter, subject to Mr. Preston’s continued employment through each vesting date, and (iii) a grant of 120,000 stock options covering shares of Lemonade common stock, which will vest over a five-year period, with 25% of the stock options vesting on the third anniversary of the effective time, an additional 25% of the stock options vesting on the fourth anniversary of the effective time, and the remaining 50% of the stock options vesting on the fifth anniversary of the effective time.
If Mr. Preston incurs a qualifying termination occurs during the 12-month period immediately following the effective time, then, subject to Mr. Preston’s execution and non-revocation of a release of claims in favor of Lemonade, Mr. Preston will be entitled to the following severance payments and benefits:
● | A lump sum payment equal to 100% of his annual base salary; |
● | Reimbursement for the monthly COBRA premium paid by Mr. Preston for his and his dependents until the earliest of (i) the 12-month anniversary of the date of termination, (ii) the date Mr. Preston is no longer eligible to receive COBRA continuation coverage, and (iii) the date on which Mr. Preston receives substantially similar coverage from another employer or other source; and |
● | All outstanding equity-based compensation awards (other than the Metromile restricted stock units outstanding immediately prior to the effective time) that would have vested in the 12-month period immediately following the date of termination will continue to vest during the 12-month period immediately following the date of termination. |
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If Mr. Preston incurs a qualifying termination at any time following the effective time, then, subject to Mr. Preston’s execution and non-revocation of a release of claims in favor of Lemonade, any then-unvested time-based Metromile RSU awards that were assumed by Lemonade will continue to vest on their original vesting dates.
For an estimate of the value of the payments and benefits described above that would be payable to Mr. Preston upon a qualifying termination in connection with the mergers, see “— Quantification of Payments and Benefits to Metromile’s Named Executive Officers” below.
Metromile Additional Shares
In connection with the INSU SPAC transaction, pursuant to the INSU Merger Agreement, in the event Metromile's share price were to exceed $15.00 per share for 20 out of any 30 consecutive trading days at any time during the twenty-four months following February 9, 2021 (the date of the closing of the INSU SPAC transaction), Metromile would then be required to cause to deliver the Metromile Additional Shares to be allocated among the stockholders of Legacy Metromile and holders of vested options of Legacy Metromile (each, a "Metromile Additional Share Participant"), as of immediately prior to the effective time of the INSU SPAC transaction, based on the proportion of each Metromile Additional Share participant's shares of Legacy Metromile relative to the aggregate of all Legacy Metromile common stock, excluding Legacy Metromile restricted shares and Vested RSU Equivalents (as defined in the INSU Merger Agreement), held by all Legacy Metromile stockholders. Additionally, pursuant to the INSU Merger Agreement, if, during the twenty-four (24) months following February 9, 2021, there is a Change of Control (as defined in the INSU Merger Agreement) that will result in the holders of Legacy Metromile common stock receiving a per share price equal to or in excess of $10.00 (as equitably adjusted for stock splits, stock dividends, special cash dividends, reorganizations, combinations, recapitalizations and similar transactions affecting the Legacy Metromile common stock after the date of the INSU Merger Agreement) (an "Acceleration Event"), then the Metromile Additional Shares shall be issued to the stockholders of Legacy Metromile common stock effective as of immediately prior to the closing of the INSU SPAC transaction.
As described in the section "The Merger Agreement - Treatment of Additional Shares", the merger agreement provides that, in accordance with the terms of the INSU Merger Agreement, if the transactions contemplated by the merger agreement, including the mergers, constitute an Acceleration Event, (a) the terms and conditions set forth in Section 2.17(g) of the INSU Merger Agreement will apply to the transactions contemplated by the merger agreement, including the mergers, (b) the Metromile Additional Shares will be issued as of immediately prior to the first effective time and (c) in accordance with the INSU Merger Agreement, as of the first effective time, each Metromile Additional Share will be converted into the right to receive Lemonade common stock in accordance with the exchange ratio.
Additionally, pursuant to the merger agreement, if the transactions contemplated by the merger agreement, including the mergers, do not constitute an Acceleration Event, then, pursuant to, and in accordance with the terms of the INSU Merger Agreement, if, (a) at any point following the first effective time and prior to February 9, 2023, the closing share price of Lemonade common stock over any 20 trading days within any 30 trading day period is greater than the quotient of (i) $15.00 divided by (ii) the exchange ratio, then, (b) as soon as practicable (but in any event within 10 business days) after such satisfaction, Lemonade will issue, on a ratable basis to the Metromile Additional Share participants, a number of shares of Lemonade common stock in an amount equal to the product of (i) 10,000,000 multiplied by (ii) the exchange ratio (the "Lemonade Additional Shares").
As described in the section "Security Ownership of Certain Beneficial Owners and Management of Metromile", as of December 10, 2021, the following members of the Metromile board of directors and executive officers of Metromile beneficially own Metromile Additional Shares in the following amounts:
● | David Friedberg (member of the Metromile board of directors): (i) 92,187 Metromile Additional Shares held by The Friedberg Irrevocable Remainder Trust u/a/d 5/17/2017, of which Mr. Friedberg is the trustee; (ii) 119,240 Metromile Additional Shares held by The David Friedberg 2019 Annuity Trust u/a/d 9/26/19, of which Mr. Friedberg is the trustee; and (iii) 490,745 Metromile Additional Shares held by The David Friedberg Revocable Trust u/a/d 9/19/13, of which Mr. Friedberg is the trustee. |
● | Dan Preston (Chief Executive Officer of Metromile and member of the Metromile board of directors): 198,693 Metromile Additional Shares. |
● | Ryan Graves (member of the Metromile board of directors and the strategic committee): (i) 333,438 Metromile Additional Shares held by Saltwater Capital ("Saltwater"); and (ii) 44,458 Metromile Additional Shares held by The Graves Irrevocable |
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Remainder Trust ("Graves Irrevocable Trust"). Ryan Graves has or may be deemed to have voting and dispositive power over the securities held by Saltwater and Graves Irrevocable Trust. |
● | Vikas Singhal (member of the Metromile board of directors and the strategic committee): (i) 288,237 Metromile Additional Shares held by HSCM Bermuda Fund LTD ("Bermuda"); (ii) 104,823 Metromile Additional Shares held by HS Santanoni LP ("Santanoni"); and (iii) 742 Metromile Additional Shares held by HSCM FI Master Fund Ltd ("FI Master Fund"). Each of Bermuda, Santanoni and FI Master Fund is advised by Hudson Structured Capital Management Ltd., an investment adviser registered with the U.S. Securities & Exchange Commission under the Investment Advisers Act of 1940 ("HSCM"). Vikas Singhal is a partner of HSCM and as such has voting and dispositive power over the securities held by Bermuda, Santanoni and FI Master Fund. |
● | Paw Andersen (Chief Technology Officer of Metromile): 15,252 Metromile Additional Shares. |
● | Lindsay Alexovich (Chief Accounting Officer of Metromile): 15,872 Metromile Additional Shares. |
● | Jesse McKendry (Vice President, Insurance of Metromile): 1,812 Metromile Additional Shares. |
● | Mark Gundacker (Mr. Gundacker resigned from his positions as Chief People Officer and Chief of Staff of Metromile effective October 29, 2021): 2,904 Metromile Additional Shares. |
Earnout Shares
In connection with the INSU SPAC transaction, INSU, Insurance Acquisition Sponsor II, LLC, a Delaware limited liability company (“INSU Sponsor”) and Dioptra Advisors II, LLC, a Delaware limited liability company (together with INSU Sponsor, the “Sponsors”) entered into that certain Sponsor Share Cancellation and Vesting Agreement, dated as of November 24, 2020 (the “Cancellation and Vesting Agreement”), pursuant to which, among other things, at the closing of the INSU SPAC transaction, 1,177,000 shares of Class B common stock of INSU collectively held by the Sponsors were forfeited and transfer restrictions were placed on an additional 5,100,370 shares of Class B common stock of INSU collectively held by the Sponsors (which were converted into 5,100,370 shares of Metromile common stock at the effective time of the INSU SPAC transaction (the “earnout shares”)). Pursuant to the Cancellation and Vesting Agreement, (i) the transfer restrictions on 2,550,168 of the earnout shares shall be removed when the Metromile share price is greater than $15.00 for any 20 trading days out of a 30 consecutive trading day period, and 2,550,202 of the earnout shares shall have the applicable transfer restrictions removed when the Metromile share price is greater than $17.00 for any 20 trading days out of a 30 consecutive trading day period, and (ii) the transfer restrictions on all of the earnout shares shall be removed if Metromile completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction upon the consummation of which holders of Metromile common stock would be entitled to exchange their shares for cash, securities or other property.
As described in the section “The Merger Agreement — Merger Consideration”, the merger agreement provides that, in accordance with the terms of the Cancellation and Vesting Agreement, the transfer restrictions on the earnout shares shall be removed upon the first effective time pursuant to Section 1.2(c) of the Cancellation and Vesting Agreement and shall be converted into the right to receive the merger consideration.
As of December 10, 2021, the Sponsors had been dissolved and all of the earnout shares had been distributed to their respective members. The Sponsors were managed by Cohen & Company, LLC. Mr. Butler, the chairman of the Metromile board of directors and a member of the strategic committee, has served as Portfolio Manager and Head of Cohen & Company’s U.S. Insurance Asset Management Platform and Global ILS Program since November 2017, and has served as the CEO of Cohen & Company Financial (Europe) Ltd since April 2019.
Indemnification; Directors' and Officers' Insurance
Metromile is party to indemnification agreements with each of its directors and executive officers that require Metromile, among other things, to indemnify the directors and executive officers against certain liabilities that may arise by reason of their status or service as directors or officers.
In addition, pursuant to the merger agreement, from and after the effective time, Lemonade will indemnify certain persons, including Metromile’s directors and executive officers. In addition, for a period of not less than six years from the effective time,
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Lemonade will maintain an insurance and indemnification policy for the benefit of certain persons, including Metromile’s directors and executive officers. For additional information, see “The Merger Agreement — Indemnification; Directors’ and Officers’ Insurance.”
Quantification of Payments and Benefits to Metromile’s Named Executive Officers
The table below sets forth the amount of payments and benefits that each of Metromile’s named executive officers would receive in connection with the mergers, assuming that the mergers were completed and each such named executive officer experienced a qualifying termination on December 8, 2021. The amounts below are based on the average closing market price of Metromile common stock over the five-day period following November 8, 2021, or $3.27, and are based on multiple assumptions that may or may not actually occur or be accurate on the relevant date, including the assumptions described in the footnotes to the table. As a result of the foregoing assumptions, the actual amounts, if any, to be received by a named executive officer may materially differ from the amounts set forth below.
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|
|
|
|
|
|
|
|
|
Name |
|
Cash
|
|
Equity
|
|
Perquisites/
|
|
Total
|
|
Dan Preston |
|
450,000 |
|
5,403,754 |
|
19,924 |
|
5,873,678 |
|
Mark Gundacker(5) |
|
— |
|
— |
|
— |
|
— |
|
Paw Anderson |
|
300,000 |
|
173,604 |
|
— |
|
473,604 |
|
(1) | The cash payments payable to (a) Mr. Preston consists of a severance payment in an amount equal to 100% of base salary, payable in lump sum pursuant to his offer letter with Lemonade and (b) Mr. Andersen consists of (i) a severance payment in an amount equal to six months of base salary, payable in installments in the form of continuation of base salary payments, and (ii) a lump sum cash payment in an amount equal to six month of base salary, payable upon the occurrence of the effective time, subject to continued employment. The severance payments are “double-trigger” (i.e., payable upon a qualifying termination following the occurrence of a change in control), while Mr. Andersen’s retention payment is “single-trigger” (i.e., payable upon the occurrence of a change in control). |
(2) | As described above, certain of the equity awards held by Metromile named executive officers are subject to “double-trigger” vesting. Set forth below are the values of each type of unvested equity award that would be payable upon a qualifying termination during the 12-month period following the effective time, assuming a per share price of Metromile common stock of $3.27, and less the applicable exercise price in the case of stock options. |
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Name |
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Metromile
|
|
Metromile
|
|
Metromile
|
|
Dan Preston |
|
— |
|
— |
|
3,815,004 |
|
Mark Gundacker |
|
— |
|
— |
|
— |
|
Paw Anderson |
|
18,913 |
|
— |
|
154,691 |
|
(3) | As described above, in connection with the execution of the merger agreement, Mr. Preston entered into an offer letter with Lemonade pursuant to which he is eligible to receive a grant of Lemonade RSU award covering 100,000 shares of Lemonade common stock and a grant of 120,000 stock options covering shares of Lemonade common stock. The equity awards that will be granted by Lemonade to Mr. Preston are subject to “double-trigger” vesting. Set forth below are the values of each type of unvested equity award that would be payable upon a qualifying termination during the 12-month period following the effective time, assuming a per share price of Lemonade common stock of $63.55, which is the average closing market price of Lemonade common stock over the five-day period following November 8, 2021. Because Mr. Preston’s stock options will be granted with an exercise price equal to the fair market value of a share of Lemonade common stock on the closing date of the mergers, these stock options would have no intrinsic value if he were to incur a qualifying termination on the closing date of the mergers. |
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|
|
|
|
|
|
Name |
|
Lemonade
|
|
Lemonade
|
|
Dan Preston |
|
— |
|
1,588,750 |
|
(4) | For Mr. Preston, the amount in this column represents the monthly COBRA premiums paid by Mr. Preston for a period of 12 months pursuant to his offer letter entered into with Lemonade in connection with the execution of the merger agreement Mr. Anderson does not participate in Metromile’s health care coverage. |
(5) | Mr. Gundacker voluntarily resigned from his position as the Chief People Officer and Chief of Staff of Metromile on October 29, 2021, and as such, he will not be entitled to any payments or benefits in connection with the mergers. |
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
The following is a general discussion of the material U.S. federal income tax consequences of the mergers to U.S. holders (as defined below) (i) of Metromile common stock who exchange their shares of Metromile common stock for shares of Lemonade common stock (and cash in lieu of fractional shares of Lemonade common stock, if any) pursuant to the first merger (ii) of Metromile warrants that are exchanged for Lemonade warrants pursuant to the first merger and (iii) entitled to receive the Metromile Additional Shares who receive the right to Lemonade Additional Shares pursuant to the merger agreement (collectively the “Metromile equity interests”).
The following discussion is based on the Code, U.S. Treasury regulations promulgated thereunder, judicial interpretations thereof and published rulings and other positions of the IRS, each as in effect as of the date hereof, and all of which are subject to change or differing interpretations, possibly with retroactive effect. Neither Lemonade nor MetroMile has sought nor will seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS will not take or a court will not sustain a contrary position to that discussed below regarding the tax consequences discussed below. Any such change or differing interpretation could affect the accuracy of the statements and conclusions set forth herein.
This discussion is limited to U.S. holders that hold their Metromile equity interests as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion is not a complete description of all of the U.S. federal income tax consequences of the mergers, nor does it describe any tax consequences of the mergers arising under the laws of any state, local, or non-U.S. jurisdiction or under any U.S. federal laws other than those pertaining to the income tax or the tax consequences of owning or disposing of Lemonade common stock received in the mergers. Further, this discussion does not address all aspects of U.S. federal income taxation that may be relevant to particular U.S. holders of Metromile equity interests in light of their individual circumstances (including the impact of the Medicare surtax on certain net investment income) or to U.S. holders of Metromile equity interests that are subject to special treatment under the U.S. federal income tax laws, such as:
● | banks, insurance companies or other financial institutions; |
● | partnerships or other pass-through entities for U.S. federal income tax purposes or holders of interests therein; |
● | tax-exempt or governmental organizations; |
● | dealers in securities or traders in securities that elect to use a mark-to-market method of accounting; |
● | persons that hold Metromile equity interests as part of a straddle, hedge, conversion transaction or other integrated investment or risk reduction transaction; |
● | persons that purchased or sell their shares of Metromile equity interests as part of a wash sale; |
● | certain former citizens or long-term residents of the United States or persons whose functional currency is other than the U.S. dollar; |
● | persons that are not U.S. holders; |
● | persons who hold Metromile equity interests issued to or held by Cantor (or Cantor’s affiliates or transferees) at the time of or in connection with the INSU SPAC transaction; |
● | persons who acquired their Metromile equity interests through the exercise of employee stock options or otherwise as compensation or through a tax-qualified retirement plan; and |
● | persons who actually or constructively hold (or actually or constructively held at any time during the five-year period ending on the date of the mergers) 5% or more of the shares of Metromile common stock. |
THE TAX CONSEQUENCES OF THE MERGERS TO A HOLDER OF METROMILE EQUITY INTERESTS MAY BE COMPLEX AND WILL DEPEND ON SUCH HOLDER’S SPECIFIC SITUATION AND FACTORS NOT WITHIN LEMONADE OR METROMILE’S CONTROL. ALL HOLDERS OF METROMILE EQUITY INTERESTS SHOULD CONSULT THEIR TAX
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ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGERS TO THEM IN THEIR PARTICULAR CIRCUMSTANCES, INCLUDING THE APPLICABILITY AND EFFECT OF THE ALTERNATIVE MINIMUM TAX AND ANY U.S. FEDERAL, U.S. STATE OR LOCAL, NON-U.S. OR OTHER TAX LAWS AND OF POTENTIAL CHANGES IN SUCH LAWS.
U.S. Holder Defined
For purposes of this discussion, a “U.S. holder” is a beneficial owner of Metromile equity interests that, for U.S. federal income tax purposes, is:
● | an individual who is a citizen or resident of the United States; |
● | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes), created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
● | an estate the income of which is subject to U.S. federal income tax regardless of its source; or |
● | a trust (i) the administration of which is subject to the primary supervision of a U.S. court and which has one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) who have the authority to control all substantial decisions of the trust or (ii) which has made a valid election under applicable U.S. Treasury regulations to be treated as a United States person. |
If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds Metromile equity interests, the tax treatment of a partner in the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, if you are a partner in a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that holds Metromile equity interests, you should consult your tax advisor regarding the tax consequences to you of the mergers.
Treatment of the Mergers
Assuming that the mergers are completed as currently contemplated, Lemonade and Metromile intend that the mergers, taken together, should qualify as a “reorganization” within the meaning of Section 368(a) of the Code. However, it is not a condition to Metromile’s obligation or Lemonade’s obligation to consummate the transactions contemplated by the merger agreement that the mergers qualify for the Intended Tax Treatment or that Metromile or Lemonade receive an opinion from counsel to that effect. Whether or not the mergers, taken together, qualify as a reorganization depends in part on whether holders of Metromile stock receive a sufficient amount of Lemonade common stock in the first merger to preserve a substantial part of their interest in Metromile through ownership of Lemonade common stock. The satisfaction of such requirement will not be known until the mergers are completed and depends on the treatment of the right under the merger agreement of current and former holders of Metromile common stock to receive the Lemonade Additional Shares in respect of their right to the Metromile Additional Shares (as described in “The Merger Agreement—Treatment of Additional Shares”). Furthermore, Metromile and Lemonade have not requested, and do not intend to request, any ruling from the IRS with respect to the tax consequences of the mergers. Accordingly, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below. The following discussion, as it relates to U.S. holders of Metromile equity interests, generally assumes the mergers, taken together, qualify as a “reorganization” within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes.
U.S. Federal Income Tax Consequences of the Mergers to U.S. Holders of Metromile Common Stock
Assuming that the mergers, taken together, are treated as described above in “—Treatment of the Mergers”, the material U.S. federal income tax consequences of the mergers to U.S. holders of Metromile common stock will be as follows:
● | a U.S. holder of Metromile common stock generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of shares of Metromile common stock for shares of Lemonade common stock pursuant to the first merger, except with respect to any cash received in lieu of fractional shares of Lemonade common stock (as discussed below); |
● | the aggregate tax basis of the shares of Lemonade common stock received by a U.S. holder of Metromile common stock pursuant to the first merger (including any fractional share of Lemonade common stock deemed received and exchanged for |
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cash, as discussed below) will equal the aggregate adjusted tax basis of such U.S. holder’s shares of Metromile common stock exchanged for such Lemonade common stock; and |
● | the holding period of a U.S. holder of Metromile common stock in the Lemonade common stock received in exchange for shares of Metromile common stock (including any fractional share of Lemonade common stock deemed received and exchanged for cash, as discussed below) will include the holding period of the Metromile common stock exchanged for such Lemonade common stock. |
If a U.S. holder of Metromile common stock acquired different blocks of Metromile common stock at different times or at different prices, the Lemonade common stock receved in the first merger generally will be allocated pro rata to each block of Metromile common stock surrendered in the first merger and such U.S. holder’s basis and holding period of each block of Lemonade common stock will be determined on a block-by-block basis by reference to the basis and holding period of the blocks of Metromile common stock exchanged for such Lemonade common stock. Any such U.S. holder should consult its tax advisor regarding the tax bases and holding periods of the particular shares of Lemonade common stock received in the first merger..
A U.S. holder of Metromile common stock who receives cash in lieu of fractional shares of Lemonade common stock generally will be treated as having received such fractional share pursuant to the first merger and then as having sold such fractional share of Lemonade common stock for cash. As a result, such U.S. holder of Metromile common stock generally will recognize gain or loss equal to the difference between the amount of cash received and the portion of the U.S. holder’s aggregate adjusted tax basis in its Metromile common stock surrendered that is allocated to such fractional share of Lemonade common stock. Such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if the U.S. holder’s holding period in the fractional share of Lemonade common stock deemed to be received exceeds one year at the effective time of the first merger. The deductibility of capital losses is subject to limitation.
U.S. Federal Income Tax Consequences of the Mergers to U.S. Holders of Warrants
Assuming that the mergers, taken together, are treated as described above in “—Treatment of the Mergers”, a U.S. holder of Metromile warrants will not recognize gain or loss upon the exchange of such warrants for Lemonade warrants pursuant to the first merger. Such U.S. holder’s aggregate adjusted tax basis and holding period in each such Lemonade warrant immediately after the first merger will be equal to such U.S. holder’s adjusted tax basis and holding period in the Metromile warrant exchanged for such Lemonade warrant.
U.S. Federal Income Tax Consequences of the Mergers to U.S. Holders Entitled to Receive Metromile Additional Shares
As described in “The Merger Agreement—Treatment of Additional Shares,” U.S. holders entitled to receive the Metromile Additional Shares under the INSU Merger Agreement will be issued Lemonade Additional Shares if certain conditions are satisfied. Assuming that the mergers, taken together, are treated as described above in “—Treatment of the Mergers,” the U.S. federal income tax treatement of such U.S. holders’ right to Lemonade Additional Shares pursuant to the merger agreement is uncertain. U.S. holders who receive the right to Lemonade Additional Shares pursuant to the merger agreement may be subject to any of the following consequences, and are urged to consult their tax advisors with respect to the treatment of the right to receive Lemonade Additional Shares pursuant to the merger agreement:
● | If U.S holders entitled to receive Metromile Additional Shares are treated as exchanging a right to receive such shares for the right to receive Lemonade Additional Shares and such exchange is treated for U.S. federal income tax purposes as an exchange of Metromile common stock for Lemonade common stock, the treatment described above in “—U.S. Federal Income Tax Consequences of the Mergers to U.S. Holders of Metromile Common Stock” will generally apply. |
190
ALL U.S. HOLDERS ENTITLED TO RECEIVE METROMILE ADDITIONAL SHARES UNDER THE INSU MERGER AGREEMENT ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGERS TO THEM.
Tax Consequences if the Mergers Fail to Qualify as a Reorganization
If the mergers do not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, a U.S. holder of Metromile common stock or warrants generally would recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the fair market value, at the time of the first merger, of the Lemonade common stock or warrants, resepectively, received in the mergers (including any cash received in lieu of a fractional shares of Lemonade common stock) and such U.S. holder’s tax basis in the Metromile common stock or warrants, respectively, surrendered in the mergers. Gain or loss must be calculated separately for each block of Metromile common stock or warrants exchanged by such U.S. holder for Lemonade common stock or warrants, respectively, if such blocks were acquired at different times or for different prices. Any gain or loss recognized generally would be capital gain or loss, and generally would be long-term capital gain or loss if the U.S. holder’s holding period in a particular block of Metromile common stock or warrants, as applicable, is more than one year at the effective time of the first merger. Long-term capital gain of certain non-corporate taxpayers, including individuals, generally is taxed at reduced U.S. federal income tax rates. The deductibility of capital losses is subject to limitations. A U.S. holder’s tax basis in Lemonade common stock or warrants received in the first merger would be equal to the fair market value of such common stock or warrants, respectively,as of the effective time of the first merger, and such U.S. holder’s holding period in such common stock or warrants would begin on the day following the first merger.
If the mergers do not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, the U.S. federal income tax treatment of the right to receive Lemonade Additional Shares pursuant to the merger agreement is uncertain. U.S. holders who receive such right may be subject to the consequences described in the third bullet point above under “—U.S. Federal Income Tax Consequences of the Mergers to U.S. Holders Entitled to Receive MetroMile Additional Shares.” U.S. holders are urged to consult their tax advisors with respect to the treatment of the right to receive Lemonade Additional Shares pursuant to the merger agreement.
Information Reporting and Backup Withholding
Information returns may be required to be filed with the IRS in connection with the mergers. Further, the consideration payable to U.S. holders in connection with the mergers may be subject to deduction or withholding as required under applicable law. A U.S. holder of Metromile equity interests may be subject to U.S. backup withholding on any cash payments made pursuant to the first merger unless such holder provides proof of an applicable exemption or a correct taxpayer identification number and otherwise complies with the applicable requirements of the backup withholding rules. Any amounts withheld under the U.S. backup withholding rules or otherwise is not an additional tax and will generally be allowed as a refund or credit against the U.S. holder’s U.S. federal income tax liability, if any, provided that the U.S. holder timely furnishes the required information to the IRS.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS. IT IS NOT A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS THAT MAY BE IMPORTANT TO A PARTICULAR U.S. HOLDER. ALL HOLDERS OF METROMILE EQUITY INTERESTS (INCLUDING HOLDERS ENTITLED TO RECEIVE METROMILE ADDITIONAL SHARES PURSUANT TO THE INSU MERGER AGREEMENT) ARE STRONGLY ENCOURAGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGERS TO THEM, INCLUDING TAX REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF ANY U.S. FEDERAL, U.S. STATE OR LOCAL, NON-U.S. OR OTHER TAX LAWS AND OF POTENTIAL CHANGES IN SUCH LAWS.
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COMPARISON OF STOCKHOLDERS’ RIGHTS
Lemonade and Metromile are Delaware corporations and the rights of Lemonade and Metromile stockholders are governed by the DGCL. Metromile stockholders’ rights are also governed by the Metromile charter and bylaws. If the mergers are completed, the rights of Metromile stockholders who become Lemonade stockholders will be governed by the Lemonade charter and bylaws.
As Lemonade and Metromile are both Delaware corporations, the rights of Lemonade and Metromile stockholders are not materially different. However, there are certain differences between the rights of Lemonade stockholders under the Lemonade charter and bylaws and the rights of Metromile stockholders under the Metromile charter and bylaws, as summarized in the table below, particularly because Lemonade is a public benefit corporation. This summary does not purport to be a complete statement of all the differences, or a complete description of the specific provisions referred to. Further, the identification of specific differences is not intended to indicate that other equally or more significant differences do not exist. Lemonade and Metromile stockholders should carefully read the relevant provisions of the Lemonade charter, the Lemonade bylaws, the Metromile charter, the Metromile bylaws and the DGCL. Copies of the documents referred to in this summary may be obtained as described under “Where You Can Find More Information.”
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Voting Rights |
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Subject to the paragraph below, each share of Lemonade common stock entitles the holder to one vote on each matter properly submitted to the stockholders of Lemonade for their vote; provided, however, that except as otherwise required by law, holders of shares of Lemonade common stock shall not be entitled to vote on any amendment to the Lemonade charter that relates solely to the terms of the outstanding preferred stock if the holders of such affected preferred stock are entitled to vote thereon pursuant to the Lemonade charter or pursuant to the DGCL. Any person who acquires Lemonade common stock and/or Lemonade preferred stock, either directly or beneficially through an agent, broker, transfer agent or the like, that would result in such person having the power to vote over 9.90% of the total number of votes that may be cast by all the then issued and outstanding shares of Lemonade entitled to vote on any matter, shall first obtain an approval or determination of non-control, as applicable, from the Superintendent of the New York Department of Financial Services and any other applicable state insurance regulatory authority, as provided in all applicable laws and regulations. Other than with respect to the election of directors, for all matters as to which no other voting requirement is specified by the DGCL, Lemonade’s charter or bylaws, the affirmative vote required for stockholder action is that of a majority of the shares present in person, by remote communication, if applicable, or represented by proxy duly authorized at the meeting and entitled to vote on the subject matter. |
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Each share of Metromile common stock entitles the holder to one vote on each matter properly submitted to the stockholders of Metromile for their vote; provided however, that, holders of common stock are not entitled to vote on any amendment to Metromile’s charter that relates to the terms of one or more outstanding series of preferred stock if the holders of such affected series are entitled to vote thereon by law or pursuant to the charter. Other than with respect to the election of directors, for all matters as to which no other voting requirement is specified by the DGCL, Metromile’s charter or bylaws, the affirmative vote required for stockholder action is that of a majority of the shares present in person, by remote communication, if applicable, or represented by proxy duly authorized at the meeting and entitled to vote on the subject matter. |
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Distributions and Dividends |
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The Lemonade board of directors may declare and pay dividends upon the shares of Lemonade capital stock. Dividends may be paid in cash, in property or in shares of stock. The Lemonade board of directors may set apart any funds available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve, at its discretion. Such purposes shall include, but not be limited to, equalizing dividends, repairing or maintaining any property of Lemonade, and meeting contingencies. |
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The Metromile board of directors may declare and pay dividends upon the shares of Metromile capital stock. Dividends may be paid in cash, in property or in shares of stock. The Metromile board of directors may set apart out of any of the funds of Metromile available for dividends a reserve or reserves for any proper purpose and may modify or abolish such reserve. |
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Quorum |
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The Lemonade bylaws provide that the presence (in person, by remote communication, if applicable, or by proxy duly authorized) of the holders of a majority of the voting power of the outstanding shares entitled to vote at the meeting constitutes a quorum. |
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The Metromile bylaws provide that the presence (in person, by remote communication, if applicable, or by proxy duly authorized) of the holders of a majority of the voting power of the outstanding shares entitled to vote at the meeting constitutes a quorum. |
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193
Record Date |
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The Lemonade board of directors may fix a record date for purposes of, among other things, determining the rights of stockholders to notice of or to vote at such meeting. In the case of determining stockholders entitled to notice of any meeting of stockholder or any adjournment thereof, or to vote at such meeting, the record date cannot be less than ten or more than 60 days preceding the date of any meeting of stockholders, unless the Lemonade board of directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. |
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The Metromile Board may fix a record date for purposes of, among other things, determining the rights of stockholders to notice of or to vote at such meeting. In the case of determining stockholders entitled to notice of any meeting of stockholder or any adjournment thereof, or to vote at such meeting, the record date cannot be less than ten or more than 60 days preceding the date of any meeting of stockholders, unless, for the purpose of determining the stockholders entitled to vote, the Metromile Board determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. |
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Number of Directors |
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The Lemonade charter provides that the number of directors on Lemonade’s board of directors shall be fixed exclusively by resolutions adopted by a majority of the Lemonade board of directors. There are currently seven Lemonade directors. |
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The Metromile charter provides that the number of directors on Metromile’s board of directors shall be fixed exclusively by resolutions adopted by a majority of the Metromile Board. There are currently seven Metromile directors. |
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Election of Directors |
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Pursuant to the Lemonade charter, directors serve three year terms and are divided into three classes designated as either Class I, Class II or Class III. The election of each class of directors is staggered such that each year, the term of only one class expires and stockholders vote only to elect directors with respect to such class. Pursuant to the Lemonade bylaws, directors are elected at each annual meeting of stockholders by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy duly authorized at the meeting and entitled to vote generally on the election of directors. Newly created directorships resulting from any increase in the authorized number of directors or any vacancies resulting from death, resignation, disqualification, removal or other causes are filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of Lemonade’s board of directors, or by the sole remaining director. |
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Pursuant to the Metromile charter, directors serve three year terms and are divided into three classes designated as either Class I, Class II or Class III. The election of each class of directors is staggered such that each year, the term of only one class expires and stockholders vote only to elect directors with respect to such class. Pursuant to the Metromile bylaws, directors are elected at each annual meeting of stockholders by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy duly authorized at the meeting and entitled to vote generally on the election of directors. Newly created directorships resulting from any increase in the authorized number of directors or any vacancies resulting from death, resignation, disqualification, removal or other causes are filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of Metromile’s board of directors, or by the sole remaining director. |
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Cumulative Voting |
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Lemonade stockholders have cumulative voting rights. |
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Metromile stockholders do not have cumulative voting rights. |
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194
Removal of Directors |
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The Lemonade directors may be removed with cause by the affirmative vote of the holders of two-thirds of the voting power of all then-outstanding shares of Lemonade capital stock entitled to vote generally at an election of directors. |
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The Metromile directors may be removed with cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of Metromile capital stock entitled to vote generally at an election of directors. |
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Director Nominations by Stockholders |
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The Lemonade bylaws provide that stockholders who comply with the notice provisions set forth in the Lemonade bylaws, are stockholders of record on the date of giving such notice and are entitled to vote at an annual meeting of stockholders may nominate a candidate to the Lemonade board of directors for election at such meeting. These notice requirements generally require that, among other things, the stockholder deliver a notice of any such nomination containing specified information no less than 90 days and no more than 120 days prior to the anniversary of the date of the immediately preceding annual meeting of stockholders. Lemonade does not have a proxy access provision in its bylaws. |
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The Metromile bylaws provide that stockholders who comply with the notice provisions set forth in the Metromile bylaws, are stockholders of record on the date of giving such notice and are entitled to vote at an annual meeting of stockholders may nominate a candidate to the Metromile Board for election at such meeting. These notice requirements generally require that, among other things, the stockholder deliver a notice of any such nomination containing specified information no less than 90 days and no more than 120 days prior to the anniversary of the date of the immediately preceding annual meeting of stockholders. Metromile does not have a proxy access provision in its bylaws. |
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Stockholder Proposals |
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Business may be properly brought before an annual meeting by any stockholder so long as he or she is a stockholder of record at the time of giving the written notice provided in the Lemonade bylaws, is entitled to vote at the meeting and complies with the notice requirements set forth in the Lemonade bylaws. To be timely, a stockholder’s notice must generally be delivered to Lemonade’s Secretary no less than 90 days and no more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders. |
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Business may be properly brought before an annual meeting by any stockholder so long as he or she is a stockholder of record at the time of giving the written notice provided in the Metromile bylaws, is entitled to vote at the meeting and complies with the notice requirements set forth in the Metromile bylaws. To be timely, a stockholder’s notice must generally be delivered to Metromile’s Secretary no less than 90 days and no more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders. |
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Stockholder Action by Written Consent |
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The Lemonade charter prohibits stockholder action by written consent or electronic transmission and requires that any action taken by Lemonade stockholders be taken at an annual or special meeting of stockholders. |
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The Metromile charter prohibits stockholder action by written consent or electronic transmission and requires that any action taken by Metromile stockholders be taken at an annual or special meeting of stockholders. |
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Special Stockholder Meetings |
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A special meeting of stockholders may be called only by the chairperson of the Lemonade board of directors, the chief executive officer, the president, the secretary or a majority of the total number of directors constituting the Lemonade board of directors at the written request of two directors. The only matters to be brought before a special meeting are those specified in the meeting notice. |
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A special meeting of stockholders may be called only by the chairperson of the Metromile board of directors, Metromile’s chief executive officer, or the Metromile Board pursuant to a resolution. The only matters to be brought before a special meeting are those specified in the meeting notice. |
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195
196
197
Certain INSU SPAC transactions |
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Section 203 of the DGCL generally prohibits a Delaware corporation from engaging in a business combination with an “interested stockholder” that acquires more than 15% but less than 85% of the corporation’s outstanding voting stock for three years following the time that person becomes an “interested stockholder” (generally defined as a holder who (a) together with its affiliates and associates, owns or (b) is an affiliate or associate of the corporation and, together with that person’s affiliates and associates, has owned at any time within the previous three years, at least 15% of the corporation’s outstanding shares), unless prior to the date the person becomes an interested stockholder, the corporation’s board of directors approves either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder or the business combination is approved by the corporation’s board of directors and by the affirmative vote of at least two-thirds of the corporation’s outstanding voting stock that is not owned by the interested stockholder at a meeting of stockholders (and not by written consent) or other specified exceptions are met. Lemonade’s charter expressly provides that it shall not be governed by Section 203 of the DGCL (or any successor provision thereto), and that the restrictions contained in Section 203 shall not apply until immediately following the time at which both of the following conditions exist (if ever): (a) Section 203 by its terms would apply to Lemonade as required by law; and (b) Daniel Schreiber and Shai Wininger do not beneficially own shares of capital stock of Lemonade representing at least fifteen percent (15%) of the voting power of all the then outstanding shares of capital stock of Lemonade, and Lemonade shall thereafter be governed by Section 203 if and for so long as Section 203 by its terms shall apply to Lemonade. Although the DGCL permits a Delaware corporation’s certificate of incorporation to provide for a greater vote for a merger, consolidation or sale of substantially all the assets of a corporation than the vote described above, the Lemonade charter does not require a greater vote. |
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Section 203 of the DGCL generally prohibits a Delaware corporation from engaging in a business combination with an “interested stockholder” that acquires more than 15% but less than 85% of the corporation’s outstanding voting stock for three years following the time that person becomes an “interested stockholder” (generally defined as a holder who (a) together with its affiliates and associates, owns or (b) is an affiliate or associate of the corporation and, together with that person’s affiliates and associates, has owned at any time within the previous three years, at least 15% of the corporation’s outstanding shares), unless prior to the date the person becomes an interested stockholder, the corporation’s board of directors approves either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder or the business combination is approved by the corporation’s board of directors and by the affirmative vote of at least two-thirds of the corporation’s outstanding voting stock that is not owned by the interested stockholder at a meeting of stockholders (and not by written consent) or other specified exceptions are met. The DGCL allows a corporation’s certificate of incorporation to contain a provision expressly electing not to be governed by Section 203, but the Metromile charter has not opted out of Section 203. Although the DGCL permits a Delaware corporation’s certificate of incorporation to provide for a greater vote for a merger, consolidation or sale of substantially all the assets of a corporation than the vote described above, the Metromile charter does not require a greater vote. |
198
NO APPRAISAL RIGHTS
Appraisal rights are statutory rights that, if applicable under law, enable stockholders to dissent from certain mergers or consolidations, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to stockholders in connection with such transaction. Under the DGCL, stockholders generally do not have appraisal rights if the shares of stock they hold are either listed on a national securities exchange or held of record by more than 2,000 holders. Notwithstanding the foregoing, appraisal rights are available if stockholders are required by the terms of the merger agreement to accept for their shares anything other than (a) shares of stock of the surviving corporation, (b) shares of stock of another corporation that will either be listed on a national securities exchange or held of record by more than 2,000 holders, (c) cash in lieu of fractional shares or (d) any combination of the foregoing.
Because Lemonade common stock is listed on the NYSE, a national securities exchange, and because Metromile stockholders are not required by the terms of the merger agreement to accept for their shares of Metromile common stock anything other than shares of Lemonade common stock and cash in lieu of fractional shares, holders of Metromile common stock are not entitled to appraisal rights in connection with the mergers.
199
LEGAL MATTERS
The legality of the shares of Lemonade common stock offered hereby will be passed upon for Lemonade by Latham & Watkins LLP. Certain U.S. federal income tax consequences relating to the mergers will be passed upon for Lemonade by Latham & Watkins LLP and for Metromile by Kirkland & Ellis LLP.
200
EXPERTS
Lemonade
The financial statements and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal Control Over Financial Reporting) incorporated in this proxy statement/prospectus by reference to the Annual Report on Form 10-K for the year ended December 31, 2020 have been so incorporated in reliance on the report of Ernst & Young LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
Metromile
The consolidated financial statements of Metromile, Inc. and its subsidiaries as of December 31, 2020 and 2019 and for the years then ended included in this proxy statement/prospectus have been audited by Moss Adams LLP, an independent registered public accounting firm, as stated in their report, which is included herein. Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
201
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF LEMONADE
The following table sets forth, as of December 10, 20216, the number of shares of Lemonade common stock beneficially owned by: (a) each person who is known to Lemonade to beneficially own 5.0% or more of the outstanding shares of Lemonade common stock; (b) each current member of the Lemonade board of directors; (c) each executive officer of Lemonade; and (d) all current members of the Lemonade board of directors and Lemonade’s executive officers as a group. Unless otherwise noted in the footnotes to the table below, to Lemonade’s knowledge, each beneficial owner has sole voting power and sole investment power, subject to community property laws for individuals that may apply to create shared voting and investment power. Unless indicated in the footnotes below, the address of each beneficial owner listed in the table below is c/o Lemonade, Inc., 5 Crosby Street, 3rd Floor, New York, New York 10013.
Except as otherwise noted in the table below, Lemonade calculated the percentage of shares outstanding based on 61,643,573 shares of Lemonade common stock outstanding on December 10, 2021. In accordance with SEC regulations, Lemonade also includes (a) shares of Lemonade common stock subject to options that are currently exercisable or will become exercisable within 60 days of December 10, 2021, and (b) shares of Lemonade common stock issuable upon settlement of restricted stock units that are vested, or will become vested within 60 days of December 10, 2021. Those shares of Lemonade common stock are deemed to be outstanding and beneficially owned by the person holding such option or restricted stock unit for purposes of computing the percentage ownership of that person, but they are not treated as outstanding for purposes of computing the percentage ownership of any other person.
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Name of Beneficial Owner (>5%) |
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Shares of Lemonade
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Percentage of Total
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5% Stockholders |
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SoftBank Group Capital Ltd.(1) |
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11,983,384 |
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19.5 |
% |
Baillie Gifford & Co (2) |
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3,282,302 |
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5.3 |
% |
Directors and Executive Officers |
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Daniel Schreiber (3) |
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14,683,543 |
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23.9 |
% |
Shai Wininger (4) |
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15,367,043 |
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25.0 |
% |
Tim Bixby (5) |
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362,862 |
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* |
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John Peters (6) |
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168,412 |
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* |
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Jorge Espinel (7) |
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167,500 |
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* |
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Joel Cutler (8) |
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2,075,147 |
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3.4 |
% |
Michael Eisenberg (9) |
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2,878,269 |
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4.7 |
% |
Silvija Martincevic |
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— |
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* |
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Irina Novoselsky |
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— |
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* |
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Mwashuma Nyatta (10) |
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11,983,384 |
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19.5 |
% |
Caryn Seidman-Becker (11) |
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78,125 |
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* |
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All executive officers and directors as a group (11 persons) |
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23,797,517 |
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38.8 |
% |
* |
Less than one percent |
(1) |
Based solely on a Schedule 13G filed on February 12, 2021. Consists of 11,983,384 shares of common stock held by SoftBank Group Capital Ltd. The address for this entity is 69 Grosvenor Street, London, England, United Kingdom W1K 3JP. SoftBank Group Capital Ltd. has delegated all of its voting and dispositive power over the shares it holds to a three-member joint investment committee consisting of Mr. Schreiber, Mr. Wininger and Mr. Nyatta, which shall act by unanimous consent. Each of the members of the joint investment committee disclaims beneficial ownership of such shares. |
(2) |
Based solely on a Schedule 13G filed on January 28, 2021. Baillie Gifford & Co. has sole voting power over 3,205,799 shares and sole dispositive power over 3,282,302 shares of common stock. The shares beneficially owned by Baillie Gifford & Co. are held by Baillie Gifford & Co. and/or one or more of its investment adviser subsidiaries, which may include Baillie Gifford Overseas Limited, on behalf of investment advisory clients, which may include investment companies registered under the Investment Company Act, employee benefit plans, pension funds or other institutional clients. The address for these entities is Calton Square, 1 Greenside Row, Edinburgh EH1 3AN, Scotland UK. |
202
(3) |
Based solely on a Schedule 13G filed on February 16, 2021. Consists of (i) 50,000 shares of common stock, (ii) 2,650,159 shares of common stock held by Dan and Dan Ltd. and (iii) 11,983,384 shares of common stock held by SoftBank Group Capital Ltd.. Mr. Schreiber is the Chief Executive Officer of Dan and Dan Ltd. and has the sole power to vote or dispose of the shares of the common stock held by Dan and Dan Ltd. Mr. Schreiber is a member, together with Mr. Wininger and Mr. Nyatta, of a joint investment committee, which shall act by unanimous consent, having sole voting and dispositive control over the shares of common stock held by SoftBank Group Capital Ltd. Each of the members of the joint investment committee disclaims beneficial ownership of such shares. |
(4) |
Based solely on a Schedule 13G filed on February 16, 2021. Consists of (i) 3,383,659 shares of common stock and (ii) 11,983,384 shares of common stock held by SoftBank Group Capital Ltd. Mr. Wininger is a member, together with Mr. Schreiber and Mr. Nyatta, of a joint investment committee, which shall act by unanimous consent, having sole voting and dispositive control over the shares of common stock held by SoftBank Group Capital Ltd. Each of the members of the joint investment committee disclaims beneficial ownership of such shares. |
(5) |
Consists of (i) 230,000 shares of common stock and (ii) 132,862 shares of common stock subject to options held by Mr. Bixby that are exercisable within 60 days of December 10, 2021. |
(6) |
Consists of (i) 11,537 shares of common stock and (ii) 156,875 shares of common stock subject to options held by Mr. Peters that are exercisable within 60 days of December 10, 2021. |
(7) |
Consists of 167,500 shares of common stock subject to options held by Mr. Espinel that are exercisable within 60 days of December 10, 2021. |
(8) |
Consists of (i) 1,440 shares of common stock held by Joel E. Cutler Family 2012 GST Trust (the “Cutler Trust”), (ii) 11,428 shares of common stock held by Mr. Cutler, (iii) 955,322 shares of common stock held by General Catalyst Group VIII, L.P. ("GC Group VIII"), and (iv) 1,106,957 shares of common stock held by General Catalyst Group VIII, Supplemental, L.P. ("GC Group VIII Supplemental"). Mr. Cutler’s spouse is a trustee of the Cutler Trust. Mr. Cutler disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. General Catalyst GP VIII, LLC ("GC VIII LLC") is the general partner of General Catalyst Partners VIII, L.P., which is the general partner of GC Group VIII and GC Group VIII Supplemental. General Catalyst Group Management, LLC ("GCGM") is the manager of GC VIII LLC. General Catalyst Group Management Holdings, L.P. ("GCGMH") is the manager of GCGM. General Catalyst Group Management Holdings GP, LLC ("GCGMH LLC") is the general partner of GCGMH. Mr. Cutler is a managing director of GCGMH LLC and shares voting and investment power over the shares held by GC Group VIII and GC Group VIII Supplemental. However, Mr. Cutler disclaims beneficial ownership over such shares except to the extent of his pecuniary interest therein. |
(9) |
Consists of (i) 2,534,375 shares of common stock held through Aleph, L.P., (ii) 252,185 shares of common stock held through Aleph-Aleph, L.P., and (iii) 91,709 shares of common stock held by Mr. Eisenberg. Aleph Equity Partners, L.P. is the general partner of Aleph, L.P. and Aleph-Aleph, L.P., and Aleph EP, Ltd is the general partner of the Aleph Equity Partners, L.P., Aleph Equity Partners, L.P. and Aleph EP, Ltd may be deemed to have sole power to vote and dispose of the shares held through Aleph, L.P. and Aleph-Aleph, L.P. Mr. Eisenberg is a director of Aleph EP, Ltd. and may be deemed to have shared power to vote and dispose of the shares held by each of these entities. |
(10) |
Based solely on a Schedule 13G filed on February 12, 2021. Consists of 11,983,384 shares of common stock held by SoftBank Group Capital Ltd. Mr. Nyatta is a member, together with Mr.Schreiber and Mr Wininger, of the joint investment committee, which shall act by unanimous consent, having sole voting and dispositive control over the common stock held by SoftBank Group Capital Ltd. Each of the members of the joint investment committee disclaims beneficial ownership of such shares, except for Mr. Nyatta to the extent of his pecuniary interest therein. Mr. Nyatta's address is c/o Softbank Group Capital Ltd., 1 Circle Star Way, San Carlos, California 94070. |
(11) |
Consists of 78,125 shares of common stock subject to options held by Ms. Seidman-Becker that are exercisable within 60 days of December 10, 2021. |
(12) |
Consists of (i) 23,262,155 shares of common stock and (ii) 535,362 shares of common stock subject to options held by all our current directors and executive officers as a group that are exercisable within 60 days of December 10, 2021. |
203
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF METROMILE
The following table sets forth, as of December 10, 2021, the number of shares of Metromile common stock beneficially owned by: (a) each person who is known to Metromile to beneficially own 5.0% or more of the outstanding shares of Metromile common stock; (b) each current member of the Metromile board of directors; (c) each executive officer of Metromile; and (d) all current members of the Metromile board of directors and Metromile’s executive officers as a group. Unless otherwise noted in the footnotes to the table below, to Metromile’s knowledge, each beneficial owner has sole voting power and sole investment power, subject to community property laws for individuals that may apply to create shared voting and investment power. Unless indicated in the footnotes below, the address of each beneficial owner listed in the table below is c/o Metromile, Inc., 425 Market Street, Suite 700, San Francisco, California, 94105.
Except as otherwise noted in the table below, Metromile calculated the percentage of shares outstanding based on 128,221,885 shares of Metromile common stock outstanding on December 10, 2021. In accordance with SEC regulations, Metromile also includes (a) shares of Metromile common stock subject to options that are currently exercisable or will become exercisable within 60 days of December 10, 2021, and (b) shares of Metromile common stock issuable upon settlement of Metromile RSU awards that are vested, or will become vested within 60 days of December 10, 2021. Those shares of Metromile common stock are deemed to be outstanding and beneficially owned by the person holding such option or restricted stock unit for purposes of computing the percentage ownership of that person, but they are not treated as outstanding for purposes of computing the percentage ownership of any other person.
|
|
|
|
|
|
Name of Beneficial Owner (>5%) (1) |
|
Shares of
|
|
Percentage of Total
|
|
5% Stockholders |
|
|
|
|
|
China Pacific Property Insurance Co. Ltd.(2) |
|
13,694,416 |
|
10.6 |
% |
New Enterprise Associates 13, L.P.(3) |
|
10,451,259 |
|
8.1 |
% |
Miller Value Partners, LLC (4) |
|
8,003,265 |
|
6.2 |
% |
The Vanguard Group, Inc.(5) |
|
7,568,668 |
|
5.9 |
% |
Entities Affiliated with Hudson Structured Capital Management Ltd.(6) |
|
7,666,839 |
|
6.0 |
% |
Entities Affiliated with Index Ventures (7) |
|
7,201,738 |
|
5.6 |
% |
Magnetar Financial LLC (8) |
|
6,802,234 |
|
5.3 |
% |
Directors and Executive Officers |
|
|
|
|
|
David Friedberg (9) |
|
4,190,978 |
|
3.2 |
% |
Dan Preston (10) |
|
2,225,603 |
|
1.7 |
% |
Paw Andersen (11) |
|
516,432 |
|
* |
|
Colin Bryant |
|
- |
|
- |
|
Vikas Singhal (6) |
|
7,666,839 |
|
6.0 |
% |
Ryan Graves (12) |
|
3,551,267 |
|
2.8 |
% |
Sandra Clarke |
|
- |
|
- |
|
John Butler |
|
117,500 |
|
* |
|
Mark Gundacker (13) |
|
116,975 |
|
* |
|
Directors and Executive Officers as a Group (12 in total) (14) |
|
18,877,706 |
|
14.3 |
% |
* |
Less than one percent (1%) |
(1) |
Unless otherwise noted, the business address of each of the following stockholders is c/o Metromile, Inc., 425 Market Street, Suite 700, San Francisco, CA 94105. |
(2) |
Consists of 12,321,301 shares of Metromile common stock and 1,373,115 Metromile Additional Shares directly held by China Pacific Property Insurance Co. Ltd. (“CPIC”). The business address for CPIC is 190 Middle Yincheng Road, Pudong New District, Shanghai, China. |
(3) |
Consists of 9,384,285 shares of Metromile common stock and 1,068,931 Metromile Additional Shares directly held by New Enterprise Associates 13, L.P. (“NEA 13”), and indirectly held by NEA Partners 13 LP (“NEA Partners 13”), the sole general partner of NEA 13, and NEA 13 GP LTD (“NEA 13 LTD”), is the sole general partner of NEA Partners 13. The individual directors of NEA 13 LTD (the “NEA 13 Directors”), are Forest Baskett, Patrick J. Kerins and Scott Sandell. The principal business address |
204
for all entities and individuals affiliated with NEA 13 is New Enterprise Associates, 1954 Greenspring Drive, Suite 600, Timonium, MD 21093. Each NEA 13 Director disclaims beneficial ownership of such shares except to the extent of a pecuniary interest therein.
(4) |
Consists of 8,003,265 shares of Metromile common stock. The business address for Miller Value Partners, LLC is 1 South St. #2550, Baltimore, MD 21202. |
(5) |
Consists of 7,568,668 shares of Metromile common stock. The business address for Vanguard Group is 100 Vanguard Blvd, Malvern, PA 19355. |
(6) |
Consists of (i) 4,303,647 shares of Metromile common stock and 288,237 Metromile Additional Shares held by HSCM Bermuda Fund LTD (“Bermuda”); (ii) 2,963,220 shares of Metromile common stock and 104,823 Metromile Additional Shares held by HS Santanoni LP (“Santanoni”); and (iii) 6,170 shares of Metromile common stock and 742 Metromile Additional Shares held by HSCM FI Master Fund Ltd (“FI Master Fund”). Each of Bermuda, Santanoni and FI Master Fund is advised by Hudson Structured Capital Management Ltd., an investment adviser registered with the U.S. Securities & Exchange Commission under the Investment Advisers Act of 1940 (“HSCM”). Vikas Singhal and Michael Millette are each partners of HSCM and as such have voting and dispositive power over the securities held by Bermuda, Santanoni and FI Master Fund. The business address of each reporting person is 2187 Atlantic Street, Fourth Floor, Stamford, CT 06902. |
(7) |
Consists of 7,143,870 shares of Metromile common stock and 859,529 Metromile Additional Shares directly held by Index Ventures V (Jersey), L.P. (“IV Jersey”), (b) 57,868 shares of Metromile common stock and 6,963 Metromile Additional Shares held by Index Ventures V Parallel Entrepreneur Fund (Jersey), L.P. (“IV Parallel”), collectively with IV Jersey referred to as Index V Funds, and (c) 91,156 shares of Metromile common stock and 10,968 Metromile Additional Shares held by Yucca (Jersey) SLP (“Yucca”). Index Venture Associates V Limited (“IVA”), is the general partner of each of the Index V Funds and may be deemed to have voting and dispositive power over the shares held by those funds. Yucca is the administrator of the Index co-investment vehicles that are contractually required to mirror the relevant Index V Funds’ investment, and IVA may be deemed to have voting and dispositive power over the allocation of shares held by Yucca. David Hall, Phil Balderson, Sarah Earles and Sinéad Meehan are the members of the board of directors of IVA, and investment and voting decisions with respect to the shares over which IVA may be deemed to have voting and dispositive power are made by such directors collectively. The address of each of these entities is 44 Esplanade, St Helier, Jersey JE4 9WG, Channel Islands. |
(8) |
Consists of 6,802,234 shares of Metromile common stock held, as of December 10, 2021, by Magnetar Financial LLC, a Delaware limited liability company (“Magnetar Financial”), Magnetar Capital Partners LP, a Delaware limited partnership (“Magnetar Capital Partners”), Supernova Management LLC, a Delaware limited liability company (“Supernova Management”), and Alec N. Litowitz (“Mr. Litowitz”). Based solely on a Schedule 13D filed with the SEC on December 13, 2021. The business address of each report person is 1603 Orrington Avenue, 13th Floor, Evanston, Illinois 60201. |
(9) |
Consists of (i) 451,197 shares of Metromile common stock and 92,187 Metromile Additional Shares held by The Friedberg Irrevocable Remainder Trust u/a/d 5/17/2017, of which Mr. Friedberg is the trustee, (ii) 566,054 shares of Metromile common stock and 119,240 Metromile Additional Shares held by The David Friedberg 2019 Annuity Trust u/a/d 9/26/19, of which Mr. Friedberg is the trustee, (iii) 2,355,764 shares of Metromile common stock and 490,745 Metromile Additional Shares held by The David Friedberg Revocable Trust u/a/d 9/19/13, of which Mr. Friedberg is the trustee and (iv) 150,000 vested Metromile RSU awards. |
(10) |
Consists of (i) 1,168,780 shares of Metromile common stock, including 1,505 shares of Metromile common stock held in Mr. Preston’s 401(k) account, (ii) 858,130 vested Metromile RSU awards and (iii) 198,693 Metromile Additional Shares. |
(11) |
Consists of (i) 175,383 vested Metromile RSU awards (ii) 15,252 Metromile Additional Shares and (iii) 325,797 shares of Metromile common stock issuable to Mr. Andersen pursuant to options that are early exercisable, but subject to repurchase right until vested, within 60 days of December 10, 2021. |
(12) |
Consists of (i) 2,800,033 shares of Metromile common stock and 333,438 Metromile Additional Shares held by Saltwater Capital (“Saltwater”), and (ii) 373,338 shares of Metromile common stock and 44,458 Metromile Additional Shares held by The Graves Irrevocable Remainder Trust (“Graves Irrevocable Trust”). Ryan Graves has or may be deemed to have voting and dispositive power over the securities held by Saltwater and Graves Irrevocable Trust. The business address of each reporting person is 1127 High Ridge Rd #132 Stamford, CT 06905. |
205
(13) |
Mr. Gundacker resigned from his positions as Chief People Officer and Chief of Staff effective October 29, 2021. Consists of (i) 31,483 vested Metromile RSU awards, (ii) 2,904 Metromile Additional Shares, (iii) 81,510 shares of Metromile common stock issuable to Mr. Gundacker pursuant to options that are early exercisable, but subject to repurchase right until vested, within 60 days of December 10, 2021, and (iv) 1,078 shares of Metromile common stock held in Mr. Gundacker’s 401(k) account. |
(14) |
Consists of 18,877,696 shares of Metromile common stock beneficially owned by directors and executive officers, of which 3,652,487 is or may become issuable to directors and executive officers within 60 days of December 10, 2021, including Metromile Additional Shares. |
STOCKHOLDER PROPOSALS
Metromile will hold an annual meeting of stockholders in 2022 (the “Metromile 2022 annual meeting)” only if the mergers have not already been completed.
Any stockholder proposals intended to be presented at the Metromile 2022 annual meeting and considered for inclusion in Metromile’s proxy materials must have been received by Metromile by a reasonable time before Metromile begins to print and send its proxy materials. Such proposals must be submitted in writing to: Metromile, Inc., Attn: Corporate Secretary, 425 Market Street, Suite 700, San Francisco, California, 94105. Such proposals must also meet the other requirements and procedures prescribed by Rule 14a-8 under the Exchange Act relating to stockholder proposals.
In addition, in accordance with the Metromile bylaws, any stockholder entitled to vote at the Metromile 2022 annual meeting may propose business (other than proposals to be included in Metromile’s proxy materials as discussed in the preceding paragraph) to be included on the agenda of, and properly presented for action at, the Metromile 2022 annual meeting and/or nominate persons to serve on the Metromile board of directors at the Metromile 2022 annual meeting only if written notice of such stockholder’s intent is given in accordance with the requirements the Metromile bylaws. Since Metromile expects the Metromile 2022 annual meeting, if held, will be more than 30 days after the anniversary of the Metromile 2021 annual meeting of stockholders, such stockholder notice will be timely if it is delivered in writing at the address shown above not earlier than the close of business on the 120th day prior to the date of the Metromile 2022 annual meeting and not later than the close of business on the later of the 90th day prior to the Metromile 2022 annual meeting, or the 10th day following the day on which public announcement of the date of such meeting is first made by Metromile.
206
HOUSEHOLDING OF PROXY MATERIALS
SEC rules permit companies and intermediaries such as brokers to satisfy delivery requirements for proxy statements and notices with respect to two or more stockholders sharing the same address by delivering a single proxy statement or a single notice addressed to those stockholders. This “householding” rule provides greater convenience for Metromile’s stockholders and cost savings for Metromile by reducing the number of duplicate documents that households receive. Also, this allows Metromile to be more environmentally friendly by reducing the unnecessary use of materials. Metromile stockholders with the same address and last name may receive only one copy of this proxy statement /prospectus. Please note that each Metromile stockholder will receive a separate proxy card, which will allow each Metromile stockholder to vote independently. Registered Metromile stockholders (those who hold shares of Metromile common stock directly in their name with Metromile’s transfer agent) may opt out of householding and receive a separate proxy statement/prospectus or other proxy materials by sending a written request to Metromile at the address below.
Some brokers also household proxy materials, delivering a single proxy statement or notice to multiple Metromile stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be householding materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate proxy statement or notice, or if your household is receiving multiple copies of these documents and you wish to request that future deliveries be limited to a single copy, please notify your broker.
Requests for additional copies of this proxy statement/prospectus should be directed to: Metromile, Inc., Attn: Corporate Secretary, 425 Market Street, Suite 700, San Francisco, California 94105 or by calling Metromile Investor Relations at (888) 242-5204.
207
WHERE YOU CAN FIND MORE INFORMATION
Lemonade and Metromile file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including both Lemonade and Metromile, which you can access at www.sec.gov. In addition, you may obtain free copies of the documents Lemonade and Metromile file with the SEC, including the registration statement on Form S-4 of which this proxy statement/prospectus forms a part, by going to Lemonade’s and Metromile’s websites at www.lemonade.com and www.metromile.com, respectively. The websites of Lemonade and Metromile are provided as inactive textual references only. The information contained on or accessible through the websites of Lemonade and Metromile (other than the documents listed below that are incorporated by reference herein) does not constitute a part of this proxy statement/prospectus, and is not incorporated by reference herein.
Statements contained or incorporated by reference in this proxy statement/prospectus regarding the contents of any contract or other document are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of that contract or other document filed as an exhibit with the SEC. The SEC allows Lemonade to “incorporate by reference” in this proxy statement/prospectus documents that it files with the SEC, including certain information required to be included in the registration statement on Form S-4 of which this proxy statement/prospectus forms a part. This means that Lemonade can disclose important information to you by referring you to those documents. The information incorporated by reference herein is considered to be a part of this proxy statement/prospectus, and later information that Lemonade files with the SEC will update and supersede that information. Lemonade incorporates by reference the following documents and any documents subsequently filed by it pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and before the date of the Metromile special meeting (other than, in each case, those documents, or the portions of those documents or exhibits thereto, deemed to be furnished and not filed in accordance with SEC rules). These documents contain important information about Lemonade’s businesses and financial performance.
Lemonade (SEC File No. 001-39367)
● | Lemonade’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 8, 2021; |
● | the information specifically incorporated by reference in Lemonade’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 from Lemonade’s definitive proxy statement on Schedule 14A for Lemonade’s 2020 annual meeting of stockholders, filed with the SEC on April 30, 2021; |
● | Lemonade’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2021, June 30, 2021 and September 30, 2021 filed with the SEC on May 12, 2021, August 11, 2021 and November 9, 2021, respectively; |
● | Lemonade’s Current Reports on Form 8-K (excluding any information and exhibits furnished under Item 2.02 or 7.01 thereof) filed with the SEC on April 26, 2021, June 14, 2021, July 26, 2021 and November 9, 2021; and |
● | any description of shares of Lemonade common stock contained in a registration statement filed pursuant to the Exchange Act and any amendment or report filed for the purpose of updating such description. |
If you are a Lemonade stockholder, you may request a copy of this proxy statement/prospectus, any of the documents incorporated by reference in this proxy statement/prospectus or other information concerning Lemonade, without charge, through the SEC’s website at www.sec.gov or by written or telephonic request to:
Lemonade, Inc.
Investor Relations
5 Crosby Street, 3rd Floor
New York, New York 10013
(844) 733-8666
If you are a Metromile stockholder, you may request a copy of this proxy statement/prospectus, any of the documents incorporated by reference to this proxy statement/prospectus or other information concerning Metromile, without charge, through the SEC’s website at www.sec.gov or by written or telephonic request to:
Metromile, Inc.
Attn: Corporate Secretary
208
425 Market Street, Suite 700
San Francisco, California 94105
(888) 242-5204
209
TRADEMARK NOTICE
This proxy statement/prospectus includes the trademarks, trade names and service marks of Lemonade and its subsidiaries and Metromile and its subsidiaries, which are protected under applicable intellectual property laws and are the property of either Lemonade or Metromile, as applicable.
This proxy statement/prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners.
Solely for convenience, trademarks, trade names and service marks referred to in this proxy statement/prospectus may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that Lemonade, Metromile or the applicable owner will not assert, to the fullest extent permitted under applicable law, its respective rights or the right of any applicable licensor to these trademarks, trade names and service marks.
Neither Lemonade nor Metromile intend the use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of Lemonade or Metromile by, these other parties.
Trademarks, trade names and service marks of Metromile include, without limitation, the following marks and phrases: AVA, M, Metromile, Metromile Pulse and Metromile Tag.
211
INDEX TO FINANCIAL STATEMENTS
Financial Statements Table of Contents
|
|
LEMONADE, INC. |
|
F-2 |
|
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 |
F-3 |
F-4 |
|
F-5 |
|
F-7 |
|
Notes to Unaudited Condensed Consolidated Financial Statements |
F-8 |
Consolidated Balance Sheets as of December 31, 2020 and 2019 |
F-22 |
F-23 |
|
F-24 |
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 |
F-26 |
F-27 |
|
METROMILE, INC. |
|
F-Error! Bookmark not defined. |
|
Unaudited Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 |
|
Unaudited Consolidated Statement of Operations for the Three Months Ended September 30, 2021, 2020 and Nine Months Ended September 30, 2021, 2020 |
|
Unaudited Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2021, 2020 and Nine Months Ended September 30, 2021, 2020 |
|
Unaudited Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit) Equity |
|
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 |
|
Notes to Unaudited Condensed Consolidated Financial Statements |
|
Consolidated Balance Sheets as of December 31, 2020 and 2019 |
F-84 |
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 |
F-85 |
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019 |
F-86 |
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit |
F-87 |
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 |
F-88 |
F-89 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Lemonade, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lemonade, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP |
|
|
|
We have served as the Company’s auditor since 2015. |
|
|
|
New York, New York |
|
|
|
March 8, 2021 |
|
F-2
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
September 30, |
|
December 31, |
||
|
|
2021 |
|
2020 |
||
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Fixed maturities available-for-sale, at fair value (amortized cost: $698.6 million and $6.4 million as of September 30, 2021 and December 31, 2020) |
|
$ |
697.6 |
|
$ |
6.6 |
Short-term investments (cost: $107.5 million) |
|
|
107.5 |
|
|
— |
Total investments |
|
|
805.1 |
|
|
6.6 |
Cash, cash equivalents and restricted cash |
|
|
319.6 |
|
|
571.4 |
Premium receivable, net of allowance for doubtful accounts of $1.0 million and $0.5 million as of September 30, 2021 and December 31, 2020 |
|
|
129.2 |
|
|
86.1 |
Reinsurance recoverable |
|
|
70.8 |
|
|
49.0 |
Prepaid reinsurance premium |
|
|
150.2 |
|
|
91.3 |
Deferred acquisition costs |
|
|
6.0 |
|
|
3.5 |
Property and equipment, net |
|
|
10.8 |
|
|
5.7 |
Intangible assets |
|
|
0.6 |
|
|
0.6 |
Other assets |
|
|
29.4 |
|
|
14.5 |
Total assets |
|
$ |
1,521.7 |
|
$ |
828.7 |
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
Unpaid loss and loss adjustment expense |
|
$ |
74.0 |
|
$ |
46.3 |
Unearned premium |
|
|
203.2 |
|
|
123.8 |
Trade payables |
|
|
3.0 |
|
|
1.4 |
Funds held for reinsurance treaties |
|
|
97.1 |
|
|
62.1 |
Deferred ceding commission |
|
|
36.1 |
|
|
22.4 |
Ceded premium payable |
|
|
24.8 |
|
|
13.0 |
Other liabilities and accrued expenses |
|
|
35.5 |
|
|
18.7 |
Total liabilities |
|
|
473.7 |
|
|
287.7 |
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
Common stock, $0.00001 par value, 200,000,000 shares authorized; 61,615,624 and 56,774,294 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively |
|
|
— |
|
|
— |
Additional paid-in capital |
|
|
1,539.5 |
|
|
859.8 |
Accumulated deficit |
|
|
(491.6) |
|
|
(320.6) |
Accumulated other comprehensive income |
|
|
0.1 |
|
|
1.8 |
Total stockholders' equity |
|
|
1,048.0 |
|
|
541.0 |
Total liabilities and stockholders' equity |
|
$ |
1,521.7 |
|
$ |
828.7 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
F-3
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
($ in millions, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
$ |
21.5 |
|
$ |
10.5 |
|
$ |
51.6 |
|
$ |
65.0 |
Ceding commission income |
|
|
12.3 |
|
|
7.0 |
|
|
31.9 |
|
|
7.4 |
Net investment income |
|
|
0.6 |
|
|
0.2 |
|
|
1.0 |
|
|
1.3 |
Commission and other income |
|
|
1.3 |
|
|
0.1 |
|
|
2.9 |
|
|
0.2 |
Total revenue |
|
|
35.7 |
|
|
17.8 |
|
|
87.4 |
|
|
73.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
17.5 |
|
|
6.7 |
|
|
47.0 |
|
|
45.4 |
Other insurance expense |
|
|
6.3 |
|
|
3.5 |
|
|
16.3 |
|
|
10.8 |
Sales and marketing |
|
|
42.2 |
|
|
22.2 |
|
|
104.4 |
|
|
57.5 |
Technology development |
|
|
14.3 |
|
|
5.3 |
|
|
35.4 |
|
|
13.0 |
General and administrative |
|
|
19.6 |
|
|
10.6 |
|
|
49.5 |
|
|
34.6 |
Total expense |
|
|
99.9 |
|
|
48.3 |
|
|
252.6 |
|
|
161.3 |
Loss before income taxes |
|
|
(64.2) |
|
|
(30.5) |
|
|
(165.2) |
|
|
(87.4) |
Income tax expense |
|
|
2.2 |
|
|
0.4 |
|
|
5.8 |
|
|
1.0 |
Net loss |
|
$ |
(66.4) |
|
$ |
(30.9) |
|
$ |
(171.0) |
|
$ |
(88.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investments |
|
|
(0.8) |
|
|
0.4 |
|
|
(1.2) |
|
|
0.6 |
Foreign currency translation adjustment |
|
|
— |
|
|
— |
|
|
(0.5) |
|
|
— |
Comprehensive loss |
|
$ |
(67.2) |
|
$ |
(30.5) |
|
$ |
(172.7) |
|
$ |
(87.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders —basic and diluted |
|
$ |
(1.08) |
|
$ |
(0.57) |
|
$ |
(2.80) |
|
$ |
(3.41) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic and diluted |
|
|
61,580,145 |
|
|
53,997,315 |
|
|
61,086,238 |
|
|
25,935,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
F-4
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
($ in millions, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock |
|
|
Common Stock |
|
Additional Paid-In |
|
|
|
|
Accumulated Other |
|
Total Stockholders' |
|||||||||
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
Capital |
|
Accumulated Deficit |
|
Comprehensive Income |
|
Equity (Deficit) |
||||||
Balance as of December 31, 2020 |
|
— |
|
$ |
— |
|
|
56,774,294 |
|
$ |
— |
|
$ |
859.8 |
|
$ |
(320.6) |
|
$ |
1.8 |
|
|
541.0 |
Issuance of common stock upon closing of Follow-on Offering, net of underwriting discounts and commissions and offering costs of $22.8 million |
|
— |
|
|
— |
|
|
4,018,647 |
|
|
— |
|
|
640.3 |
|
|
— |
|
|
— |
|
|
640.3 |
Exercise of stock options |
|
— |
|
|
— |
|
|
577,162 |
|
|
— |
|
|
6.1 |
|
|
— |
|
|
— |
|
|
6.1 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6.1 |
|
|
— |
|
|
— |
|
|
6.1 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(49.0) |
|
|
— |
|
|
(49.0) |
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.8) |
|
|
(0.8) |
Balance as of March 31, 2021 |
|
— |
|
$ |
— |
|
|
61,370,103 |
|
$ |
— |
|
$ |
1,512.3 |
|
$ |
(369.6) |
|
$ |
1.0 |
|
$ |
1,143.7 |
Exercise of stock options |
|
— |
|
|
— |
|
|
162,024 |
|
|
— |
|
|
1.7 |
|
|
— |
|
|
— |
|
|
1.7 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
11.9 |
|
|
— |
|
|
— |
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(55.6) |
|
|
— |
|
|
(55.6) |
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
(0.1) |
Balance as of June 30, 2021 |
|
— |
|
$ |
— |
|
|
61,532,127 |
|
$ |
— |
|
$ |
1,525.9 |
|
$ |
(425.2) |
|
$ |
0.9 |
|
$ |
1,101.6 |
Exercise of stock options and distribution of restricted stock units |
|
— |
|
|
— |
|
|
83,497 |
|
|
— |
|
|
0.9 |
|
|
— |
|
|
— |
|
|
0.9 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
12.7 |
|
|
— |
|
|
— |
|
|
12.7 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(66.4) |
|
|
— |
|
|
(66.4) |
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.8) |
|
|
(0.8) |
Balance as of September 30, 2021 |
|
— |
|
$ |
— |
|
|
61,615,624 |
|
$ |
— |
|
$ |
1,539.5 |
|
$ |
(491.6) |
|
$ |
0.1 |
|
$ |
1,048.0 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
F-5
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
($ in millions, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock |
|
|
Common Stock |
|
Additional |
|
|
|
|
Accumulated Other |
|
Total Stockholders' |
|||||||||
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
Paid-In Capital |
|
Accumulated Deficit |
|
Comprehensive Income |
|
Equity (Deficit) |
||||||
Balance as of December 31, 2019 |
|
31,557,107 |
|
$ |
480.2 |
|
|
11,271,228 |
|
$ |
— |
|
$ |
15.7 |
|
$ |
(198.3) |
|
$ |
0.1 |
|
$ |
(182.5) |
Exercise of stock options |
|
— |
|
|
— |
|
|
54,374 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.2 |
|
|
— |
|
|
— |
|
|
2.2 |
Contribution to the Lemonade Foundation |
|
— |
|
|
— |
|
|
500,000 |
|
|
— |
|
|
12.2 |
|
|
— |
|
|
— |
|
|
12.2 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(36.5) |
|
|
— |
|
|
(36.5) |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Balance as of March 31, 2020 |
|
31,557,107 |
|
$ |
480.2 |
|
|
11,825,602 |
|
$ |
— |
|
$ |
30.1 |
|
$ |
(234.8) |
|
$ |
0.1 |
|
$ |
(204.6) |
Exercise of stock options |
|
— |
|
|
— |
|
|
30,562 |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
0.1 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.4 |
|
|
— |
|
|
— |
|
|
2.4 |
Release of shares upon repayment |
|
— |
|
|
— |
|
|
513,537 |
|
|
— |
|
|
1.3 |
|
|
— |
|
|
— |
|
|
1.3 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(21.0) |
|
|
— |
|
|
(21.0) |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.2 |
|
|
0.2 |
Balance as of June 30, 2020 |
|
31,557,107 |
|
$ |
480.2 |
|
|
12,369,701 |
|
$ |
— |
|
$ |
33.9 |
|
$ |
(255.8) |
|
$ |
0.3 |
|
$ |
(221.6) |
Conversion of convertible preferred stock to common stock upon closing of Initial Public Offering (IPO) |
|
(31,557,107) |
|
|
(480.2) |
|
|
31,557,107 |
|
|
— |
|
|
480.2 |
|
|
— |
|
|
— |
|
|
480.2 |
Issuance of common stock upon closing of IPO, net of issuance costs and underwriting fees of $28.9 million |
|
— |
|
|
— |
|
|
12,650,000 |
|
|
— |
|
|
338.0 |
|
|
— |
|
|
— |
|
|
338.0 |
Exercise of stock options |
|
— |
|
|
— |
|
|
7,221 |
|
|
— |
|
|
0.2 |
|
|
— |
|
|
— |
|
|
0.2 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.7 |
|
|
— |
|
|
— |
|
|
2.7 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(30.9) |
|
|
— |
|
|
(30.9) |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.4 |
|
|
0.4 |
Balance as of September 30, 2020 |
|
— |
|
$ |
— |
|
|
56,584,029 |
|
$ |
— |
|
$ |
855.0 |
|
$ |
(286.7) |
|
$ |
0.7 |
|
$ |
569.0 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
F-6
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2021 |
|
2020 |
||
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ |
(171.0) |
|
$ |
(88.4) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
Depreciation |
|
|
2.5 |
|
|
1.1 |
Stock-based compensation |
|
|
30.7 |
|
|
7.3 |
Amortization of discount on bonds |
|
|
(1.5) |
|
|
(0.4) |
Provision for bad debts |
|
|
3.8 |
|
|
1.4 |
|
|
|
|
|
|
|
Common shares contribution to the Lemonade Foundation |
|
|
— |
|
|
12.2 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Premium receivable |
|
|
(46.9) |
|
|
(30.1) |
Reinsurance recoverable |
|
|
(21.8) |
|
|
(21.9) |
Prepaid reinsurance premium |
|
|
(58.9) |
|
|
(85.2) |
Deferred acquisition costs |
|
|
(2.5) |
|
|
(1.5) |
Other assets |
|
|
(15.0) |
|
|
(11.4) |
Unpaid loss and loss adjustment expense |
|
|
27.7 |
|
|
11.5 |
Unearned premium |
|
|
79.4 |
|
|
47.3 |
Trade payables |
|
|
1.6 |
|
|
0.3 |
Funds held for reinsurance treaties |
|
|
35.0 |
|
|
52.4 |
Deferred ceding commissions |
|
|
13.7 |
|
|
20.9 |
Ceded premium payable |
|
|
11.8 |
|
|
14.0 |
Other liabilities and accrued expenses |
|
|
16.7 |
|
|
(0.5) |
Net cash used in operating activities |
|
|
(94.7) |
|
|
(71.0) |
Cash flows from investing activities: |
|
|
|
|
|
|
Proceeds from short-term investments sold or matured |
|
|
— |
|
|
55.0 |
Proceeds from bonds sold or matured |
|
|
7.9 |
|
|
2.2 |
Cost of short-term investments acquired |
|
|
(107.5) |
|
|
(14.9) |
Cost of bonds acquired |
|
|
(700.1) |
|
|
(2.9) |
Purchases of property and equipment |
|
|
(7.4) |
|
|
(3.1) |
Net cash (used in) provided by investing activities |
|
|
(807.1) |
|
|
36.3 |
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from Initial Public Offering and Follow-on Offering, net of underwriting discounts and commissions and offering costs |
|
|
640.3 |
|
|
338.0 |
Proceeds from release of shares upon repayment |
|
|
— |
|
|
1.3 |
Proceeds from stock exercises |
|
|
8.7 |
|
|
0.3 |
Net cash provided by financing activities |
|
|
649.0 |
|
|
339.6 |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
1.0 |
|
|
0.5 |
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
(251.8) |
|
|
305.4 |
Cash, cash equivalents and restricted cash at beginning of period |
|
|
571.4 |
|
|
270.3 |
Cash, cash equivalents and restricted cash at end of period |
|
$ |
319.6 |
|
$ |
575.7 |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
2.1 |
|
$ |
1.1 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
F-7
LEMONADE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
Lemonade, Inc. is a public benefit corporation organized under Delaware law on June 17, 2015. It provides certain personnel, facilities and services to each of its subsidiaries (together with Lemonade, Inc., the “Company”), all of which are 100% owned, directly or indirectly, by Lemonade, Inc. For the list of the Company’s US and EU subsidiaries, see Note 1 - Nature of the Business, of the audited consolidated financial statements and related notes thereto for the year ended December 31, 2020 as contained in the Company’s Annual Report on Form 10-K for the year ending December 31, 2020 (the "Annual Report on Form 10-K") for more complete descriptions and discussions.
2. Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated upon consolidation. All foreign currency amounts in the condensed consolidated statement of operations and comprehensive loss have been translated using an average rate for the reporting period. All foreign currency balances in the balance sheet have been translated using the spot rate at the end of the reporting period. All figures expressed, except share amounts, are in U.S. dollars in millions.
Risk and Uncertainties
The global pandemic resulting from the disease known as COVID-19, caused by a novel strain of coronavirus, SARS-CoV-2, has caused national and global economic and financial market disruptions and may adversely impact our business. Although the Company did not see a material impact on its results of operations for the three and nine months ended September 30, 2021 due to the COVID-19 pandemic, the Company cannot predict the duration or magnitude of the pandemic or the full impact that it may have on the Company’s financial condition and results of operations, business operations, and workforce.
Unaudited interim financial information
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of its financial position and its results of operations, changes in stockholders’ equity (deficit) and cash flows. The condensed consolidated balance sheet at December 31, 2020, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2020 contained in the Company’s Annual Report on Form 10-K.
3. Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates estimates, including those related to contingent assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities at the dates of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, reinsurance recoverables on unpaid losses, valuation allowance on deferred tax assets and valuation on stock-based compensation prior to the Company’s Initial Public Offering (the “IPO”).
F-8
4. Summary of Significant Accounting Policies
Cash, cash equivalents and restricted cash
The following represents the Company’s cash, cash equivalents and restricted cash as of September 30, 2021 and December 31, 2020 ($ in millions):
Cash and cash equivalents consist primarily of bank deposits and money market accounts with maturities of three months or less at the date of acquisition and are stated at cost, which approximates fair value. The Company’s restricted cash relates to security deposits for office leases in Israel. The carrying value of restricted cash approximates fair value.
Deferred offering costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction to the carrying value of stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of such offering. In connection with the IPO, the Company incurred total offering costs of $32.4 million, of which $28.9 million was recorded as a reduction to gross proceeds, and $3.5 million was recognized as a component of general and administrative expense in 2019. On January 14, 2021, the Company completed a Follow-on Offering of common stock, as defined and discussed in detail in Note 9, which generated net proceeds of $525.7 million, after deducting underwriting discounts and offering costs. On February 1, 2021, the underwriters exercised their option to purchase additional shares, and generated additional net proceeds to us of $114.6 million. Deferred offering costs from the Follow-on Offering amounted to $0.4 million.
Recent accounting pronouncements
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.
The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, simplifies the various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends the existing guidance to improve consistent application. The adoption of ASU 2019-12 beginning January 1, 2021 did not have a material impact on our condensed consolidated financial statement and related disclosures.
In February 2016, the FASB issued Leases (Topic 842) (“ASU 2016-02”), whereby a lessee will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. ASU 2016-02 is effective for the Company’s annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The adoption of the new standard is expected to result in the recognition of additional lease liabilities and right-of-use assets as of January 1, 2022. The Company is evaluating the potential impact of this pronouncement.
F-9
In June 2016, the FASB issued Financial Instruments — Credit Losses, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, premium receivables, and reinsurance recoverable. The valuation allowance is a measurement of expected losses that is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This methodology is referred to as the current expected credit loss model. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets, as well as available for sale securities, and that they be presented on the financial statements net of the valuation allowance. ASU 2016-13 is effective for the Company’s annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-13 on its financial condition and results of operations, with a primary focus on its reinsurance recoverable.
Reclassification
Certain accounts in the prior period financial statements were reclassified to conform with the current period presentation.
5. Investments
Unrealized gains and losses
The following tables present cost or amortized cost and fair values of investment in fixed maturities as of September 30, 2021 and December 31, 2020 ($ in millions):
Gross unrealized losses amounted to $1.1 million as of September 30, 2021 and less than $0.1 million as of December 31, 2020. Gross unrealized gains and losses were recorded as a component of accumulated other comprehensive income.
Contractual maturities of bonds
The following table presents the cost or amortized cost and estimated fair value of investments in fixed maturities as of September 30, 2021 by contractual maturity ($ in millions). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
F-10
Net investment income
An analysis of net investment income follows ($ in millions):
Investment gains and losses
The Company had pre-tax net realized capital losses of $0.2 million for the three and nine months ended September 30, 2021. There were no pre-tax net realized capital gains or losses for the three and nine months ended September 30, 2020.
Aging of gross unrealized losses
The following table presents the gross unrealized losses and related fair values for the Company’s investment in fixed maturities, grouped by duration of time in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020 ($ in millions):
Gross unrealized losses for investment in fixed maturities for twelve months or more was less than $0.1 million for both September 30, 2021 and December 31, 2020.
The gross unrealized investment losses as of September 30, 2021 and December 31, 2020, were deemed to be temporary, based on, among other things:
● | the duration of time and the relative magnitude to which fair values of these investments have been below their amortized cost was not indicative of an other than temporary impairment loss; |
● | the absence of compelling evidence that would cause the Company to call into question the financial condition or near-term prospects of the issuer of the investment; and |
● | the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. |
F-11
The Company may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology the Company uses to assess other-than-temporary declines in value. Risks and uncertainties could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral, and unfavorable changes in economic conditions or social trends, interest rates or credit ratings.
As of September 30, 2021, one of the investments in fixed maturities was held in unrealized loss position for 12 months or more, and none as of December 31, 2020.
6. Fair Value Measurements
The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured as of September 30, 2021 and December 31, 2020 ($ in millions):
The fair value of all our different classes of Level 2 fixed maturities and short-term investments are estimated by using quoted prices from a third-party valuation service provider to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments.
There were no transfers between Level 1, Level 2, or Level 3 during September 30, 2021 and December 31, 2020, respectively.
F-12
7. Unpaid Loss and Loss Adjustment Expense
The following table presents the activity in the liability for unpaid loss and loss adjustment expense (“LAE”) for the nine months ended September 30, 2021 and 2020 ($ in millions):
(1) | Reinsurance recoverable in this table includes only ceded unpaid loss and LAE |
Unpaid loss and LAE includes anticipated salvage and subrogation recoverable.
Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity. Additional variability exists due to accident year allocations of ceded amounts in accordance with reinsurance agreements, which is not expected to result in any changes to the ultimate liability. The Company had favorable development on net loss and LAE reserves of $0.3 million for the nine months ended September 30, 2021, and unfavorable development on net loss and LAE reserves of $1.3 million for the nine months ended September 30, 2020. No additional premiums or returned premiums have been accrued as a result of prior year effects.
For the nine months ended September 30, 2021, current accident year incurred loss and LAE included $6.9 million of net incurred loss and LAE from the severe winter storm that affected our customers in the states of Texas and Oklahoma. The net incurred loss and LAE from Winter Storm Uri as of September 30, 2021 represents the Company’s best estimates based upon information currently available.
Through June 30, 2021, the Company had proportional reinsurance contracts which cover all of the Company’s products and geographies, and transferred, or “ceded,” 75% of the premium to reinsurers ("Proportional Reinsurance Contracts"). In exchange, these reinsurers paid a ceding commission of 25% for every dollar ceded, in addition to funding all of the corresponding claims, or 75% of all claims. The Company opted to manage the remaining 25% of the business with alternative forms of reinsurance through non-proportional reinsurance contracts ("Non-Proportional Reinsurance Contracts").
A portion of the Company’s proportional reinsurance program expired on June 30, 2021. The Company renewed the majority of the expiring reinsurance contracts at terms that are very similar to the prior agreements. As the business continues to grow and diversify, and with stability in our insurance results, the Company decreased the overall share of proportional reinsurance from 75% of premium to 70%. In addition, the Company purchased a new reinsurance program to protect against catastrophe risk in the U.S that exceed $60 million in losses. Other non-proportional reinsurance contracts were renewed with terms similar to the expiring contracts.
F-13
8. Other Liabilities and Accrued Expenses
Other liabilities and accrued expenses as of September 30, 2021 and December 31, 2020 consist of the following ($ in millions):
9. Stockholders’ Equity
Common stock
The Company completed its IPO on July 2, 2020, in which the Company issued and sold 12,650,000 shares of its common stock at a public offering price of $29 per share, including 1,650,000 shares sold upon the exercise of the underwriter’s option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the IPO were approximately $335.6 million.
In connection with the IPO, the Company’s outstanding convertible preferred stock converted into 31,557,107 shares of common stock. Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the preferred stock to common stock and additional paid in capital.
Upon closing of the IPO, the Company filed an amended and restated certificate of incorporation on July 7, 2020 with the Secretary of State of the State of Delaware to authorize the issuance of up to 200,000,000 shares of common stock, par value $0.00001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share.
On January 14, 2021, the Company completed a Follow-on Offering of common stock (the "Follow-on Offering"), which resulted in the issuance and sale of 3,300,000 shares of common stock of the Company, and 1,524,314 shares of common stock by certain selling shareholders, and generated net proceeds to us of $525.7 million after deducting underwriting discounts and commissions and other offering costs. On February 1, 2021, the underwriters exercised their option to purchase additional shares, which resulted in the issuance and sale of an additional 718,647 shares of common stock of the Company, and generated additional net proceeds of $114.6 million to us after deducting underwriting discounts.
As of both September 30, 2021 and December 31, 2020, the Company was authorized to issue 200,000,000 shares of par value $0.00001 per share common stock. The voting, dividend and liquidation rights of the holders of the Company’s common stock is subject to and qualified by the rights, powers and preferences of the holders of the preferred stock.
On February 18, 2020, the Company made a contribution of 500,000 newly issued shares of common stock to a related party, the Lemonade Foundation (see Note 13). In connection with the Follow-on Offering noted above, Lemonade Foundation sold 100,000 of the contributed shares of the Company.
Undesignated Preferred Stock
As of both September 30, 2021 and December 31, 2020, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue up to 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share. As of both September 30, 2021 and December 31, 2020, there were no shares of undesignated preferred stock issued or outstanding.
F-14
10. Stock-based Compensation
Share option plans
2020 Incentive Compensation Plan
On July 2, 2020, the Company’s board of directors adopted and the Company’s stockholders approved the 2020 Incentive Compensation Plan (the “2020 Plan”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s IPO on July 2, 2020. The 2020 Plan provides for the issuance of incentive stock options, non-qualified stock options, stock awards, stock units, stock appreciation rights and other stock-based awards.
The number of shares initially reserved for issuance under the 2020 Plan is 5,503,678 shares, inclusive of available shares previously reserved for issuance under the 2015 Incentive Share Option Plan, as amended and restated on September 4, 2019 (the “2015 Plan”). In addition, the number of shares reserved for issuance under the 2020 Plan is subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised. Annually, on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, the reserve will be increased by an amount equal to the lesser of (A) 5% of the shares outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares as determined by the Company’s board of directors, provided that no more than 3,650,000 shares may be issued upon the exercise of incentive stock options. On January 1, 2021, the 2020 Plan was increased by 2,838,412 shares, equal to 5% of the aggregate number of outstanding common stock as of December 31, 2020. As of September 30, 2021, there were 5,733,902 shares of common stock available for future grants.
2020 Employee Stock Purchase Plan
On July 2, 2020, the Company’s board of directors adopted and the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (the “2020 ESPP”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s IPO on July 2, 2020. The total shares of common stock initially reserved for issuance under the 2020 ESPP is limited to 1,000,000 shares. In addition, the number of shares available for issuance under the 2020 ESPP will be annually increased on January 1 of each calendar year beginning in 2021 and ending in and including 2030, by an amount equal to the lesser of (A) 1,000,000 shares, (B) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (C) such smaller number of shares as is determined by the board of directors. The board of directors or a committee of the board of directors will administer and will have authority to interpret the terms of the 2020 ESPP and determine eligibility of participants. On January 1, 2021, the 2020 ESPP was increased by 567,682 shares, equal to 1% of the aggregate number of outstanding common stock as of December 31, 2020. As of September 30, 2021, there were no shares of common stock issued under the 2020 ESPP.
2015 Incentive Share Option Plan
In July 2015, the Company adopted the 2015 Plan. The 2015 Plan has been amended and restated from time to time to increase the number of shares reserved for grant and to enable the grant of options to employees of the Company’s subsidiaries. Under the 2015 Plan, options to purchase common stock of the Company may be granted to employees, officers, directors and consultants of the Company. Each option granted can be exercised for one share of common stock of the Company. Options granted to employees generally vest over a period of no more than four years. The options expire ten years from the date of grant.
Pursuant to the 2015 Plan, the Company had reserved 7,312,590 shares of common stock for issuance. Effective immediately upon the approval of the 2020 plan, the remaining shares of common stock available for future grant under the 2015 Plan were transferred to the 2020 Plan. As of September 30, 2021, there were no shares of common stock available for future grant under the 2015 Plan. Subsequent to the approval of the 2020 Plan, no additional grants will be made under the 2015 Plan and any outstanding awards under the 2015 Plan will continue with their original terms.
F-15
Options granted to employees and non-employees
The fair value of each option granted for the nine months ended September 30, 2021 and 2020 is estimated on the date of grant using the Black-Scholes model based on the following assumptions:
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
||
|
|
2021 |
|
2020 |
|
Weighted average expected term (years) |
|
6.1 |
|
6.1 |
|
Risk-free interest rate |
|
1.3 |
% |
0.8 |
% |
Volatility |
|
49 |
% |
40 |
% |
Expected dividend yield |
|
0 |
% |
0 |
% |
Expected volatility is calculated based on implied volatility from market comparisons of certain publicly traded companies and other factors. The expected term of options granted is based on the simplified method, which uses the midpoint between the vesting date and the contractual term in accordance with ASC 718, “Compensation — Stock Compensation”. The risk-free interest rate is based on observed interest rates appropriate for the term of the Company’s stock options. The dividend yield assumption is based on the Company’s historical and expected future dividend payouts and may be subject to substantial change in the future.
The following tables summarize activity of stock options and restricted stock units ("RSUs") ($ in millions, except for number of options and weighted average amounts):
Stock options
On July 28, 2021, the Board of Directors of the Company approved the reduction in exercise price of certain options granted to employees in the beginning of 2021, with original exercise price ranging from $142.64 to $159.02 and were each repriced at an exercise price of $90.70 per share. Incremental compensation expense resulting from the repricing was $3.0 million, and compensation expense amounted to $0.6 million and $0.6 million during the three and nine months ended September 30, 2021, respectively. There were no changes in the vesting schedule or maturity term of the options.
Restricted Stock Units
|
|
|
|
|
|
|
|
|
|
Grant Date |
|
|
|
Number of shares |
|
Fair Value |
|
Outstanding as of December 31, 2020 |
|
— |
|
$ |
— |
Granted |
|
144,254 |
|
|
109.50 |
Vested |
|
(12,108) |
|
|
159.02 |
Cancelled |
|
(1,905) |
|
|
157.76 |
Outstanding as of September 30, 2021 |
|
130,241 |
|
$ |
104.19 |
F-16
Stock-based compensation expense
Stock-based compensation expense from stock options and RSUs granted included and classified in the condensed consolidated statements of operations for the nine months ended September 30, 2021 and 2020 is as follows ($ in millions):
Stock-based compensation expense classified by award type as included in the condensed consolidated statements of operations is as follows ($ in millions):
The total unrecognized expense granted to employees and non-employees outstanding at September 30, 2021 was $104.7 million for the stock options and $12.4 million for the RSUs, with a remaining weighted-average vesting period of 1.4 years for the stock options and 1.7 years for the RSUs.
11. Income Taxes
Effective tax rates
The consolidated effective tax rate for the nine months ended September 30, 2021 and 2020 was (3.5)% and (1.1)%, respectively. The change in effective tax rate over the two periods was predominantly reflective of the change in profit before tax of its wholly-owned subsidiaries in Israel and the Netherlands. The Company believes that as of September 30, 2021, it had no material uncertain tax positions. Interest and penalties related to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable.
There were no material liabilities for interest and penalties accrued as of September 30, 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief in measures in response to the economic conditions due to the COVID-19 pandemic. As of September 30, 2021, the Company has determined that neither the CARES Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on the Company’s effective tax rate.
F-17
12. Net Loss per Share
Net loss per share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
The Company’s potentially dilutive securities, which include stock options, unvested RSUs and preferred stock, have been excluded from the computation of diluted net loss per share as the effect would be anti-dilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded unvested RSUs and outstanding options to purchase common stock of 6,163,039 and 4,814,924 for the nine months ended September 30, 2021 and 2020, respectively, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect.
13. Related Party Transactions
The Company uses the services of a travel agency owned by a relative of one of the Company’s key stockholders. The Company incurred less than $0.1 million of travel related expenses during the three and nine months ended September 30, 2021. Travel expenses was less than $0.1 million during the three months ended September 30, 2020 and $0.1 million during the nine months ended September 30, 2020.
The Company has historically leased office spaces in the United States and The Netherlands from an affiliate. Rental expense amounted to less than $0.1 million for the three and nine months ended September 30, 2021, and less than $0.1 million for the three months ended September 30, 2020 and $0.1 million for the nine months ended September 30, 2020. There were no outstanding amounts due to or from related parties as of September 30, 2021 and December 31, 2020.
The Company’s Chief Executive Officer and the Company’s President and Chief Operating Officer, both of whom are also members of the Company’s board of directors, are the two sole members of the board of directors of the Lemonade Foundation. Effective July 2021, the Company’s President and Chief Operating Officer became the Company’s Co-Chief Executive Officer. The Company contributed 500,000 shares of common stock with a fair market value of $24.36 per share (see Note 9). The Company recorded $12.2 million of non-cash expense within general and administrative expense in connection with this contribution for the year ended December 31, 2020. In connection with the Follow-on Offering as discussed in Note 9, Lemonade Foundation sold 100,000 shares of the contributed shares of the Company. As of September 30, 2021, there were no outstanding amounts due to or from the Lemonade Foundation.
F-18
14. Commitments and Contingent Liabilities
Litigation
The Company is occasionally a party to routine claims or litigation incidental to its business. The Company does not believe that it is a party to any pending legal proceeding that is likely to have a material adverse effect on its business, financial condition or results of operations.
Lease commitments
The Company and its subsidiaries lease their facilities under various operating lease agreements. The Company’s headquarters in New York is under a lease that expires in November 2022, and in November 2021 the lease agreement was modified to extend the lease term to November 2025. The Company’s Israel based operations is under a lease that expires in July 2026. The Company’s office space in Scottsdale, Arizona is under a lease that expires in November 2024.
Aggregate minimum rental commitments under non-cancelable leases at September 30, 2021 are as follows ($ in millions):
|
|
|
|
2021 (remaining three months) |
|
$ |
1.3 |
2022 |
|
|
5.0 |
2023 |
|
|
2.8 |
2024 |
|
|
2.8 |
2025 and thereafter |
|
|
4.2 |
|
|
$ |
16.1 |
Expenses for lease of facilities for the three and nine months ended September 30, 2021 were $1.3 million and $3.4 million, respectively, and for the three and nine months ended September 30, 2020 were $0.9 million and $2.8 million, respectively, and are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Charges and guarantees
The Company provided guarantees with respect to office leases in an aggregate amount of $0.2 million as of September 30, 2021 and $0.6 million as of December 31, 2020.
15. Geographical Breakdown of Gross Written Premium
The Company has a single reportable segment and offers insurance coverage under the homeowners multi-peril and inland marine lines of business. Gross written premium by jurisdiction are as follows ($ in millions):
F-19
16. Subsequent Events
On November 8, 2021, Lemonade entered into a definitive agreement (“Agreement”) to acquire Metromile, Inc. (“Metromile’). Pursuant to the terms of the Agreement, the Company will acquire 100% of the equity of Metromile, through an all stock transaction that implies a fully diluted equity value of $500.0 million, or over $200.0 million net of cash (based upon the conversion ratio of 19 shares of Metromile for 1 share of Lemonade). The transaction is expected to close in the second quarter of 2022 subject to customary closing conditions, including stockholder approval of Metromile.
Metromile is a leading digital insurance platform in the United States with primary focus on data science on personalized auto insurance policies. Metromile also offers cloud-based software as a service that automates claims through its subsidiary.
F-20
Index to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm |
F-83 |
Consolidated Financial Statements |
|
Consolidated Balance Sheets as of December 31, 2020 and 2019 |
F-22 |
F-23 |
|
F-24 |
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 |
F-26 |
F-27 |
F-21
LEMONADE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
December 31, |
||||
|
|
2020 |
|
2019 |
||
Assets |
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Fixed maturities available-for-sale, at fair value (amortized cost: $6.4 million and $5.8 million as of December 31, 2020 and 2019 ) |
|
$ |
6.6 |
|
$ |
5.9 |
Short-term investments |
|
|
— |
|
|
54.7 |
Total investments |
|
|
6.6 |
|
|
60.6 |
Cash, cash equivalents and restricted cash |
|
|
571.4 |
|
|
270.3 |
Premium receivable, net of allowance for doubtful accounts of $0.5 million and $0.2 million as of December 31, 2020 and 2019 |
|
|
86.1 |
|
|
54.1 |
Reinsurance recoverable |
|
|
49.0 |
|
|
20.3 |
Prepaid reinsurance premium |
|
|
91.3 |
|
|
1.0 |
Deferred acquisition costs |
|
|
3.5 |
|
|
1.8 |
Property and equipment, net |
|
|
5.7 |
|
|
3.1 |
Intangible assets |
|
|
0.6 |
|
|
0.6 |
Other assets |
|
|
14.5 |
|
|
2.5 |
Total assets |
|
$ |
828.7 |
|
$ |
414.3 |
Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit) |
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses |
|
$ |
46.3 |
|
$ |
28.2 |
Unearned premium |
|
|
123.8 |
|
|
68.0 |
Trade payables |
|
|
1.4 |
|
|
0.7 |
Funds held for reinsurance treaties |
|
|
62.1 |
|
|
— |
Other liabilities and accrued expenses |
|
|
54.1 |
|
|
19.7 |
Total liabilities |
|
|
287.7 |
|
|
116.6 |
Commitments and contingencies (Note 20) |
|
|
|
|
|
|
Convertible preferred stock (Series Seed, A, B, C, and D), $0.00001 par value; no shares issued, authorized and outstanding as of December 31, 2020; 31,557,107 shares authorized, issued and outstanding as of December 31, 2019; aggregate liquidation preference of $0.0 million and $480.8 million on as of December 31, 2020 and 2019, respectively |
|
|
— |
|
|
480.2 |
Stockholders' equity (deficit): |
|
|
|
|
|
|
Common stock, $0.00001 par value, 200,000,000 shares and 52,000,000 shares authorized as of December 31, 2020 and 2019 , respectively; 56,774,294 shares and 11,784,765 shares issued and 56,774,294 shares and 11,271,228 shares outstanding as of December 31, 2020 and 2019, respectively |
|
|
— |
|
|
— |
Additional paid-in capital |
|
|
859.8 |
|
|
15.7 |
Accumulated deficit |
|
|
(320.6) |
|
|
(198.3) |
Accumulated other comprehensive income |
|
|
1.8 |
|
|
0.1 |
Total stockholders' equity (deficit) |
|
|
541.0 |
|
|
(182.5) |
Total liabilities, convertible preferred stock and stockholders' equity (deficit) |
|
$ |
828.7 |
|
$ |
414.3 |
The accompanying notes are an integral part of the consolidated financial statements.
F-22
LEMONADE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
($ in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|||||||
|
|
2020 |
|
2019 |
|
2018 |
|||
Revenue |
|
|
|
|
|
|
|
|
|
Net earned premium |
|
$ |
77.3 |
|
$ |
63.8 |
|
$ |
21.2 |
Ceding commission income |
|
|
15.3 |
|
|
— |
|
|
— |
Net investment income |
|
|
1.5 |
|
|
3.4 |
|
|
1.3 |
Commission and other income |
|
|
0.3 |
|
|
0.1 |
|
|
— |
Total revenue |
|
|
94.4 |
|
|
67.3 |
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
54.7 |
|
|
45.8 |
|
|
15.2 |
Other insurance expense |
|
|
14.4 |
|
|
9.6 |
|
|
4.2 |
Sales and marketing |
|
|
80.4 |
|
|
88.5 |
|
|
41.7 |
Technology development |
|
|
19.4 |
|
|
9.8 |
|
|
4.7 |
General and administrative |
|
|
46.3 |
|
|
21.5 |
|
|
9.3 |
Total expense |
|
|
215.2 |
|
|
175.2 |
|
|
75.1 |
Loss before income taxes |
|
|
(120.8) |
|
|
(107.9) |
|
|
(52.6) |
Income tax expense |
|
|
1.5 |
|
|
0.6 |
|
|
0.3 |
Net loss |
|
$ |
(122.3) |
|
$ |
(108.5) |
|
$ |
(52.9) |
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
Unrealized gain on investments |
|
|
0.1 |
|
|
0.1 |
|
|
— |
Foreign currency translation adjustment |
|
|
1.6 |
|
|
— |
|
$ |
— |
Comprehensive loss |
|
$ |
(120.6) |
|
$ |
(108.4) |
|
$ |
(52.9) |
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders — basic and diluted |
|
$ |
(3.63) |
|
$ |
(9.75) |
|
$ |
(4.84) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic and diluted |
|
|
33,654,828 |
|
|
11,124,397 |
|
|
10,931,776 |
The accompanying notes are an integral part of the consolidated financial statements.
F-23
LEMONADE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY (DEFICIT)
($ in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Total |
||
|
|
Convertible Preferred |
|
|
|
|
|
|
|
Additional |
|
|
|
|
Other |
|
Stockholders' |
||||||
|
|
Stock |
|
|
Common Stock |
|
Paid-In |
|
Accumulated |
|
Comprehensive |
|
Equity |
||||||||||
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Income |
|
(Deficit) |
||||||
Balance as of December 31, 2017 |
|
15,671,730 |
|
$ |
60.4 |
|
|
10,887,059 |
|
$ |
— |
|
$ |
8.5 |
|
$ |
(36.9) |
|
$ |
— |
|
$ |
(28.4) |
Issuance of Series C Preferred stock, net of issuance costs of $0.2 million |
|
8,700,224 |
|
|
119.8 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Exercise of stock options |
|
— |
|
|
— |
|
|
34,125 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Repayment of partial recourse loan |
|
— |
|
|
— |
|
|
62,500 |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
0.1 |
Exercise of Series A Preferred stock warrants |
|
73,601 |
|
|
0.6 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.1 |
|
|
— |
|
|
— |
|
|
2.1 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(52.9) |
|
|
— |
|
|
(52.9) |
Balance as of December 31, 2018 |
|
24,445,555 |
|
|
180.8 |
|
|
10,983,684 |
|
|
— |
|
|
10.7 |
|
|
(89.8) |
|
|
— |
|
|
(79.1) |
Issuance of Series C Preferred stock, net of issuance costs of $0.0 million |
|
3,622 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Issuance of Series D Preferred stock, net of issuance costs of $0.6 million |
|
7,107,930 |
|
|
299.4 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Repayment of partial recourse loan |
|
— |
|
|
— |
|
|
105,487 |
|
|
— |
|
|
0.2 |
|
|
— |
|
|
— |
|
|
0.2 |
Exercise of stock options |
|
— |
|
|
— |
|
|
182,057 |
|
|
— |
|
|
0.5 |
|
|
— |
|
|
— |
|
|
0.5 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4.3 |
|
|
— |
|
|
— |
|
|
4.3 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(108.5) |
|
|
— |
|
|
(108.5) |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.1 |
|
|
0.1 |
Balance as of December 31, 2019 |
|
31,557,107 |
|
$ |
480.2 |
|
|
11,271,228 |
|
$ |
— |
|
$ |
15.7 |
|
$ |
(198.3) |
|
$ |
0.1 |
|
$ |
(182.5) |
The accompanying notes are an integral part of the consolidated financial statements
F-24
LEMONADE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
($ in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Total |
||
|
|
Convertible Preferred |
|
|
|
|
|
|
|
Additional |
|
|
|
|
Other |
|
Stockholders' |
||||||
|
|
Stock |
|
|
Common Stock |
|
Paid-In |
|
Accumulated |
|
Comprehensive |
|
Equity |
||||||||||
|
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Income |
|
(Deficit) |
||||||
Balance as of December 31, 2019 |
|
31,557,107 |
|
$ |
480.2 |
|
|
11,271,228 |
|
$ |
— |
|
$ |
15.7 |
|
$ |
(198.3) |
|
$ |
0.1 |
|
$ |
(182.5) |
Conversion of convertible preferred stock to common stock upon closing of initial public offering |
|
(31,557,107) |
|
|
(480.2) |
|
|
31,557,107 |
|
|
— |
|
|
480.2 |
|
|
— |
|
|
— |
|
|
480.2 |
Issuance of common stock upon closing of initial public offering, net of issuance costs and underwriting fees of $31.3 million |
|
— |
|
|
— |
|
|
12,650,000 |
|
|
— |
|
|
338.0 |
|
|
— |
|
|
— |
|
|
338.0 |
Contribution to the Lemonade Foundation |
|
— |
|
|
— |
|
|
500,000 |
|
|
— |
|
|
12.2 |
|
|
— |
|
|
— |
|
|
12.2 |
Release of shares upon repayment |
|
— |
|
|
— |
|
|
513,537 |
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
1.3 |
Exercise of stock options |
|
— |
|
|
— |
|
|
282,422 |
|
|
— |
|
|
1.8 |
|
|
— |
|
|
— |
|
|
1.8 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
10.6 |
|
|
— |
|
|
— |
|
|
10.6 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(122.3) |
|
|
— |
|
|
(122.3) |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.7 |
|
|
1.7 |
Balance as of December 31, 2020 |
|
— |
|
$ |
— |
|
|
56,774,294 |
|
$ |
— |
|
$ |
859.8 |
|
$ |
(320.6) |
|
$ |
1.8 |
|
$ |
541.0 |
The accompanying notes are an integral part of the consolidated financial statements
F-25
LEMONADE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|||||||
|
|
2020 |
|
2019 |
|
2018 |
|||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(122.3) |
|
$ |
(108.5) |
|
$ |
(52.9) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
1.7 |
|
|
0.6 |
|
|
0.1 |
Stock-based compensation |
|
|
10.6 |
|
|
4.3 |
|
|
2.1 |
Change in fair value of warrant liability |
|
|
— |
|
|
— |
|
|
0.2 |
Amortization of discount on bonds |
|
|
(0.4) |
|
|
(0.5) |
|
|
— |
Provision for bad debt |
|
|
2.2 |
|
|
0.9 |
|
|
— |
Common shares contribution to Lemonade Foundation |
|
|
12.2 |
|
|
— |
|
|
— |
Unrealized loss on money market funds |
|
|
0.1 |
|
|
— |
|
|
— |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Premium receivable |
|
|
(34.2) |
|
|
(29.1) |
|
|
(20.0) |
Reinsurance recoverable |
|
|
(28.7) |
|
|
(8.5) |
|
|
(8.9) |
Prepaid reinsurance premium |
|
|
(90.3) |
|
|
0.5 |
|
|
(0.8) |
Deferred acquisition costs |
|
|
(1.7) |
|
|
(1.2) |
|
|
(0.5) |
Other assets |
|
|
(12.0) |
|
|
(1.1) |
|
|
(0.4) |
Unpaid losses and loss adjustment expenses |
|
|
18.1 |
|
|
15.1 |
|
|
11.0 |
Unearned premium |
|
|
55.8 |
|
|
40.3 |
|
|
21.4 |
Trade payables |
|
|
0.7 |
|
|
(0.8) |
|
|
0.2 |
Funds held for reinsurance treaties |
|
|
62.1 |
|
|
— |
|
|
— |
Other liabilities and accrued expenses |
|
|
34.4 |
|
|
9.9 |
|
|
7.7 |
Net cash used in operating activities |
|
|
(91.7) |
|
|
(78.1) |
|
|
(40.8) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from short-term investments sold or matured |
|
|
70.0 |
|
|
21.0 |
|
|
20.9 |
Proceeds from bonds sold or matured |
|
|
2.3 |
|
|
1.0 |
|
|
— |
Cost of short-term investments acquired |
|
|
(14.9) |
|
|
(69.2) |
|
|
(13.8) |
Cost of bonds acquired |
|
|
(2.9) |
|
|
(3.5) |
|
|
— |
Purchases of property and equipment |
|
|
(4.4) |
|
|
(2.7) |
|
|
(0.7) |
Purchases of intangible assets |
|
|
— |
|
|
(0.6) |
|
|
— |
Net cash provided by (used in) investing activities |
|
|
50.1 |
|
|
(54.0) |
|
|
6.4 |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of underwriting discount and offering costs |
|
|
338.0 |
|
|
— |
|
|
— |
Proceeds from release of shares upon repayment |
|
|
1.3 |
|
|
— |
|
|
— |
Issuance of Preferred stock, net |
|
|
— |
|
|
299.4 |
|
|
119.8 |
Proceeds from stock exercises |
|
|
1.8 |
|
|
0.7 |
|
|
0.1 |
Net cash provided by financing activities |
|
|
341.1 |
|
|
300.1 |
|
|
119.9 |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
1.6 |
|
|
(0.1) |
|
|
— |
Net increase in cash, cash equivalents and restricted cash |
|
|
301.1 |
|
|
167.9 |
|
|
85.5 |
Cash, cash equivalents and restricted cash at beginning of year |
|
|
270.3 |
|
|
102.4 |
|
|
16.9 |
Cash, cash equivalents and restricted cash at end of year |
|
$ |
571.4 |
|
$ |
270.3 |
|
$ |
102.4 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
1.6 |
|
$ |
0.5 |
|
$ |
0.2 |
The accompanying notes are an integral part of the consolidated financial statements.
F-26
LEMONADE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
Lemonade, Inc. is a public benefit corporation organized under Delaware law on June 17, 2015. It provides certain personnel, facilities and services to each of its subsidiaries (together with Lemonade, Inc., the "Company"), all of which are wholly-owned, directly or indirectly, by Lemonade, Inc. The Company consists of the following entities, which support Lemonade, Inc.’s U.S. and E.U. operations: (1) Lemonade Insurance Company, an insurance corporation organized under New York law; this company issues insurance policies and pays claims; it is licensed and regulated as a stock property and casualty insurance company in New York and in all other states where the Company’s insurance products are available; (2) Lemonade Insurance Agency, LLC, a limited liability company organized under New York law; this company is licensed as an insurance agent in New York and in all other states where the Company’s insurance products are available and it acts as the distribution and marketing agent for Lemonade Insurance Company and provides certain underwriting and claims services, and receives a fixed percentage of premium for doing so; it also acts as agent for other insurance companies in distributing their insurance, for which it receives various percentages of premium; (3) Lemonade Ltd., a company organized under the laws of Israel; this company provides technology, research and development, management, marketing and other services to the companies in the group, charged on a "cost plus" basis; (4) Lemonade Insurance N.V., a public limited company organized under the laws of the Netherlands; (5) Lemonade Agency B.V., a Netherlands private limited liability company, (6) Lemonade B.V., a Netherlands private limited liability company; and (7) Lemonade Life Insurance Agency, LLC, a limited liability company organized under the laws of Delaware; this company acts as the distribution and marketing agent for the sale and servicing of life insurance products.
2. Basis of Presentation
The Company presents its financial statements on a consolidated basis including all of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. All foreign currency amounts in the statements of operations and comprehensive loss have been translated using an average rate for the reporting period. All foreign currency balances in the balance sheet have been translated using the spot rate at the end of the year. All figures expressed, except share amounts, are represented in U.S. dollars in millions.
Risks and Uncertainties
The global pandemic resulting from the disease known as COVID-19, caused by a novel strain of coronavirus, SARS-CoV-2, has caused national and global economic and financial market disruptions and may adversely impact our business. Although the Company did not see a material impact on its results of operations for the year ended December 31, 2020 due to the COVID-19 pandemic, the Company cannot predict the duration or magnitude of the pandemic or the full impact that it may have on the Company’s financial condition and results of operations, business operations and workforce.
3. Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. All revisions to accounting estimates are recognized in the period in which the estimates are revised. Significant estimates reflected in the Company’s consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, reinsurance recoverable on unpaid losses, the fair values of investments, valuation allowance on deferred tax assets and the valuation of stock-based compensation.
4. Summary of Significant Accounting Policies
Segment information
The Company’s chief operating decision maker is the Chief Executive Officer. The chief operating decision maker manages operations, allocates resources, and evaluates financial performance on a company-wide basis. The Company operates in one reporting segment within the United States and Europe, providing insurance products to customers through various sales channels.
F-27
Cash, cash equivalents and restricted cash
The following represents the Company’s cash, cash equivalents and restricted cash as of December 31, 2020 and 2019, ($ in millions).
|
|
|
|
|
|
|
|
|
December 31, |
||||
|
|
2020 |
|
2019 |
||
Cash and cash equivalents |
|
$ |
570.8 |
|
$ |
270.0 |
Restricted cash |
|
|
0.6 |
|
|
0.3 |
Total cash, cash equivalents and restricted cash |
|
$ |
571.4 |
|
$ |
270.3 |
Cash consists primarily of cash on hand and bank deposits. Cash equivalents consist primarily of money market accounts with maturities of three months or less at the date of acquisition and are stated at cost, which approximates fair value. The Company’s restricted cash relates to security deposits for office leases in Israel. The carrying value of restricted cash approximates fair value.
Investments
Investments consist of bonds and short-term investments. The Company considers all of its marketable bonds as available-for-sale. Bonds consist of securities with an initial fixed maturity of more than one year. Bonds are principally carried at fair value. Unrealized gains and losses related to bonds are included in accumulated other comprehensive income as a separate component of stockholders’ equity (deficit). The discount or premium on bonds is amortized using the effective yield method. Short-term investments, which may include commercial paper, certificates of deposit, and fixed maturity investments with an initial maturity of one year or less, are carried at amortized cost, which approximates fair value.
The fair value of bonds is principally derived from market price data for identical assets from exchange or dealer markets and from market observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. For certain bonds for which market prices are not readily available, market values are principally estimated using values obtained from independent pricing services, broker quotes and internal estimates.
Realized gains or losses on the sale of investments are determined on the basis of specific identification. In addition, where declines in the fair value of securities below cost or amortized cost were considered to be an other-than-temporary impairment ("OTTI"), a realized loss would be recorded for the difference between cost or amortized cost and estimated fair value of such securities. Estimates of fair value are subjective and actual realizations will be dependent upon future events.
The Company continually monitors the difference between cost and the estimated fair value of its investments, which involves uncertainty as to whether declines in value are temporary in nature. The analysis of any individual security’s decline in value is performed in its functional currency.
Each reporting period, all securities are reviewed to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. The Company considers relevant facts and circumstances in evaluating whether a credit or interest rate related impairment of a security is other than temporary. Relevant facts and circumstances considered include:
● | the extent and length of time the fair value has been below cost; |
● | the reasons for the decline in value; the financial position and access to capital of the issuer, including the current and future impact of any specific events; for structured securities, the adequacy of the expected cash flows; and |
● | for fixed maturities, the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. |
If management can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then any other-than-temporary impairment identified is separated into two components: (i) the amount related to credit losses (recorded in earnings) and (ii) the amount related to all other factors (recorded in other comprehensive income). The credit-related portion of an OTTI is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge. If
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management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment charge to earnings is recorded to reduce the amortized cost of that security to fair value.
For debt securities in an unrealized loss position as of the end of each period which meet the criteria for evaluation, the Company develops a best estimate of the present value of expected cash flows to determine if it will recover all amounts due according to the contractual terms of the security in effect at the date of acquisition. If the Company determines that it will not recover all amounts due according to the contractual terms of the debt security as of the date of acquisition, the Company records an OTTI loss in earnings equal to the difference between the present value of expected cash flows and the current amortized cost basis of the security.
In developing the expected recovery analysis for debt securities, the Company reviews business prospects, credit ratings and available information from asset managers and rating agencies for individual securities.
If a loss is recognized from a sale subsequent to a balance sheet date pursuant to changes in circumstances, the loss is recognized in the period in which the intent to hold the securities to recovery no longer exists.
Interest income, as well as prepayment fees and the amortization of the related premium or discount, is reported in net investment income. In periods subsequent to the recognition of OTTI loss for bonds, the Company generally accretes into income the discount or amortizes the reduced premium resulting from the reduction in cost basis over the remaining life of the security based on the amount and timing of estimated future cash flows.
Fair value of financial instruments
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. In addition, a three-tiered hierarchy for inputs is used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are market participant assumptions based on market data obtained from sources independent of the Company. Unobservable inputs are the reporting entity’s own assumptions about market participant assumptions based on the best information available under the circumstances. In assessing the appropriateness of using observable inputs in making its fair value determinations, the Company considers whether the market for a particular security is "active" or not based on all the relevant facts and circumstances.
To determine the fair value of its investments, the Company utilizes third-party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments.
Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates and other market observable information, as applicable. The valuation models consider, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector and, when applicable, collateral quality and other issue or issuer specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.
As a basis for considering such assumptions, a three-tier value hierarchy is used in management’s determination of fair value based on the reliability and observability of inputs as follows:
Level 1 — Valuations are based on unadjusted quoted prices in active markets that the Company has the ability to access for identical, unrestricted assets and do not involve any meaningful degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis;
Level 2 — Valuations are based on direct and indirect observable inputs other than quoted market prices included in Level 1. Level 2 inputs include quoted prices for similar assets in active markets and inputs other than quoted prices that are observable for the asset, such as the terms of the security and market-based inputs;
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Level 3 — Valuations are based on techniques that use significant inputs that are unobservable. The valuation of Level 3 assets and liabilities requires the greatest degree of judgment. These measurements may be made under circumstances in which there is little, if any, market activity for the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, the Company considers factors specific to the asset. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company’s fair value measurements include investments, preferred stock warrants and stock options.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. Cash and cash equivalents are held with financial institutions of high quality. Balances may exceed the amount of insurance provided on such balances.
Premium receivable
Premium receivable is reported net of an allowance for estimated uncollectible premium amounts. Such allowance is based upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the insured and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance. The Company recorded an allowance for doubtful accounts of $0.5 million and $0.2 million as of December 31, 2020 and 2019, respectively.
Reinsurance
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring loss exposures does not relieve the Company from its obligations to policyholders. Reinsurance recoverable, including amounts related to incurred but not reported claims (“IBNR”) and prepaid reinsurance premium, is reported as assets. To minimize exposure to losses related to a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of a reinsurer, the collectability of the reinsurance recoverable is evaluated based upon a number of other factors. Such factors include the amounts outstanding, length of collection periods, disputes, any collateral or letters of credit held and other relevant factors. To the extent that an allowance for uncollectible reinsurance recoverable is established, amounts deemed to be uncollectible would be written off against the allowance for estimated uncollectible reinsurance recoverable. The Company currently has no allowance for uncollectible reinsurance recoverable.
Ceded premium written is recorded in accordance with the applicable terms of the reinsurance contracts and ceded premium earned is charged against revenue over the period of the reinsurance contracts. Ceded losses incurred reduce net loss and loss adjustment expense (“LAE”) incurred over the applicable periods of the reinsurance contracts with third-party reinsurers.
Amounts recoverable from reinsurers are estimated in a manner consistent with the liability associated with the reinsured business and consistent with the terms of the underlying contract.
The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk.
Prepaid reinsurance premiums represents the unearned portion of premiums ceded to reinsurers. Funds held under reinsurance treaties represent amounts retained by the Company on behalf of the reinsurer based on terms of the reinsurance agreements.
Deferred acquisition costs
Direct acquisition expenses, which primarily consist of premium taxes, related to each policy the Company writes are deferred and amortized to expense in proportion to the premium earned, generally over a period of one year. Deferred acquisition costs are reviewed at least annually to determine their recoverability from future income. If any such costs are determined not to be recoverable they are charged to expense. Anticipated net loss and LAE and estimated remaining costs of servicing contracts are considered when
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evaluating recoverability of deferred acquisition costs. The amount of deferred acquisition costs amortized to income was $4.9 million, $2.1 million, and $0.7 million for the years ended December 31, 2020, 2019, and 2018 respectively, and are included in other insurance expense on the consolidated statements of operations and comprehensive loss.
Property and equipment, net
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the assets at the following rates:
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Years |
Computers and electronic equipment |
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3 |
Furniture and equipment |
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6 |
Leasehold improvements |
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Shorter of lease term or useful life |
Capitalized internal use software
The Company defers certain costs related to the development of internal use software, which are incurred during the application development stage, and amortizes them over the software’s estimated useful life. The amounts capitalized include employee payroll and payroll-related costs directly associated with the development activities. The Company’s policy is to amortize capitalized costs using the straight-line method over the estimated useful life, which is currently two years, beginning when the software is substantially complete and ready for its intended use. Costs incurred in the preliminary and post-implementation stages of the Company’s products are expensed as incurred.
Intangible assets
Indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. The annual impairment test for indefinite-lived intangible assets may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. The Company may elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, the Company will test for impairment using a quantitative process. If the Company determines that impairment of its intangible assets may exist, the amount of impairment loss is measured as the excess of carrying value over fair value. The estimates in the determination of the fair value of indefinite-lived intangible assets include the anticipated future revenues of the Company and the resulting cash flows. As of December 31, 2020 and 2019, there were no circumstances that indicate that the carrying amount of intangible assets deemed to have an indefinite useful life may not be recoverable.
Unpaid loss and loss adjustment expense
The reserves for loss and LAE represent management’s best estimate of the ultimate cost of all reported and unreported loss incurred through the balance sheet date. Unpaid loss and LAE are based upon the assumption that past developments are an appropriate indicator of future events. The IBNR portion of unpaid loss and LAE is based on past experience and other factors. The methods of making such estimates and for establishing the resulting reserves are periodically reviewed and updated. Any resulting adjustments are reflected in income. Unpaid loss and LAE consists of the estimated ultimate cost of settling claims incurred within the reporting period (net of related reinsurance recoverable), including IBNR claims, plus changes in estimates of prior period losses. The Company reports its unpaid loss and LAE on an undiscounted basis.
The estimation of the liability for unpaid loss and LAE is inherently complex and subjective, especially in view of changes in the legal and economic environment, which impact the development of unpaid loss and LAE, and therefore quantitative techniques frequently have to be supplemented by subjective considerations and managerial judgment. In addition, trends that have affected development of liabilities in the past may not necessarily occur or affect liability development to the same degree in the future. Therefore, there can be no assurance that the ultimate liability will not materially differ from amounts reserved with a resulting material effect on the operating results of the Company.
The unpaid loss and loss adjustment expense estimate is generally calculated by first projecting the ultimate cost of all claims that have been incurred and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. Therefore, the IBNR also includes provision for expected development on reported claims.
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The Company’s actuarial analysis of the historical data provides the factors the Company uses in its actuarial analysis in estimating its loss and LAE reserves. These factors are measures over time of claims reported, average case incurred amounts, case development, severity and payment patterns. However, these factors cannot be directly used as they do not take into consideration changes in business mix, claims management, regulatory issues, and other subjective factors. The Company uses multiple actuarial methods in determining its estimates of the ultimate unpaid claim liabilities. Each of these methods require judgment and assumptions. The methods can include, but are not limited to:
● | Paid Development Method — uses historical, cumulative paid losses by accident year and develops those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years. |
● | Paid Bornhuetter-Ferguson Method — a combination of the Paid Development Method and the Expected Loss Method, the Paid Bornhuetter-Ferguson Method estimates ultimate losses by adding actual paid losses and projected future unpaid losses. The amounts produced are then added to cumulative paid losses to produce the final estimates of ultimate incurred losses. |
● | Incurred Development Method — uses historical, cumulative incurred losses by accident year and develops those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years. |
● | Incurred Bornhuetter — Ferguson Method — a combination of the Incurred Development Method and the Expected Loss Method, the Incurred Bornhuetter-Ferguson Method estimates ultimate losses by adding actual incurred losses and projected future unreported losses. The amounts produced are then added to cumulative incurred losses to produce an estimate of ultimate incurred losses. |
● | Expected Loss Method — utilizes an expected ultimate loss ratio based on historical experience adjusted for trends multiplied by earned premium to project ultimate losses. |
For each method, losses are projected to the ultimate amount to be paid. The Company then analyzes the results and may emphasize or de-emphasize some or all of the outcomes to reflect actuarial judgment regarding their reasonableness in relation to supplementary information and operational and industry changes. These outcomes are then aggregated to produce a single selected point estimate that is the basis for the actuary’s point estimate for loss reserves.
Contingent liabilities
The Company accounts for its contingent liabilities in accordance with Accounting Standards Codification (ASC) Topic 450, "Contingencies". A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.
Preferred stock warrant liability
The Company classified warrants for the purchase of shares of its convertible preferred stock (see Notes 6 and 14) as a liability on its consolidated balance sheets as these warrants were freestanding financial instruments which underlying shares are contingently redeemable (upon a certain liquidation events) and, therefore, may obligate the Company to transfer assets at some point in the future. The warrant liability, which consists of warrants for the purchase of Series A convertible preferred stock, was initially recorded at fair value upon the date of issuance and was subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of general and administrative expenses in the consolidated statements of operations and comprehensive loss. Changes in the fair value of the warrants comprising the preferred stock warrant liability were recognized until each respective warrant was exercised (see Notes 6 and 14).
Comprehensive loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders.
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Employee related obligations
During 2019, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code for employees based in the United States. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Company’s board of directors. The matching contributions made by the Company amounted to $0.5 million, $0.3 million and $0.0 million for the years ended December 31, 2020, 2019 and 2018.
Revenue
Premium is earned on a pro-rata basis over the term of the related insurance coverage. Unearned premium and prepaid reinsurance premium represent the portion of gross premium written and ceded premium written, respectively, related to the unexpired terms of related policies. Premium ceded to third party reinsurers is reported as a reduction of earned premium.
A premium deficiency is recognized if the sum of expected loss and loss adjustment expense, unamortized acquisition costs, and policy maintenance costs exceeds the remaining unearned premium. A premium deficiency would first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency. The Company does not consider anticipated investment income when determining if a premium deficiency exists. There was no premium deficiency as of December 31, 2020 and 2019.
Net investment income represents interest earned from fixed maturity securities, short term securities and other investments, and gains or losses from sale of investments. Investment income is recorded as earned. Investment income consists primarily of interest income which is recognized on an accrual basis. Net investment income represents investment income, net of expenses.
Commission income consists of commissions earned on policies written on behalf of third-party insurance companies where the Company has no exposure to the insured risk. Such commission is recognized on the effective date of the associated policy.
Other income consists of fees collected from policyholders relating to installment premiums, and are recognized at the time each policy installment is billed.
Other insurance expense
Other insurance expense consists of the amortization of deferred acquisition costs and merchant processing fees. Other insurance expense also includes employee compensation, including stock-based compensation and benefits, of the Company’s underwriting teams, as well as allocated occupancy costs and related overhead based on headcount.
Sales and marketing
Sales and marketing includes third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing also includes associated employee compensation, including stock-based compensation and benefits, as well as allocated occupancy costs and related overhead based on headcount. Sales and marketing costs are expensed as incurred. Advertising expenses totaled $58.3 million, $76.0 million and $36.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Technology development
Technology development consists of employee compensation, including stock-based compensation and benefits, and expenses related to vendors engaged in product management, design, development and testing of the Company’s websites and products. Technology development also includes allocated occupancy costs and related overhead based on headcount. Technology development costs are expensed as incurred, except for costs that are capitalized related to internal-use software development projects which are subsequently depreciated over the expected useful life of the developed software.
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General and administrative
General and administrative includes employee compensation, including stock-based compensation and benefits for executive, finance, accounting, legal, business operations and other administrative personnel. In addition, general and administrative includes outside legal, tax and accounting services, insurance, and allocated occupancy costs and related overhead based on headcount.
Accounting for stock-based compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, "Compensation — Stock Compensation." Stock options are mainly awarded to employees and members of the Company’s board of directors and measured at fair value at each grant date. The Company calculates the fair value of share options on the date of grant using the Black-Scholes option-pricing model and the expense is recognized over the requisite service period for awards expected to vest using the straight-line method. The requisite service period for share options is generally four years. The Company recognizes forfeitures as they occur.
The Black-Scholes option-pricing model requires the Company to make a number of assumptions, including the value of the Company’s common stock, expected volatility, expected term, risk-free interest rate and expected dividends. The Company evaluates the assumptions used to value option awards upon each grant of stock options. Expected volatility was calculated based on the implied volatilities from market comparisons of certain publicly traded companies and other factors. The expected option term was calculated based on the simplified method, which uses the midpoint between the vesting date and the contractual term, as the Company does not have sufficient historical data to develop an estimate based on participant behavior. The risk-free interest rate was based on the U.S. treasury bond yield with an equivalent term. The Company has not paid dividends and has no foreseeable plans to pay dividends.
The fair value of common stock underlying the options was historically determined by the Company’s board of directors, with input from management, and considered third-party valuations of the Company’s common stock. Because there was no public market for the Company’s common stock, the board of directors determined its fair value at the time of grant of the option by considering a number of objective and subjective factors, including financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors. The Company’s board of directors determined the fair value of common stock based on valuations performed using the Option Pricing Method ("OPM") and the Probability Weighted Expected Return Method ("PWERM") subject to relevant facts and circumstances for the year ended December 31, 2019.
Foreign currency
Financial statement accounts expressed in foreign currencies are translated into U.S. dollars. Functional currency assets and liabilities are translated into U.S. dollars generally using rates of exchange prevailing at the balance sheet date of each respective subsidiary and the related translation adjustments are recorded as a separate component of Accumulated other comprehensive income, net of any related taxes.
Income taxes
The Company accounts for income taxes in accordance with the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more-likely-than-not to be realized. As of December 31, 2020 and 2019, sufficient doubt existed over the Company’s ability to generate sufficient taxable income to realize its deferred income tax assets, and accordingly, the Company has provided a full valuation allowance against its deferred tax assets.
ASC 740, "Income Taxes" ("ASC 740") clarifies the accounting for uncertainties in income taxes by establishing minimum standards for the recognition and measurement of tax positions taken or expected to be taken in a tax return. Under the requirements of ASC 740, the Company reviews all of its tax positions and makes a determination as to whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue. The Company did not have any uncertain tax positions for the years ended December 31, 2020 and 2019.
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The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. The Company did not incur any interest and penalties related to uncertain tax positions during the years ended December 31, 2020 and 2019. The Company did not record any liabilities for tax-related interest and penalties on its consolidated balance sheets as of December 31, 2020 and 2019.
Net loss per share
The Company follows the two-class method when computing net loss per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, convertible preferred stock and warrants to purchase shares of convertible preferred stock are considered potential dilutive common shares.
The Company’s convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, such losses are not allocated to such participating securities.
In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the years ended December 31, 2020, 2019 and 2018.
Recent accounting pronouncements
The Company currently qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.
The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 ("ASU 2014-09") "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)" and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This standard established the core principle of recognizing revenue to depict the transfer of promised goods and services and defines a five-step process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligations. Although the standard and all related amendments supersede nearly all existing revenue recognition guidance under GAAP, the guidance does not amend the accounting for insurance contracts recognized in accordance with ASC Topic 944, Financial Services — Insurance ("ASC 944"). The Company adopted the standard and all related amendments using the modified retrospective method, effective January 1, 2019. The Company’s primary sources of revenue are recognized in accordance with ASC 944 as such, revenue within the scope of the new standard primarily includes commission revenue. There was no material changes in the timing or measurement of revenues based upon the guidance. As a result, there was no cumulative effect on retained earnings.
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In January 2016, the FASB issued Financial Instruments — Overall, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 affected the recognition, measurement, presentation, and disclosure of financial instruments. The guidance required equity investments to be measured at fair value with changes in fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee) and an assessment of a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The Company adopted the standard and all related amendments prospectively, effective January 1, 2019. The adoption of ASU 2016-01 did not have a material impact on the financial condition and results of operations of the Company.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"), which requires restricted cash to be presented with cash and cash equivalents on the consolidated statements of cash flows and disclosure of how the consolidated statements of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. The Company adopted ASU 2016-18 as of January 1, 2019. Restricted cash is now included as a component of cash, cash equivalents and restricted cash on the Company’s consolidated statements of cash flows. Upon the adoption of ASU 2016-18, the amount of cash and cash equivalents previously presented on the consolidated statements of cash flows reflects the inclusion of restricted cash in the amount reported for changes in cash, cash equivalents and restricted cash. Additionally, as a result of the adoption, transfers between restricted and unrestricted cash are no longer presented as a component of the Company’s investing activities.
In June 2018, the FASB issued ASU 2018-07 "Compensation — Stock Compensation (Topic 718); Improvements to Nonemployee Share-Based Payment Accounting". ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share-based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to ASC 718 upon vesting, which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. The Company adopted ASU 2018-07 on January 1, 2019, which had no impact on the consolidated financial statements as all share-based awards granted to nonemployees prior to adoption were fully vested.
Recently issued accounting pronouncements
In February 2016, the FASB issued Leases (Topic 842) ("ASU 2016-02"), whereby lessee’s will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. In November 2019, the FASB issued Accounting Standards Update 2019-10-Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The ASU provides a framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 changed the effective date for ASU 2016-02 which now effective for annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The adoption of the new standard is expected to result in the recognition of additional lease liabilities and right-of-use assets as of January 1, 2022. The Company is currently evaluating the potential impact of ASU 2016-02 on its financial condition and results of operations.
In June 2016, the FASB issued Financial Instruments — Credit Losses, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, premium receivables, and reinsurance recoverable. The valuation allowance is a measurement of expected losses that is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This methodology is referred to as the current expected credit loss model. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets, as well as available for sale securities, and that they be presented on the financial statements net of the valuation allowance. In November 2019, the FASB issued Accounting Standards Update 2019-10-Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. The ASU provides a framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to
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certain types of entities. Specifically, ASU 2019-10 changed the effective dates for ASU 2016-13 which is now effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of ASU 2016-13 on its financial condition and results of operations.
Reclassification
Certain accounts in the prior year financial statements were reclassified to conform with the current year presentation.
5. Investments
The following tables present cost or amortized cost and fair values of investments at December 31, 2020 and 2019, respectively ($ in millions):
Gross unrealized losses were less than $0.1 million for U.S. Government obligations as of December 31, 2020 and 2019. Gross unrealized gains and losses are recorded as a component of accumulated other comprehensive income.
Contractual maturities of bonds
The following table presents the cost or amortized cost and estimated fair value of bonds as of December 31, 2020 by contractual maturity ($ in millions). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
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Aging of gross unrealized losses
The following tables present the gross unrealized losses and related fair values for the Company’s available-for-sale bond securities, grouped by duration of time in a continuous unrealized loss position, as of December 31, 2020 and 2019 ($ in millions):
Gross unrealized losses for U.S. Government obligations was less than $0.1 million for twelve months or more as of December 31, 2020 and 2019, respectively.
The gross unrealized investment losses as of December 31, 2020 and 2019, respectively, were deemed to be temporary, based on, among other things:
● | the duration of time and the relative magnitude to which fair values of these investments have been below their amortized cost was not indicative of an OTTI loss; |
● | the absence of compelling evidence that would cause the Company to call into question the financial condition or near-term prospects of the issuer of the investment; and |
● | the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. |
The Company may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology the Company uses to assess other-than-temporary declines in value. Risks and uncertainties could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral, and unfavorable changes in economic conditions or social trends, interest rates or credit ratings.
As of December 31, 2020, none of the debt securities held were in an unrealized loss position. As of December 31, 2019, the Company held a total of nine debt securities, four of which were in an unrealized loss position continuously for 12 months or more.
Special deposits
Bonds with a total carrying value of $6.5 million and $5.6 million at December 31, 2020 and 2019, respectively, which are included in fixed maturities available-for-sale on the balance sheets were deposited with various state insurance departments, as
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required, to comply with state insurance laws. The carrying value of bonds deposited with each respective state is as follows ($ in millions):
Net investment income
An analysis of net investment income follows ($ in millions):
Investment gains and losses
The Company had no pre-tax net realized capital gains or losses for the years ended December 31, 2020, 2019 and 2018.
6. Fair Value Measurements
The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured as of December 31, 2020 and 2019 ($ in millions):
There were no transfers between Level 1, Level 2, or Level 3 during the years ended December 31, 2020 and 2019.
7. Reinsurance
In the ordinary course of business, the Company cedes losses and LAE to other reinsurance companies. These arrangements reduce the net loss potential arising from large or catastrophic risks. Certain of these arrangements consist of excess of loss and catastrophe contracts, which protect against losses exceeding stipulated amounts. The ceding of risk through reinsurance does not relieve the Company from its obligations to policyholders. The Company remains liable with respect to losses and LAE ceded in the
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event that any reinsurer does not meet obligations assumed under the reinsurance agreements. The Company does not have any significant unsecured aggregate recoverable for losses, paid and unpaid including IBNR, loss adjustment expenses, and unearned premium with any individual reinsurer.
As of July 1, 2020, the Company entered into proportional reinsurance contracts which cover all of the Company’s products and geographies, and transfer, or “cede,” 75% of the premium to reinsurers ("Proportional Reinsurance Contracts"). In exchange, these reinsurers pay a ceding commission of 25% for every dollar ceded, in addition to funding all of the corresponding claims, or 75% of all claims. The Company opted to manage the remaining 25% of the business with alternative forms of reinsurance through non-proportional reinsurance contracts ("Non-Proportional Reinsurance Contracts"). The majority of the Proportional Reinsurance Contracts run for a three-year term, expiring June 30, 2023, while the remainder will expire on June 30, 2021. The Company’s Non-Proportional Reinsurance Contracts are likewise effective as of July 1, 2020, and have a one-year term.
The Company in 2017 entered into a multi-year Aggregate Excess of Loss Reinsurance Contract which expired on June 30, 2020, and covered against both catastrophe and non-catastrophe events, and provided excess of loss reinsurance on a per cohort basis excess of a cohort’s 50% Loss Ratio subject to an aggregate (i.e., a portfolio level) deductible of 10% of earned premium. A cohort as it relates to this reinsurance contract is a notional grouping of policyholders on the books of the Company. After a policy is bound, the new policyholder is asked to designate to which non-profit group he/she would prefer any charitable donation that the Company may make be contributed. All policyholders identifying the same non-profit group constitute one cohort.
Reinsurance recoverable
Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the reinsurance placement and presented on the balance sheet as reinsurance recoverable. Such balance as of December 31, 2020 and 2019 are presented in the table below ($ in millions).
|
|
|
|
|
|
|
|
|
December 31, |
||||
|
|
2020 |
|
2019 |
||
Reinsurance recoverable on paid losses |
|
$ |
12.7 |
|
$ |
1.8 |
Ceded unpaid loss and LAE |
|
|
36.3 |
|
|
18.5 |
Total reinsurance recoverable |
|
$ |
49.0 |
|
$ |
20.3 |
To reduce credit exposure to reinsurance recoverable balances, the Company obtains letters of credit from certain reinsurers that are not authorized as reinsurers under U.S. state insurance regulations. In addition, under the terms of its reinsurance contracts, the Company may retain funds due to reinsurers as security for those recoverable balances. The Company has the following unsecured reinsurance recoverable balances from reinsurers at December 31, 2020 and 2019 with all but one having an A.M. Best rating of A (Excellent) or better ($ in millions):
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Premium written, earned and losses and LAE incurred
The impact of reinsurance treaties on the Company’s consolidated financial statements is as follows ($ in millions):
8. Deferred Acquisition Costs
Deferred acquisition costs consist primarily of commissions, premium taxes and other acquisition costs incurred that are directly related to the successful acquisition of business written on a direct basis. The amortization of deferred acquisition costs is included in other insurance expense in the consolidated statements of operations and comprehensive loss. The following table presents the policy acquisition costs deferred and amortized ($ in millions):
9. Property and Equipment, net
Property and equipment, net consists of the following ($ in millions):
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Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $1.7 million, $0.6 million and $0.1 million, respectively and included in general and administrative expenses on the consolidated statements of operations and comprehensive loss.
The Company capitalized costs related to the development of internal-use software of $3.2 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. Capitalized amounts are included as a component of property and equipment under computer equipment and software.
10. Intangible Assets
The Company acquired a trademark associated with the Company’s name in 2019. The indefinite-lived intangible asset has a carrying value of $0.6 million and $0.6 million as of December 31, 2020 and 2019. The Company intends to maintain the trademark and renewal will take place as needed.
11. Other Assets
Other assets consists of the following ($ in millions):
12. Unpaid Loss and Loss Adjustment Expense
The following table presents the activities in the liability for unpaid loss and loss adjustment expense (“LAE”) as of December 31, 2020 and 2019 ($ in millions):
(1) | Reinsurance recoverable in this table includes only ceded unpaid loss and LAE |
Unpaid loss and LAE includes anticipated salvage and subrogation recoverable.
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Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders’ equity. Additional variability exists due to accident year allocations of ceded amounts in accordance with reinsurance agreements, which is not expected to result in any changes to the ultimate liability. The Company had favorable development on net loss and LAE reserves of $0.1 million and $1.5 million as of December 31, 2020 and December 31, 2019. No additional premium or returned premium have been accrued as a result of prior year effects.
The Company compiles and aggregates its claims data by grouping the claims according to the year in which the claim occurred (Accident Year) when analyzing claim payment and emergence patterns and trends over time. For the purpose of defining claims frequency, the number of reported claims is by loss occurrence and includes claims that do not result in a liability or payment associated with them.
The following is information about incurred and paid loss development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities included within the net incurred loss amounts. The information about incurred and paid claims development for the years ended prior to December 31, 2020, is presented as unaudited supplementary information.
Incurred loss and allocated loss adjustment expense ("ALAE"), net of reinsurance
The following table presents incurred loss and ALAE, net of reinsurance, as well as IBNR loss reserves and the number of reported claims ($ in millions, except for number of claims):
Amounts in accident year 2016 for the years ended December 31, 2016, 2017, 2018, 2019 and 2020 were less than $0.1 million, respectively. IBNR as of December 31, 2020 for accident years 2018 to 2019 was less than $0.1 million.
Cumulative paid loss and ALAE, net of reinsurance
The following table presents cumulative paid loss and ALAE, net of reinsurance ($ in millions):
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Cumulative paid loss and ALAE net of reinsurance related to accident year 2016 were less than $0.0 million during the years ended December 31, 2016, 2017, 2018, 2019, and 2020, respectively.
The reconciliation of the net incurred and paid loss information in the loss reserve rollforward table and development tables with respect to the current accident year is as follows ($ in millions):
Average annual percentage payout of accident year incurred claims by age, net of reinsurance (unaudited supplementary information)
|
|
|
|
|
|
|
|
|
|
1 |
|
2 |
|
3 |
|
Property & Casualty |
|
78 |
% |
16 |
% |
5 |
% |
13. Other Liabilities and Accrued Expenses
Other liabilities and accrued expenses consists of the following ($ in millions):
14. Convertible Preferred Stock and Preferred Stock Warrants
Concurrently with the closing of the IPO, all shares of convertible preferred stock were converted into 31,557,107 shares of common stock (See Notes 1 and 15). As of December 31, 2020, there was no preferred stock outstanding.
As of December 31, 2019, the Company’s certificate of incorporation, as then in effect, authorized the Company to issue 31,557,107 shares of par value $0.00001 per share convertible preferred stock. The holders of convertible preferred stock have liquidation rights in the event of a deemed liquidation that, in certain situations, were not solely within the control of the Company. Therefore the convertible preferred stock was classified outside of stockholders’ equity (deficit) on the consolidated balance sheet.
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As of December 31, 2019, preferred stock consisted of the following ($ in millions, except for share amounts):
The holders of the preferred stock have the following rights and preferences:
Liquidation preference
In the event of a liquidation event, as defined in the Company’s Amended and Restated Certificate of Incorporation (the "COI"), the holders of Series D preferred Stock shall be entitled to receive, before any payment shall be made or declared to the holders of the Series Seed, A, B, and C preferred stock (collectively, the "Prior Preferred Stock") or to the holders of common stock, an amount equal to the Series D preferred stock original issue price, plus declared but unpaid dividends on such stock (the "Series D Preference"). After the full Series D Preference has been paid, and the liquidation preference of the Prior Preferred Stock has been paid, any remaining funds and assets of the Company legally available for distribution to stockholders shall be distributed pro rata among the holders of the common stock (the "Remaining Distribution"). For the purpose of determining the amount each holder of the preferred stock is entitled to receive, with respect to the Remaining Distribution, each such holder of the Series Seed, A, B, C, and D preferred stock shall be deemed to have converted such holder’s stock of Series Seed, A, B, C, and D preferred stock into common stock.
Voting rights
Holders of Series Seed, A, B, C and D preferred stock (collectively, "Preferred Stockholders") are entitled to vote on all matters and are entitled to the number of votes equal to the number of shares of common stock into which each share of preferred stock is then convertible, except as otherwise required by law or as set forth in the Company’s COI.
Dividends
Preferred Stockholders are entitled to receive, out of funds legally available, dividends prior and in preference to payment of any dividends (other than payable in common stock) on common stock, dividends at a rate of 8%, per share per annum, payable as and if declared by the board of directors. Such dividends shall not be cumulative. No dividends were declared or paid.
Conversion
Preferred stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such amount of fully paid and non-assessable common stock as is determined by dividing the Series Seed, A, B, C and D original issuance prices by the applicable conversion price in effect at the time of conversion. Preferred stock shall automatically be converted into common stock at the applicable conversion price in effect at the time for such conversion immediately upon the earlier of: (1) the closing of a qualified public offering with aggregate gross proceeds to the Company of at least $50.0 million, or (2) the date or the occurrence of an event, specified by vote or written consent or agreement of the Preferred Majority (as defined in the COI), provided that (i) if such election is made in connection with a Liquidation Event in which the holders of Series B Preferred would receive less than one times (1x) the Original Issue Price in respect of each share Series B preferred stock as a result of such election, then the vote of the Series B Majority (as defined in the COI) shall also be required, and (ii) if such election is made in connection with a Liquidation Event in which the holders of Series C Preferred would receive less than one times (1x) the Original Issue Price in respect of each share Series C preferred stock as a result of such election, then the vote of the Series C Majority (as defined in the COI) shall also be required.
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15. Stockholders’ Equity
Common stock
The Company completed its IPO in which the Company issued and sold 12,650,000 shares of its common stock at a public offering price of $29 per share, including 1,650,000 shares sold upon the exercise of the underwriter’s option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the IPO were approximately $335.6 million. Offering cost of approximately $3.5 million were recognized as a component of general and administrative expense for the year ended December 31, 2019.
In connection with the IPO, the Company’s outstanding convertible preferred stock converted into shares of common stock (See Note 14) on July 2, 2020. Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the preferred stock to common stock and additional paid in capital.
Upon closing of the IPO, the Company filed an amended and restated certificate of incorporation on July 7, 2020 with the Secretary of State of the State of Delaware to authorize the issuance of up to 200,000,000 shares of common stock, par value $0.00001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share.
As of December 31, 2020 and 2019, the Company was authorized to issue 200,000,000 shares and 52,000,000 shares, respectively, of par value $0.00001 per share common stock. The voting, dividend and liquidation rights of the holders of the Company’s common stock is subject to and qualified by the rights, powers and preferences of the holders of the preferred stock as set forth above.
Common stock confers upon its holders the following rights:
On February 18, 2020, the Company made a contribution of 500,000 newly issued shares of common stock to a related party, the Lemonade Foundation (see Note 19).
Undesignated Preferred Stock
As of December 31, 2020, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue up to 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share. As of December 31, 2020, there were no shares of undesignated preferred stock issued or outstanding.
Statutory dividend restrictions
The payment of dividends by Lemonade Insurance Company (‘LIC”) is restricted by state insurance regulations. Under New York insurance law, LIC may pay cash dividends only out of its statutory earned surplus. Generally, the maximum amount of dividends that LIC may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory policyholders’ surplus as of the end of the most recently reported quarter unless the NYS Department of Financial Services, upon prior application, approves a greater dividend distribution. Adjusted net investment income is defined for this purpose to include net investment income for the thirty-six months immediately preceding the declaration or distribution of the current dividend less any dividends declared or distributed during the period commencing thirty-six months prior to the declaration or distribution of the current dividend and ending twelve months prior thereto. As of December 31, 2020 and 2019, LIC was not eligible to make dividend payments.
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16. Stock-based Compensation
Share option plan
2020 Incentive Compensation Plan
On July 2, 2020, the Company’s board of directors adopted and the Company’s stockholders approved the 2020 Incentive Compensation Plan (the “2020 Plan”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s IPO on July 2, 2020. The 2020 Plan provides for the issuance of incentive stock options, non-qualified stock options, stock awards, stock units, stock appreciation rights and other stock-based awards.
The number of shares initially reserved for issuance under the 2020 Plan is 5,503,678 shares, inclusive of available shares previously reserved for issuance under the 2015 Incentive Share Option Plan, as amended and restated on September 4, 2019 (the “2015 Plan”). In addition, the number of shares reserved for issuance under the 2020 Plan is subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised. Annually, on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, the reserve will be increased by an amount equal to the lesser of (A) 5% of the shares outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares as determined by the Company’s board of directors, provided that no more than 3,650,000 shares may be issued upon the exercise of incentive stock options.
As of December 31, 2020, there were 4,936,501 shares of common stock available for future grants.
2020 Employee Stock Purchase Plan
On July 2, 2020, the Company’s board of directors adopted and the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (the "2020 ESPP"), which became effective immediately prior to the effectiveness of the registration statement for the Company’s IPO on July 2, 2020. The total shares of common stock initially reserved for issuance under the 2020 ESPP is limited to 1,000,000 shares. In addition, the number of shares available for issuance under the 2020 ESPP will be annually increased on January 1 of each calendar year beginning in 2021 and ending in and including 2030, by an amount equal to the lesser of (A) 1,000,000 Shares, (B) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (C) such smaller number of shares as is determined by the board of directors. The board of directors or a committee of the board of directors will administer and will have authority to interpret the terms of the 2020 ESPP and determine eligibility of participants. There were no shares issued under the 2020 ESPP as of December 31, 2020.
2015 Incentive Share Option Plan
In July 2015, the Company adopted the 2015 Incentive Share Option Plan (“2015 Plan”). The 2015 Plan has been amended and restated from time to time to increase the number of shares reserved for grant and to enable the grant of options to employees of the Company’s subsidiaries. Under the 2015 Plan, options to purchase common stock of the Company may be granted to employees, officers, directors and consultants of the Company. Each option granted can be exercised for one share of common stock of the Company. Options granted to employees generally vest over a period of no more than four years. The options expire ten years from the date of grant.
Pursuant to the 2015 Plan, the Company had reserved 7,312,590 shares of common stock for issuance. Effective immediately upon the approval of the 2020 Plan, the remaining shares of common stock available for future grant under the 2015 Plan were transferred to the 2020 Plan. As of December 31, 2020, there were no shares of common stock available for future grant under the 2015 Plan. Subsequent to the approval of the 2020 Plan, no additional grants were made under the 2015 Plan and any outstanding awards under the 2015 Plan will continue with their original terms.
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Options granted to employees and non-employees
The fair value of each option granted during the year ended December 31, 2020 and 2019 is estimated on the date of grant using the Black-Scholes model with the following assumptions (annualized percentage):
|
|
|
|
|
|
|
|
December 31, |
|
||
|
|
2020 |
|
2019 |
|
Weighted average expected term (years) |
|
6.09 |
|
6.06 |
|
Risk-free interest rate |
|
0.7 |
% |
1.7 |
% |
Volatility |
|
40 |
% |
45 |
% |
Expected dividend yield |
|
0 |
% |
0 |
% |
Expected volatility is based on companies at a comparable stage, as well as companies in the same or a similar industry. The expected term of options granted is based on the simplified method, which uses the midpoint between the vesting date and the contractual term in accordance with ASC 718, "Compensation — Stock Compensation". The risk-free interest rate is based on observed interest rates appropriate for the term of the Company’s stock options. The dividend yield assumption is based on the Company’s historical and expected future dividend payouts and may be subject to substantial change in the future.
The following table summarizes activity ($ in millions, except for option and average amounts):
Total stock-based compensation expenses resulting from stock options granted included in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2020, 2019 and 2018 were $10.6 million, $4.3 million and $2.1 million, respectively.
The unrecognized expense on options granted at December 31, 2020 was $36.9 million, with a remaining weighted average vesting period of 1.5 years.
Stock-based compensation expense
Stock-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows ($ in millions):
In 2016 and 2017, the Company entered into stock purchase agreements with two executive employees where in lieu of cash payment for the stock, promissory notes secured by the underlying stock purchased, were issued totaling $1.5 million and bearing a weighted average interest of 1.9% per annum, payable to the Company. One executive settled a portion of the existing promissory
F-48
note in an amount equal to $0.1 million inclusive of accumulated interest, for which 105,487 shares were released in 2019. There were 513,537 shares restricted under the stock purchase agreements as of December 31, 2019. On June 8, 2020, the Company received $1.3 million in cash from the two executives in full settlement of the outstanding promissory notes, including principal and accrued and unpaid interest.
Total stock-based compensation expense resulting from stock options granted to the executives for the years ended December 31, 2020 and 2019 was $0.2 million and $0.2 million, respectively. The unrecognized expense for options granted to these executives outstanding at December 31, 2020 was $0.1 million with a remaining weighted average vesting period of 0.3 years.
17. Income Taxes
Corporate tax rates
Lemonade, Inc., together with its U.S. subsidiaries, is taxed under the tax laws of the United States and the statutory enacted corporate income tax rate for the years ended December 31, 2020 and 2019 is approximately 21%.
The Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), which reduced the corporate income tax rate to 23%.
The statutory enacted corporate tax rate in the Netherlands is approximately 25%.
Deferred taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets are comprised of operating loss carryforwards and other temporary differences.
The components of the net deferred tax assets are as follows ($ in millions):
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Income tax expense
(Loss) income before tax consists of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|||||||
|
|
2020 |
|
2019 |
|
2018 |
|||
United States |
|
$ |
(123.6) |
|
$ |
(109.5) |
|
$ |
(53.0) |
Foreign |
|
|
2.8 |
|
|
1.6 |
|
|
0.4 |
Total |
|
$ |
(120.8) |
|
$ |
(107.9) |
|
$ |
(52.6) |
Income tax expense consists of the following ($ in millions):
The Company classifies all interest and penalties related to tax contingencies as income tax expense.
As of December 31, 2020, there were no material positions for which management believes it is reasonably possible that the total amounts will significantly increase or decrease within 12 months of the reporting date.
The provision for federal and foreign income taxes incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes.
A reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows:
Tax reform in the U.S.
The Company selected to apply the "period cost method" to account for the Global Intangible Low-Taxed Income, and treated it as a current-period expense for December 31, 2020, 2019 and 2018 and had a gross inclusion of $8.7 million, $5.5 million and $2.3 million respectively, in its taxable income.
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Tax benefits under Israel’s law for the Encouragement of Capital Investments, 1959 ("the Investment Law")
As of January 1, 2011, new legislation amending the Investment Law came into effect (the "2011 Amendment"). The 2011 Amendment introduced new statuses of "Preferred Company" and "Preferred Enterprise", replacing the then existing status of "Beneficiary Company" and "Beneficiary Enterprise". Similar to the previous status of Beneficiary Company, a Preferred Company is an industrial company owning a Preferred Enterprise which meets certain conditions, including a minimum threshold of 25% export, though the requirement for a minimum investment in productive assets was cancelled as part of the 2011 Amendment.
Under the 2011 Amendment, a uniform corporate tax rate will apply to all qualifying income of the Preferred Company, as opposed to the former law which was limited to income from the Approved Enterprises and Beneficiary Enterprise during the benefits period. During 2015 and 2016, the uniform corporate tax rate was 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. In December 2016, the Economic Efficiency Law 2016 (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), which includes Amendment 73 to the Investment Law ("the Amendment"), was published. According to the Amendment, a Preferred Enterprise located in Development Zone A will be subject to a tax rate of 7.5%, effective from January 1, 2017 and thereafter. The tax rate applicable to Preferred Enterprises located in other areas remains at 16%.
During 2019, Lemonade Ltd., which is located outside Development Zone A, adopted the Amendment and filed a request to receive Preferred Enterprises status.
Net operating loss carryforward
As of December 31, 2020, the Company has gross accumulated federal losses for tax purposes of $272.1 million, which can be offset against future taxable income. Of this federal loss carryforward, $35.5 million in losses will begin to expire in 2035 and $236.6 million in losses can be carried forward indefinitely. As of December 31, 2020, the Company has gross accumulated state and local losses for tax purposes of $528.3 million which will begin to expire in 2029.
The Company’s income tax returns for 2017 through 2019 remain subject to examination by the tax authorities.
Coronavirus Aid, Relief, and Economic Security Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. On December 27, 2020, the “Consolidated Appropriations Act, 2021” was signed into law in the U.S. to reprise several significant COVID relief provisions. As of December 31, 2020, the Company has determined that neither the CARES Act , the Consolidated Appropriations Act nor any changes to income tax laws or regulations in other jurisdictions had a significant impact on our effective tax rate.
18. Net Loss per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
The Company’s potentially dilutive securities, which include stock options, preferred stock and warrants to purchase shares of preferred stock, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented
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based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
December 31, |
||
|
|
2020 |
|
2019 |
Options to purchase common stock |
|
4,944,711 |
|
4,048,802 |
Convertible preferred stock (as converted to common stock) |
|
— |
|
31,557,107 |
|
|
4,944,711 |
|
35,605,909 |
In addition to the potentially dilutive securities noted above, in 2016 and 2017 the Company entered into stock purchase agreements with executive employees where in lieu of cash payment for the stock, promissory notes were issued (see Note 16). The Company determined the purchase of the stock to be non-substantive, and as such, the shares subject to the promissory notes will not be deemed issued until such time as the promissory notes have been repaid. Accordingly, the Company has excluded these shares in the calculation of basic and diluted net loss per share for the year ended December 31, 2019.
On June 8, 2020, all outstanding balances under the promissory notes were paid back to the Company and therefore, these shares were included in the calculation of basic and diluted net loss per share for the year ended December 31, 2020.
19. Related Party Transactions
The Company uses the services of a travel agency owned by a relative of one of the Company’s key stockholders. During the years ended December 31, 2020, 2019 and 2018, the Company incurred travel related expenses in the amount of approximately $0.1 million, $0.3 million and $0.2 million respectively, in connection with these services.
The Company has leased office space in the United States and the Netherlands from an affiliate. Rental expense recorded for the years ended December 31, 2020, 2019 and 2018 in connection with this leased space was less than $0.1 million, $0.1 million and $0.1 million, There were no outstanding amounts due to or from related parties as of December 31, 2020 and 2019.
The Company’s Chief Executive Officer and the Company’s President and Chief Operating Officer, both of whom are also members of the Company’s board of directors, are the two sole members of the board of directors of the Lemonade Foundation. The Company contributed 500,000 shares of common stock with a fair market value of $24.36 per share (see Note 15), and recorded $12.2 million of non-cash expense within general and administrative expense for the year ended December 31, 2020. The Company had a receivable of $0.1 million from the Lemonade Foundation in connection with certain expenses paid for by the Company on behalf of the Lemonade Foundation as of December 31, 2020.
20. Commitments and Contingencies
Litigation
The Company is occasionally a party to routine claims or litigation incidental to its business. The Company does not believe that it is a party to any pending legal proceeding that is likely to have a material adverse effect on its business, financial condition or results of operations.
Lease commitments
The Company and its subsidiaries lease their facilities under various operating lease agreements. The Company’s headquarters in New York is under a lease that expires in November 2022. The Company’s Israel based operations occupy offices with lease expiration dates that extend through July 2026. On March 18, 2019, the Company entered into a lease agreement to lease office space in Scottsdale, Arizona that expires in November 2024.
F-52
Aggregate minimum rental commitments under non-cancelable operating leases at December 31, 2020 are as follows ($ in millions):
|
|
|
|
2021 |
|
$ |
4.8 |
2022 |
|
|
5.0 |
2023 |
|
|
2.8 |
2024 |
|
|
2.8 |
2025 and thereafter |
|
|
4.4 |
|
|
$ |
19.8 |
Expenses for lease of facilities for the years ended December 31, 2020, 2019 and 2018 were approximately $3.8 million, $3.0 million, and $1.5 million respectively and are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Charges and guarantees
As of December 31, 2020, 2019 and 2018, the Company provided guarantees in an aggregate amount of $0.6 million, $0.6 million and $0.5 million, respectively, with respect to office leases.
21. Statutory Financial Information
U.S. state insurance laws and regulations prescribe accounting practices for determining statutory net income and capital and surplus for insurance companies. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. Statutory accounting practices ("SAP") prescribed or permitted by regulatory authorities for statements of the Company’s insurance subsidiary are (a) policy acquisition costs are expensed as incurred under SAP, whereas they are deferred and amortized under GAAP, (b) certain assets are not admitted for purposes of determining surplus under SAP, (c) investments in fixed income securities are carried at amortized cost under SAP, whereas such securities are carried at fair value under GAAP, and (d) the criteria for recognizing net deferred tax assets ("DTAs") and the methodologies used to determine such amounts are different under SAP and GAAP.
Risk-based capital (“RBC”) requirements promulgated by the National Association of Insurance Commissioners require property/casualty insurers to maintain minimum capitalization levels determined based on formulas incorporating various business risks of the insurance subsidiaries. LIC’s statutory capital and surplus amounted to $61.4 million and $48.4 million as of December 31, 2020 and 2019, respectively. The Company’s capital and surplus exceeded its authorized control level RBC of $10.9 million and $13.7 million as of December 31, 2020 and 2019, respectively.
F-53
22. Geographical Breakdown of Gross Written Premium
The Company has a single reportable segment and offers insurance coverage under the homeowners multi-peril, inland marine and general liability lines of business. Gross written premium by jurisdiction is as follows ($ in millions):
23. Subsequent Events
Follow-on Offering
On January 11, 2021, Lemonade announced the offering of 3,000,000 shares of its common stock for sale in an underwritten public offering (the “Primary Offering”). Certain selling stockholders of Lemonade also offered 1,524,314 shares of Lemonade’s common stock for sale in the offering (the “Secondary Offering”, combined with the “Primary Offering”, the “Offering”). Lemonade also granted the underwriters a 30-day option to purchase up to an additional 678,647 shares of Lemonade’s common stock. On January 13, 2021, the Company announced the pricing at $165 per share and upsizing to 3,300,000 shares for the Primary Offering, 1,524,314 shares for the Secondary Offering and up to an additional 723,647 shares for the underwriters.
Lemonade intends to use the proceeds from the Primary Offering for general corporate purposes, and will not receive any proceeds from the sale of shares by the selling stockholders in the Secondary Offering. The Offering closed on January 19, 2021, subject to customary closing conditions. The Offering resulted in the issuance of 3,300,000 shares of its common stock, including exercise of the underwriters’ option to purchase additional shares, and generated net proceeds of $525.2 million, after deducting underwriting discounts and other offering costs, to the Company. On February 1, 2021, the underwriters exercised their option to purchase additional shares, which resulted in the issuance and sale of an additional 718,647 shares of common stock by us, and generated additional net proceeds of $114.6 million.
In connection with the Offering noted above, Lemonade Foundation sold 100,000 of the contributed shares of the Company as discussed in Note 19.
Share-pool increase in 2020 Plan and 2020 ESPP
On January 1, 2021, the 2020 Plan was increased by 2,838,412 shares, equal to 5% of the aggregate number of outstanding common stock as of December 31, 2020. In addition, the 2020 ESPP was increased by 567,682 shares, equal to 1% of the aggregate number of outstanding common stock as of December 31, 2020 (Refer to Note 16).
F-54
Schedule V
LEMONADE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
||||
|
|
Balance at |
|
Charged to |
|
Charge |
|
|
|
|
Balance at |
||||
|
|
beginning |
|
costs and |
|
to other |
|
|
|
|
end of |
||||
($in millions) |
|
of period |
|
expenses |
|
accounts |
|
(Deductions) |
|
period |
|||||
Year Ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets |
|
$ |
66.0 |
|
$ |
40.9 |
|
$ |
— |
|
$ |
— |
|
$ |
106.9 |
Allowance for premium receivables |
|
$ |
0.2 |
|
$ |
2.2 |
|
$ |
— |
|
$ |
(1.9) |
|
$ |
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets |
|
$ |
29.4 |
|
$ |
36.6 |
|
$ |
— |
|
$ |
— |
|
$ |
66.0 |
Allowance for premium receivables |
|
$ |
— |
|
$ |
0.9 |
|
$ |
— |
|
$ |
(0.7) |
|
$ |
0.2 |
F-55
METROMILE OPERATING COMPANY
Index to Consolidated Financial Statements
|
|
F-83 |
|
F-57 |
|
F-58 |
|
F-59 |
|
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit |
F-60 |
F-61 |
|
F-62 |
F-56
METROMILE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
2021 |
|
2020 |
||
|
|
(unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Marketable securities - restricted |
|
$ |
49,792 |
|
$ |
24,651 |
Total investments |
|
|
49,792 |
|
|
24,651 |
Cash and cash equivalents |
|
|
159,157 |
|
|
19,150 |
Restricted cash and cash equivalents |
|
|
50,938 |
|
|
31,038 |
Receivable for securities |
|
|
624 |
|
|
— |
Premiums receivable |
|
|
18,655 |
|
|
16,329 |
Reinsurance recoverable on paid loss |
|
|
— |
|
|
8,475 |
Reinsurance recoverable on unpaid loss |
|
|
— |
|
|
33,941 |
Prepaid reinsurance premium |
|
|
— |
|
|
13,668 |
Prepaid expenses and other assets |
|
|
7,973 |
|
|
12,058 |
|
|
|
|
|
|
|
Deferred transaction costs |
|
|
— |
|
|
3,581 |
Deferred policy acquisition costs, net |
|
|
1,569 |
|
|
656 |
Telematics devices, improvements and equipment, net |
|
|
13,025 |
|
|
12,716 |
Website and software development costs, net |
|
|
22,008 |
|
|
18,401 |
Digital assets, net |
|
|
803 |
|
|
— |
Intangible assets |
|
|
7,500 |
|
|
7,500 |
Total assets |
|
$ |
332,044 |
|
$ |
202,164 |
|
|
|
|
|
|
|
Liabilities, Convertible Preferred Stock and Stockholders’ Deficit |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
70,798 |
|
$ |
57,093 |
Ceded reinsurance premium payable |
|
|
— |
|
|
27,000 |
Payable to carriers - premiums and LAE, net |
|
|
299 |
|
|
849 |
Unearned premium reserve |
|
|
17,393 |
|
|
16,070 |
Deferred revenue |
|
|
4,597 |
|
|
5,817 |
Accounts payable and accrued expenses |
|
|
8,907 |
|
|
8,222 |
Notes payable |
|
|
— |
|
|
51,934 |
Warrant liability |
|
|
6,693 |
|
|
83,652 |
Other liabilities |
|
|
6,302 |
|
|
8,554 |
Total liabilities |
|
|
114,989 |
|
|
259,191 |
|
|
|
|
|
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value; 10,000,000 and 89,775,268 shares authorized as of September 30, 2021, and December 31, 2020, respectively; 0 and 68,776,614 shares issued and outstanding as of September 30, 2021, and December 31, 2020, respectively; liquidation preference of $0 and $302,397 as of September 30, 2021, and December 31, 2020, respectively |
|
|
— |
|
|
304,469 |
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
|
|
|
|
Common stock, $0.0001 par value; 640,000,000 and 111,702,628 shares authorized as of September 30, 2021, and December 31, 2020, respectively; 127,737,209 and 8,992,039 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively |
|
|
13 |
|
|
1 |
Accumulated paid-in capital |
|
|
755,276 |
|
|
5,482 |
Note receivable from executive |
|
|
— |
|
|
(415) |
Accumulated other comprehensive (loss) income |
|
|
(15) |
|
|
11 |
Accumulated deficit |
|
|
(538,219) |
|
|
(366,575) |
Total stockholders’ equity (deficit) |
|
|
217,055 |
|
|
(361,496) |
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and stockholders’ equity (deficit) |
|
$ |
332,044 |
|
$ |
202,164 |
See notes to consolidated financial statements.
F-57
METROMILE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||
Revenue |
|
(unaudited) |
|
(unaudited) |
||||||||
Premiums earned, net |
|
$ |
28,142 |
|
$ |
3,139 |
|
$ |
47,316 |
|
$ |
9,360 |
Investment income |
|
|
30 |
|
|
81 |
|
|
85 |
|
|
500 |
Other revenue |
|
|
1,829 |
|
|
4,731 |
|
|
27,974 |
|
|
14,499 |
Total revenue |
|
|
30,001 |
|
|
7,951 |
|
|
75,375 |
|
|
24,359 |
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
27,480 |
|
|
4,443 |
|
|
62,383 |
|
|
12,214 |
Policy servicing expense and other |
|
|
5,674 |
|
|
4,119 |
|
|
15,172 |
|
|
12,803 |
Sales, marketing and other acquisition costs |
|
|
12,332 |
|
|
28 |
|
|
85,552 |
|
|
3,616 |
Research and development |
|
|
5,130 |
|
|
1,832 |
|
|
11,898 |
|
|
6,668 |
Amortization of capitalized software |
|
|
2,838 |
|
|
2,815 |
|
|
8,190 |
|
|
8,311 |
Other operating expenses |
|
|
14,207 |
|
|
3,924 |
|
|
39,534 |
|
|
13,138 |
Total costs and expenses |
|
|
67,661 |
|
|
17,161 |
|
|
222,729 |
|
|
56,750 |
Loss from operations |
|
|
(37,660) |
|
|
(9,210) |
|
|
(147,354) |
|
|
(32,391) |
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
— |
|
|
1,513 |
|
|
15,974 |
|
|
3,453 |
Impairment on digital assets |
|
|
117 |
|
|
— |
|
|
183 |
|
|
— |
(Decrease) increase in fair value of stock warrant liability |
|
|
(11,020) |
|
|
(26) |
|
|
8,133 |
|
|
640 |
Total other expense |
|
|
(10,903) |
|
|
1,487 |
|
|
24,290 |
|
|
4,093 |
Loss before taxes |
|
|
(26,757) |
|
|
(10,697) |
|
|
(171,644) |
|
|
(36,484) |
Income tax benefit |
|
|
— |
|
|
(67) |
|
|
— |
|
|
(67) |
Net loss |
|
$ |
(26,757) |
|
$ |
(10,630) |
|
$ |
(171,644) |
|
$ |
(36,417) |
Net loss per share, basic and diluted |
|
$ |
(0.21) |
|
$ |
(1.20) |
|
$ |
(1.56) |
|
$ |
(4.10) |
Weighted-average shares used in computing basic and diluted net loss per share |
|
|
127,166,524 |
|
|
8,888,099 |
|
|
109,988,189 |
|
|
8,882,040 |
See notes to consolidated financial statements.
F-58
METROMILE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||
|
|
(unaudited) |
|
(unaudited) |
||||||||
Net loss |
|
$ |
(26,757) |
|
$ |
(10,630) |
|
$ |
(171,644) |
|
$ |
(36,417) |
Unrealized net loss on marketable securities |
|
|
— |
|
|
(64) |
|
|
(26) |
|
|
(33) |
Total comprehensive loss |
|
$ |
(26,757) |
|
$ |
(10,694) |
|
$ |
(171,670) |
|
$ |
(36,450) |
See notes to consolidated financial statements.
F-59
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’
(DEFICIT) EQUITY
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock |
|
Common Stock |
|
|
|
|
Note |
|
Comprehensive |
|
Accumulated |
|
|
|
|
|||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
APIC |
|
Receivable |
|
Income |
|
Deficit |
|
Total |
||||||||
Balance as of December 31, 2019 |
|
67,728,286 |
|
$ |
304,469 |
|
|
8,730,377 |
|
$ |
1 |
|
$ |
3,816 |
|
$ |
(408) |
|
$ |
60 |
|
$ |
(246,478) |
|
$ |
(243,009) |
Retroactive application of recapitalization |
|
1,048,328 |
|
|
— |
|
|
135,133 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
As adjusted, beginning of period |
|
68,776,614 |
|
|
304,469 |
|
|
8,865,510 |
|
|
1 |
|
|
3,816 |
|
|
(408) |
|
|
60 |
|
|
(246,478) |
|
|
(243,009) |
Exercises and vested portion of stock options |
|
— |
|
|
— |
|
|
20,452 |
|
|
— |
|
|
50 |
|
|
— |
|
|
— |
|
|
— |
|
|
50 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
555 |
|
|
— |
|
|
— |
|
|
— |
|
|
555 |
Interest on stock purchase promissory note |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6) |
|
|
— |
|
|
— |
|
|
(6) |
Unrealized net gain on marketable securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
31 |
|
|
— |
|
|
31 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(25,787) |
|
|
(25,787) |
Balance as of June 30, 2020 |
|
68,776,614 |
|
$ |
304,469 |
|
|
8,885,962 |
|
$ |
1 |
|
$ |
4,421 |
|
$ |
(414) |
|
$ |
91 |
|
$ |
(272,265) |
|
|
(268,166) |
Exercises and vested portion of stock options |
|
— |
|
|
— |
|
|
7,630 |
|
|
— |
|
|
20 |
|
|
— |
|
|
— |
|
|
— |
|
|
20 |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
426 |
|
|
— |
|
|
— |
|
|
— |
|
|
426 |
Interest on stock purchase promissory note |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2) |
|
|
— |
|
|
— |
|
|
(2) |
Unrealized net gain on marketable securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(64) |
|
|
— |
|
|
(64) |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,630) |
|
|
(10,630) |
Balance as of September 30, 2020 |
|
68,776,614 |
|
$ |
304,469 |
|
|
8,893,592 |
|
$ |
1 |
|
$ |
4,867 |
|
$ |
(416) |
|
$ |
27 |
|
$ |
(282,895) |
|
$ |
(278,416) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020 |
|
67,728,286 |
|
$ |
304,469 |
|
|
8,854,978 |
|
$ |
1 |
|
$ |
5,482 |
|
$ |
(415) |
|
$ |
11 |
|
$ |
(366,575) |
|
$ |
(361,496) |
Retroactive application of recapitalization |
|
1,048,328 |
|
|
137,061 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted, beginning of period |
|
68,776,614 |
|
$ |
304,469 |
|
$ |
8,992,039 |
|
$ |
1 |
|
$ |
5,482 |
|
$ |
(415) |
|
$ |
11 |
|
$ |
(366,575) |
|
$ |
(361,496) |
Stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
12,021 |
|
|
— |
|
|
— |
|
|
— |
|
|
12,021 |
Exercises and vested portion of stock options |
|
— |
|
|
— |
|
|
1,089,670 |
|
|
— |
|
|
2,175 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,175 |
Conversion of promissory note |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(415) |
|
|
415 |
|
|
— |
|
|
— |
|
|
— |
RSUs withheld for tax purposes |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(422) |
|
|
— |
|
|
— |
|
|
— |
|
|
(422) |
Unrealized net loss on marketable securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(26) |
|
|
— |
|
|
(26) |
Exercise of convertible preferred stock warrants |
|
3,974,655 |
|
|
132,718 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
Conversion of preferred stock to common |
|
(72,751,269) |
|
|
(437,187) |
|
|
72,751,269 |
|
|
7 |
|
|
437,187 |
|
|
— |
|
|
— |
|
|
— |
|
|
437,194 |
Business Combination and PIPE financing |
|
— |
|
|
— |
|
|
43,894,156 |
|
|
4 |
|
|
290,953 |
|
|
— |
|
|
— |
|
|
— |
|
|
290,957 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(144,887) |
|
|
(144,887) |
Balance as of June 30, 2021 |
|
— |
|
$ |
— |
|
|
126,727,134 |
|
$ |
12 |
|
$ |
746,981 |
|
$ |
— |
|
$ |
(15) |
|
$ |
(511,462) |
|
$ |
235,516 |
401K match with MILE stock |
|
— |
|
|
— |
|
|
37,170 |
|
|
— |
|
|
321 |
|
|
— |
|
|
— |
|
|
— |
|
|
321 |
Exercises and vested portion of stock options |
|
— |
|
|
— |
|
|
5,968 |
|
|
— |
|
|
46 |
|
|
— |
|
|
— |
|
|
— |
|
|
46 |
Stock-based compensation |
|
— |
|
|
— |
|
|
966,937 |
|
|
1 |
|
|
7,928 |
|
|
— |
|
|
— |
|
|
— |
|
|
7,929 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(26,757) |
|
|
(26,757) |
Balance as of September 30, 2021 |
|
— |
|
$ |
— |
|
|
127,737,209 |
|
$ |
13 |
|
$ |
755,276 |
|
$ |
— |
|
$ |
(15) |
|
$ |
(538,219) |
|
$ |
217,055 |
See notes to consolidated financial statements.
F-60
METROMILE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2021 |
|
2020 |
||
|
|
(unaudited) |
||||
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ |
(171,644) |
|
$ |
(36,417) |
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,523 |
|
|
12,503 |
Stock-based compensation |
|
|
19,949 |
|
|
981 |
Change in fair value of warrant liability |
|
|
8,133 |
|
|
640 |
Telematics devices unreturned |
|
|
1,616 |
|
|
684 |
Amortization of debt issuance costs |
|
|
11,695 |
|
|
796 |
Noncash interest and other expense |
|
|
4,388 |
|
|
8,344 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Premiums receivable |
|
|
(2,326) |
|
|
(1,171) |
Accounts receivable |
|
|
3,526 |
|
|
692 |
Reinsurance recoverable on paid loss |
|
|
8,475 |
|
|
4,752 |
Reinsurance recoverable on unpaid loss |
|
|
33,941 |
|
|
(4,746) |
Prepaid reinsurance premium |
|
|
13,668 |
|
|
(1,899) |
Prepaid expenses and other assets |
|
|
456 |
|
|
3,636 |
Deferred transaction costs |
|
|
3,581 |
|
|
— |
Deferred policy acquisition costs, net |
|
|
(1,951) |
|
|
(482) |
Digital assets, net |
|
|
(986) |
|
|
— |
Accounts payable and accrued expenses |
|
|
476 |
|
|
(2,115) |
Ceded reinsurance premium payable |
|
|
(27,000) |
|
|
(8,683) |
Loss and loss adjustment expense reserves |
|
|
13,705 |
|
|
1,157 |
Payable to carriers - premiums and LAE, net |
|
|
(550) |
|
|
(1,558) |
Unearned premium reserve |
|
|
1,323 |
|
|
2,234 |
Deferred revenue |
|
|
(1,220) |
|
|
249 |
Deferred tax liability |
|
|
— |
|
|
(67) |
Other liabilities |
|
|
(2,109) |
|
|
1,134 |
Net cash used in operating activities |
|
|
(70,331) |
|
|
(19,336) |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of telematics devices, improvements, and equipment |
|
|
(5,220) |
|
|
(6,269) |
Payments relating to capitalized website and software development costs |
|
|
(12,077) |
|
|
(10,320) |
Net change in payable/(receivable) for securities |
|
|
(624) |
|
|
225 |
Purchase of securities |
|
|
(44,828) |
|
|
(18,088) |
Sales and maturities of marketable securities |
|
|
19,484 |
|
|
39,040 |
Net cash (used in) provided by investing activities |
|
|
(43,265) |
|
|
4,588 |
Cash flow from financing activities: |
|
|
|
|
|
|
Proceeds from notes payable |
|
|
2,015 |
|
|
25,880 |
Payment on notes payable |
|
|
(69,351) |
|
|
(222) |
Proceeds from merger with INSU II, net of issuance costs |
|
|
336,469 |
|
|
— |
Proceeds from exercise of common stock options and warrants |
|
|
4,370 |
|
|
70 |
Net cash provided by financing activities |
|
|
273,503 |
|
|
25,728 |
Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
159,907 |
|
|
10,980 |
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period |
|
|
50,188 |
|
|
42,887 |
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period |
|
$ |
210,095 |
|
$ |
53,867 |
Supplemental cash flow data: |
|
|
|
|
|
|
Cash paid for interest |
|
$ |
3,164 |
|
$ |
2,233 |
Non-cash investing and financing transactions: |
|
|
|
|
|
|
Net liabilities assumed in the Business Combination |
|
$ |
45,516 |
|
$ |
— |
Net exercise of preferred stock warrants |
|
$ |
56,160 |
|
$ |
— |
Net exercise of promissory note |
|
$ |
415 |
|
$ |
— |
Capitalized website and software development costs included in accrued liabilities |
|
$ |
280 |
|
$ |
125 |
Capitalized stock-based compensation |
|
$ |
639 |
|
$ |
336 |
Reclassification of liability to equity for vesting of stock options |
|
$ |
169 |
|
$ |
— |
Preferred stock warrant issued in conjunction with note payable |
|
$ |
— |
|
$ |
12,464 |
See notes to consolidated financial statements.
F-61
METROMILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview and Basis of Presentation
Metromile, Inc. (together with its consolidated subsidiaries, the “Company”) formerly known as INSU Acquisition Corp. II (“INSU”), was incorporated in Delaware on October 11, 2018. INSU was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.
The registration statement for INSU’s initial public offering (“IPO”) was declared effective on September 2, 2020. On September 8, 2020 INSU consummated the IPO of 23,000,000 units (“Units”), and, with respect to the shares of Class A common stock, par value $0.0001 (the “Class A Common Stock”) included in the Units sold (the “Public Shares”), which included the full exercise by the underwriters of their over-allotment option in the amount of 3,000,000 Units, at $10.00 per Unit, generating gross proceeds of $230.0 million. Simultaneously with the closing of the IPO, INSU consummated the sale of 540,000 units (the “Placement Units”), at a price of $10.00 per Placement Unit in a private placement to the sponsor and Cantor Fitzgerald & Co. (“Cantor”), generating gross proceeds of $5.4 million. Transaction costs amounted to $14.2 million, consisting of $4.0 million in cash underwriting fees, $9.8 million of deferred underwriting fees and $0.4 million of other offering costs. Following the closing of the IPO on September 8, 2020, $230.0 million ($10.00 per Unit) from the net proceeds of the sale of the Units in the IPO and the sale of the Placement Units was placed in a trust account (the “Trust Account”), which was invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 185 days or less, or in money market funds meeting certain conditions under Rule 2a-7 of the Investment Company Act, as determined by INSU.
Acquisition of Metromile, Inc. by Lemonade, Inc.
On November 8, 2021, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Lemonade, Inc., a Delaware corporation (“Lemonade”), Citrus Merger Sub A, Inc., a Delaware corporation and a wholly-owned subsidiary of Lemonade (“Acquisition Sub I”) and Citrus Merger Sub B, LLC, a Delaware limited liability company and wholly owned subsidiary of Lemonade (“Acquisition Sub II”). The Agreement provides that, pursuant to and on the terms and conditions set forth therein, (i) Acquisition Sub I will merge with and into the Company (the “First Merger” and the effective time of the First Merger, the “First Effective Time”)), with the Company continuing as the surviving entity (the “Initial Surviving Corporation”), and (ii) the Initial Surviving Corporation will merge with and into Acquisition Sub II (the “Second Merger”), with Acquisition Sub II continuing as the surviving entity as a wholly owned subsidiary of Lemonade (the First Merger, the Second Merger and the other transactions contemplated by the Agreement, collectively, the “Proposed Transaction”). The Proposed Transaction implies a fully diluted equity value of approximately $500 million, or an enterprise value of about $340 million net of unrestricted cash and cash equivalents as of September 30, 2021. Under the terms of the Agreement, stockholders of the Company will receive shares of Lemonade common stock at a ratio of 19:1. The transaction is conditioned on customary closing conditions, including receipt of applicable regulatory approvals and approval of the Proposed Transaction by stockholders of the Company, and is expected to close in the second quarter of 2022. The Boards of Directors of both the Company and Lemonade have each approved the Proposed Transaction.
For additional information related to the Agreement and the Proposed Transaction, see Note 18, Subsequent Events.
Business Combination
On February 9, 2021, the Company consummated a merger pursuant to that certain Agreement and Plan of Merger and Reorganization, dated November 24, 2020, and as amended on January 12, 2021 and February 8, 2021 (the “Merger Agreement”), by and among INSU, INSU II Merger Sub Corp., a Delaware corporation and a direct wholly owned subsidiary of INSU (“Merger Sub”) and MetroMile, Inc., a Delaware corporation (“Legacy Metromile”), pursuant to which, among other things, Merger Sub merged with and into Legacy Metromile, with Legacy Metromile surviving the merger as a wholly owned subsidiary of the Company (the “Merger,” and together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). In connection with the closing of the Business Combination (the “Closing”), the Company changed its name to Metromile, Inc., and Legacy Metromile changed its name to Metromile Operating Company. Unless the context indicates otherwise, references to “INSU” refer to the historical operations of INSU prior to the Closing, and references to the “Company,” “Metromile” and “Metromile Operating Company” refer to the historical operations of Legacy Metromile and its consolidated subsidiaries prior to the Closing and the business of the combined company and its subsidiaries following the Closing.
F-62
The Merger was accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States (“GAAP”). Under this method of accounting, INSU, who was the legal acquirer, is treated as the “acquired” company for financial reporting purposes and Metromile Operating Company is treated as the accounting acquirer. This determination was primarily based on the fact that Metromile Operating Company’s stockholders prior to the Merger have a majority of the voting power of the Company, Metromile Operating Company’s senior management now comprise substantially all of the senior management of the Company, the relative size of Metromile Operating Company compared to the Company, and that Metromile Operating Company’s operations comprise the ongoing operations of the Company. Accordingly, for accounting purposes, the Merger is treated as the equivalent of a capital transaction in which Metromile Operating Company issued stock for the net assets of INSU, which are stated at historical cost, with no goodwill or other intangible assets recorded, and Metromile Operating Company’s financial statements became those of the Company.
Pursuant to the Amended and Restated Certificate of Incorporation of the Company, at the closing, each share of INSU’s Class B Common Stock, par value $0.0001 per share (the “Class B Common Stock”), converted into one share of INSU’s Class A Common Stock. After the Closing and following the effectiveness of the Second Amended and Restated Certificate of Incorporation of the Company, each share of Class A Common Stock was automatically reclassified, redesignated and changed into one validly issued, fully paid and non-assessable share of the Company’s Common Stock, par value $0.0001 per share (the “Common Stock”), without any further action by the Company or any stockholder thereof.
On February 9, 2021, a number of purchasers (each, a “Subscriber”) purchased from the Company an aggregate of 17,000,000 shares of Common Stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $170.0 million, pursuant to separate subscription agreements (each, a “Subscription Agreement”) entered into effective as of November 24, 2020. Pursuant to the Subscription Agreements, the Company gave certain registration rights to the Subscribers with respect to the PIPE Shares. The sale of PIPE Shares was consummated concurrently with the Closing.
Description of Business after the Business Combination
The Company, through Metromile Operating Company and its wholly owned subsidiary, Metromile Insurance Services LLC (the “GA Subsidiary”), sells pay-per-mile auto insurance to consumers in eight states: California, Washington, Oregon, Illinois, Pennsylvania, Virginia, New Jersey, and Arizona. Metromile Operating Company has a wholly owned subsidiary, Metromile Insurance Company (the “Insurance Company”), which focuses on property and casualty insurance. In January 2019, Metromile Operating Company formed Metromile Enterprise Solutions, LLC (“Enterprise”), a wholly owned subsidiary, which focuses on selling its insurance solution technology to third party customers.
The Insurance Company provides auto insurance to customers with premiums based on a flat rate plus an adjustable rate based on actual miles driven. To record miles driven, the GA Subsidiary may provide drivers with a telematics device, the Metromile Pulse, which plugs into a car’s on-board diagnostic system to capture mileage.
The GA Subsidiary acts as a full-service insurance General Agent (“GA”). As a full-service GA, the subsidiary provides all policy pricing, binding, and servicing (payments and customer service) for the policyholders. Until late 2016, the GA Subsidiary underwriting carrier was National General Insurance (“NGI”) and its related carriers. The GA Subsidiary began transitioning NGI-issued policies upon renewal in late 2016 to the Insurance Company and has only a small number of policies with NGI as of September 30, 2021. Policies underwritten by the Insurance Company are binded by the GA as well as through a network of independent agents.
NGI handles claims for the GA Subsidiary’s policies underwritten by NGI and its related carriers, for which it pays NGI a fee for the LAE. NGI bears the risk of loss under these policies. Accordingly, the Company has no exposure to claims that would require an accrual for those NGI-related losses.
The Insurance Company bears risk of loss under all insurance policies it underwrites. The financial statements include reserves for future claims based on actuarial estimates for the Insurance Company. The Loss and LAE reserves as of September 30, 2021 (unaudited) and December 31, 2020 were $70.8 million and $57.1 million, respectively.
Basis of Presentation
The accompanying interim unaudited consolidated financial statements have been prepared in accordance GAAP and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). References to the Accounting
F-63
Standard Codification (“ASC”) and Accounting Standard Updates (“ASU”) included hereinafter refer to the Accounting Standards Codification and Updates established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP. The consolidated financial statements include the accounts of Metromile, Inc. and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.
These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2020, which are included in the Company’s Post-Effective Amendment No. 1 to Form S-1 filed with the SEC on August 27, 2021.
Liquidity and Capital Resources
The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring losses and an accumulated deficit since its inception, related primarily to the development of its website, technology, customer acquisition, insurance losses and other operations. The Company obtained additional funding of $310.0 million in 2021 in connection with the Business Combination to support its ongoing operations and fund future growth of the Company. Management has concluded that substantial doubt regarding the Company’s ability to continue as a going concern for the period November 2021 through December 2022 has been alleviated based upon the recent funding and future operational improvement plans.
In the first quarter of 2020, the global pandemic caused by COVID-19 breached the U.S. and resulted in Shelter-In-Place orders across the country and insurance department bulletins limiting the actions that insurance carriers may take and reducing the amount of premiums that will be promptly received in the short term. These factors resulted in a significant decline in both revenues and losses of the Insurance Company. In addition, in response to these events, the Company performed a temporary reduction in force of 125 employees to further align costs with revenue during the second quarter of 2020. The Company will continue to monitor the situation closely, but given the uncertainty about the duration or magnitude of the pandemic, management cannot estimate the impact on its financial condition, operations, and workforce.
Revision to Previously Issued Financial Statements
The Company has made revisions to the table in Note 15, Segment and Geographic Information, which presents a reconciliation of the Company’s total reportable segments’ contributions to its total loss from operations. To reflect proper classification of certain income and expense amounts, $1.8 million was reclassified from Policy services expenses and other to Other income within the reconciliation presented for the nine months ended September 30, 2020. The revisions had no effect on total liabilities, stockholders’ deficit or net loss after taxes as previously reported.
Reclassifications
Reclassifications have been made to the prior year balances to conform to the current year presentation. In particular, accounts receivable has been combined with prepaid expenses and other assets into a single line on the consolidated balance sheets. The reclassifications had no effect on stockholders’ deficit or net loss after taxes as previously reported.
Unaudited interim financial information
The accompanying interim consolidated balance sheet as of September 30, 2021, the interim consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ (deficit) equity for the three months and nine months ended September 30, 2020 and 2021, and cash flows for the nine months ended September 30, 2020 and 2021 are unaudited. These unaudited interim consolidated financial statements are presented in accordance with the rules and regulations of the SEC and do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with GAAP. In management’s opinion, the unaudited interim consolidated financial statements have been prepared on the same basis as the annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2021 and the Company’s consolidated results of operations for the three months and nine months ended September 30, 2020 and 2021, and cash flows for the nine months ended September 30, 2020 and 2021. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other future interim or annual periods.
F-64
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. On an ongoing basis, the Company’s management evaluates estimates, including those related to contingent assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. The Company’s principal estimates include: unpaid losses and LAE reserves; the fair value of investments; the fair value of stock-based awards; the fair value of the warrant liability; premium refunds to policyholders; reinsurance recoverable on unpaid loss; and the valuation allowance for income taxes. Because of uncertainties associated with estimating the amounts, timing and likelihood of possible outcomes, actual results could differ materially from these estimates.
There have been no material changes to our significant accounting policies from our audited consolidated financial statements included in the Company’s Post-Effective Amendment No. 2 to Form S-1 filed with the SEC on August 27, 2021.
Digital Assets, Net
During the nine months ended September 30, 2021, the Company purchased an aggregate of $1.0 million in digital assets, comprised solely of bitcoin. The Company currently accounts for these digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other. The Company has ownership of and control over the purchased bitcoin asset and uses third-party custodial services to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheets at cost, net of any impairment losses incurred since acquisition.
An impairment analysis is performed at each reporting period to identify whether events or changes in circumstances, in particular decreases in the quoted prices on active exchanges, indicate that it is more likely than not that digital assets held by the Company are impaired. The fair value of digital assets is determined on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that the Company has determined is its principal market for bitcoin (Level 1 inputs). If the carrying value of the digital asset exceeds the fair value based on the lowest price quoted in the active exchanges during the period, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.
Impairment losses are recognized within Other expense in the consolidated statements of operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale. There were no digital assets sales during the nine months ended September 30, 2021.
Recent Issued Accounting Pronouncements
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (the “JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election.
In February 2016, FASB issued ASU 2016-2, Leases (Topic 842). Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model and the new revenue recognition standard. The standard will be effective beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating this new standard and the impact it will have on its consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), intended to improve the timing, and enhance the accounting and disclosure, of credit losses on financial assets. This update modified the existing accounting guidance related to the impairment evaluation for available-for-sale debt securities, reinsurance recoverables, and premiums receivables and could result in the creation of an allowance for credit losses as a contra asset account. The ASU requires a cumulative-effect change to retained earnings in the period of adoption and prospective changes on previously recorded impairments, to the extent applicable. The amendments in ASU 2016-13 are effective for fiscal years
F-65
beginning after December 15, 2022. The Company is currently evaluating this new standard and the impact it will have on its consolidated financial statements.
In March 2020, FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued. The standard is effective upon issuance through December 31, 2022 and may be applied at the beginning of the interim period that includes March 12, 2020 or any date thereafter. The Company is currently evaluating this new standard and the impact it will have on its consolidated financial statements.
2. Fair Value of Financial Instruments
Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Cash and Cash Equivalents
The Company’s cash and cash equivalents are demand and money market accounts and other highly liquid investments with an original maturity of three months or less. Demand and money market accounts are at stated values. Fair values for other cash equivalents are classified as Level 1 and are based upon appropriate valuation methodology.
Marketable Securities - Available-for-sale
The Company classifies highly liquid money market funds, U.S. Treasury bonds and certificates of deposit within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets and upon models that take into consideration such market-based factors as recent sales, risk-free yield curves, and prices of similarly rated bonds. Commercial paper, corporate bonds, corporate debt securities, repurchase agreements, and asset backed securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which may not be actively traded. The Company did not hold any securities classified within Level 3 as of September 30, 2021 (unaudited) and December 31, 2020.
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Assets measured on a recurring basis at fair value, primarily related to marketable securities, included in the consolidated balance sheets as of September 30, 2021 (unaudited) and December 31, 2020 are set forth below (in thousands):
Public and Private Warrants
At the Closing, Metromile Operating Company acquired the net liabilities from INSU, including warrants exercisable for common stock. The Company estimated the fair value of warrants exercisable for common stock measured at fair value on a recurring basis at the respective dates using the public trading price, for the Public warrants, and the Black-Scholes option valuation model, for the Private placement warrants (together with the public warrants, the “Warrants”), respectively. The Black-Scholes option valuation model inputs are based on the estimated fair value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, the risk-free interest rates, the expected dividends, and the expected volatility of the price of the Company’s underlying stock. These estimates, especially the expected volatility, are highly judgmental and could differ materially in the future.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The Company considers its Public warrants to be Level 1 liabilities as it uses publicly and readily available information to measure the fair value of the warrants. For the Company’s Private placement warrants, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date and as such are classified as Level 2 liabilities.
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The table below sets forth a summary of changes in the fair value of the Company’s Level 1, Level 2, and Level 3 liabilities for the year ended December 31, 2020 and the nine months ended September 30, 2021 (unaudited) (in thousands):
The fair value of the Private placement warrants was determined using the Black-Scholes option valuation model using the following assumptions for values as of September 30, 2021:
In connection with the Merger, each of the Metromile Operating Company convertible preferred stock warrants outstanding as of December 31, 2020 was exercised for shares of Metromile Operating Company common stock. Therefore, there were no convertible preferred stock warrants outstanding after the Closing.
Through the three months and nine months ended September 30, 2021 and 2020 (unaudited), there were no transfers to or from any Level. The carrying amounts of accounts payable, accrued expenses and notes payable approximate their fair values because of the relatively short periods until they mature or are required to be settled.
3. Marketable Securities
The Company has investments in certain debt securities that have been classified as available-for-sale and recorded at fair value. These investments are included in both assets for securities with a maturity of one-year or less and assets for securities with a maturity of more than one-year. These securities are held in the Insurance Company and shown as restricted given that the transfer of these assets is subject to the approval of the state regulators. As of September 30, 2021 (unaudited) and December 31, 2020, deposits with various states consisted of bonds, cash and cash equivalents with carrying values of $5.1 million and $4.9 million, respectively.
When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of December 31, 2020 and September 30, 2021 (unaudited), the Company does not consider any of its investments to be other-than-temporarily impaired. Unrealized gains and losses arising from the revaluation of available-for-sale securities are included in the consolidated statements of other comprehensive loss. Realized gains and losses on sales of investments are generally determined using the specific identification method and are included in the consolidated statements of operations.
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The cost basis and fair value of available-for-sale securities as of September 30, 2021 (unaudited) and December 31, 2020 are presented below (in thousands):
The amortized cost and estimated fair value of marketable securities as of September 30, 2021 (unaudited) and December 31, 2020 and are shown below by contractual maturity (in thousands):
4. Business Combination
As described in Note 1, the Business Combination was consummated on February 9, 2021 (the “Closing Date”). For financial accounting and reporting purposes under GAAP, the Business Combination was accounted for as a reverse acquisition and recapitalization, with no goodwill or other intangible asset recorded. As a result, the historical operations of Metromile Operating Company are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Metromile Operating Company prior to the Business Combination; (ii) the combined results of the Company and Metromile Operating Company following the Business Combination; (iii) the assets and liabilities of Metromile Operating Company at their historical cost; and (iv) the Company’s equity structure for all periods presented.
In accordance with guidance applicable to these circumstances, the equity structure has been restated in all comparative periods up to the Closing Date, to reflect the number of shares of the Company’s common stock issued to Metromile Operating Company stockholders in connection with the recapitalization transaction. As such, the shares and corresponding capital amounts and earnings per share related to Metromile Operating Company redeemable convertible preferred stock and Metromile Operating Company common stock prior to the Business Combination have been retroactively restated as shares reflecting the exchange ratio established in
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the Merger Agreement. Activity within the statement of stockholder’s equity for the issuances and repurchases of Metromile Operating Company redeemable preferred stock, were also retroactively converted to Metromile Operating Company common stock.
The following table reconciles the elements of the Business Combination to the consolidated statement of cash flows and the consolidated statement of stockholders’ equity for the nine months ended September 30, 2021 (dollars in thousands).
(1) | The number of Metromile Operating Company shares was determined from the 78,313,665 shares of Metromile Operating Company common and preferred stock outstanding immediately prior to the closing of the Business Combination, which are presented net of the common and preferred stock redeemed, converted at the Exchange Ratio of 1.01547844. All fractional shares were rounded down. |
5. Deferred Policy Acquisition Costs, Net
Deferred policy acquisition costs, net ("DPAC") consists of the following (in thousands):
(1) As of June 30, 2021, the Company had commuted all of its reinsurance agreements. Balance from this period onward represents deferred commissions from the Company’s relationship with NGI. See Note 1, Overview and Basis of Presentation for more detail regarding NGI.
For the three months ended September 30, 2021 and 2020 (unaudited), total amortization expense was approximately $0.3 million and $0.4 million , respectively. For the nine months ended September 30, 2021 and 2020 (unaudited), total amortization expense was approximately $1.0 million and $1.2 million, respectively. During all periods presented the amortization expense was included as part of sales, marketing and other acquisition costs in the Company’s consolidated statements of operations.
6. Digital Assets, Net
In June 2021, the Company purchased and received $1.0 million of bitcoin. During the three months and nine months ended September 30, 2021 (unaudited), the Company recorded $0.1 million and $0.2 million, respectively, of impairment losses on bitcoin. There were no realized gains or losses recognized during the three months and nine months ended September 30, 2021 (unaudited). As
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of September 2021 (unaudited), the carrying value of the Company’s bitcoin digital assets held was $0.8 million, which reflects cumulative impairments of $0.2 million. The fair market value of bitcoin held as of September 30, 2021 (unaudited), was $1.2 million.
7. Loss and Loss Adjustment Expense Reserves
The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE, net of reinsurance recoverable, for the nine months ended September 30, 2020 and 2021 (unaudited) (in thousands):
These reserve estimates are generally the result of ongoing analysis of recent loss development trends and emerging historical experience. Original estimates are increased or decreased as additional information becomes known regarding individual claims. In setting reserves, the Company reviewed its loss data to estimate expected loss development. Management believes that the use of sound actuarial methodology applied to its analyses of historical experience provides a reasonable estimate of future losses. However, actual future losses may differ from the Company’s estimates, and future events beyond the control of management, such as changes in law, judicial interpretations of law and inflation, may favorably or unfavorably impact the ultimate settlement of the Company’s losses and LAE.
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends.
The estimation of unpaid losses and LAE reserves is based on existing factors at the date of estimation. Accordingly, future events may result in ultimate losses and LAE significantly varying from a reasonable provision as of the date of estimation. Unfavorable development of claims in future years could result in a significant negative impact on operations, stockholders’ surplus, and RBC. Such development, if not offset by other increases in stockholders’ surplus, could result in the insurance departments of the state of domicile taking regulatory actions against the Insurance Company.
During the nine months ended September 30, 2021 (unaudited), the Company experienced unfavorable development on losses and LAE from prior accident years as a result of higher severity for the injury coverages. The Company has not had any unfavorable prior year claim experience on retrospectively rated policies. In 2020, the Company experienced unfavorable development on losses and LAE from prior accident years as a result of adverse LAE development. The Company has not had any unfavorable prior year claim experience on retrospectively rated policies.
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8. Reinsurance
During the periods presented, the Company used reinsurance contracts to protect itself from losses due to concentration of risk and to manage its operating leverage ratios. As of September 30, 2021, the Company has commuted all of its reinsurance agreements. Details regarding the commutation settlement agreements include the following:
● | In February 2021, Metromile Insurance Company entered into a settlement agreement with Horseshoe Re Limited (“Horseshoe”) to commute the reinsurance agreements with effective dates beginning May 1, 2017, May 1, 2018, and May 1, 2019. Pursuant to the agreement, Metromile Insurance Company paid approximately $9.0 million, net, for commutation of the underlying agreements. |
● | In June and July 2021, Metromile Insurance Company entered into settlement agreements with Horseshoe, Partner Reinsurance Company of the U.S. (“Partner”), Topsail Reinsurance SPC Ltd. (“Topsail”), The Cincinnati Insurance Company (“Cincinnati”) and Mapfre Re (“Mapfre”) to commute the reinsurance agreements between the parties with effective dates beginning May 1, 2017, May 1, 2018, May 1, 2019, and May 1, 2020. The commutations were effective April 30, 2021. Pursuant to the settlements, Metromile Insurance Company paid approximately $6.2 million, net, for commutation of the underlying agreements. |
Prior to the above-mentioned reinsurance agreement commutations, the Company had several quota-share reinsurance agreements in place. For more detail on such agreements see below and refer to Reinsurance in the notes to the audited consolidated financial statements which are included in the Company’s Post-Effective Amendment No. 2 to Form S-1 filed with the SEC on August 27, 2021.
o | Effective May 1, 2017, two quota-share reinsurance agreements were entered into under which 85% of the Company’s premiums and losses related to its renewal business occurring May 1, 2017 through April 30, 2018 were ceded to two unaffiliated reinsurers. |
o | Effective May 1, 2018, three quota-share reinsurance agreements were in place whereby 85% of the Company’s premiums and losses related to its second term renewal business occurring May 1, 2018 through April 30, 2019, but not covered by the earlier quota-share agreements, were ceded to three unaffiliated reinsurers. |
o | Effective May 1, 2019, four quota-share reinsurance agreements were in place whereby 85% of the Company’s premiums and losses, subject to a loss corridor, related to its new and renewal business occurring May 1, 2019 through April 30, 2020, but not covered by the earlier quota-share agreements, were ceded to four unaffiliated reinsurers. |
o | Effective May 1, 2020, five quota-share reinsurance agreements were in place whereby 85% of the Company’s premiums and losses, subject to a loss corridor for one agreement, related to its new and renewal business occurring May 1, 2020 through April 30, 2021, but not covered by the earlier quota-share agreements, were ceded to five unaffiliated reinsurers. |
In addition, the Company received revenue from the reinsurers related to the acquisition costs incurred related to the ceded policies. The revenue was based on the number of policies newly ceded to the reinsurers. During the three months ended September 30, 2021 and 2020 (unaudited) the Company received $0.0 million and $2.1 million, respectively, for acquisition costs from the reinsurers, pursuant to the existing reinsurance agreements. During the nine months ended September 30, 2021 and 2020 (unaudited) the Company received $4.7 million and $9.1 million, respectively, for acquisition costs from the reinsurers, pursuant to the existing reinsurance agreements. This revenue is recorded in other revenue on the consolidated statements of operations.
The insurance company was not relieved of its primary obligations to policyholders as a result of any reinsurance agreements. The credit risk associated with the Company’s reinsurance contracts was mitigated by using a diverse group of reinsurers and monitoring their financial strength ratings. The former reinsurance counterparties and their A.M. Best financial strength ratings are as follows: Mapfre (A), Cincinnati (A+), Partner (A+), Horseshoe (not rated), and Topsail (not rated). For reinsurance counterparties not rated, adequate levels of collateral were required either in the form of a letter of credit or funded trust account.
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The effect of the Company’s reinsurance agreements on premiums, loss and LAE related to the insurance company for the nine months ended September 30, 2021 (unaudited) and the year ended December 31, 2020 is as follows (in thousands):
9. Notes Payable, net
The following table summarizes the Company’s debt outstanding, net of issuance costs (in thousands):
Paycheck Protection Program Loan
In April 2020, the Company was granted a loan under the Paycheck Protection Program offered by the Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), section 7(a)(36) of the Small Business Act for approximately $5.9 million. The loan was evidenced by a promissory note and bore interest at 1% with payments deferred for 10 months after the covered period of 24 weeks. Monthly payments of principal and interest of approximately $0.3 million would have begun in September 2021 and continued through maturity in April 2022, if required. The loan was subject to partial or full forgiveness if the Company: used all proceeds for eligible purposes; maintained certain employment levels; and maintained certain compensation levels in accordance with and subject to the CARES Act and the rules, regulations and guidance. This loan was repaid in February 2021 and is no longer outstanding.
Subordinated Note Purchase and Security Agreement
In April 2020, the Company entered into that certain Note Purchase and Security Agreement (as amended, the “Note Purchase Agreement”) with us, as issuer, certain of the Company’s subsidiaries, as guarantors, and certain affiliates of Hudson Structured Capital Management (collectively, “Hudson”) with borrowings totaling $31.6 million through December 31, 2020 in the aggregate, along with $0.9 million of capitalized payment in kind (“PIK”) interest. The transaction further provided for additional funds up to $15.0 million over time, from Hudson, the timing of which was subject to reinsurance settlement timing. The outstanding principal under the Note Purchase Agreement was due in April 2025 and bore interest at the following rates: 2% per annum payable quarterly in arrears in cash, and a varying interest rate of 9.0% to 11.0% of PIK interest. The PIK interest was based on the aggregate outstanding principal balance as follows: (i) 11.0% if the outstanding balance was less than $5.0 million; (ii) 10.0% if the outstanding balance was greater than or equal to $5.0 million but less than $10.0 million; and (iii) 9.0% if the outstanding balance was greater than or equal to $10.0 million. PIK interest represents contractually deferred interest that is added to the principal balance outstanding and due at maturity. The loan was secured by substantially all assets of the Company. As of December 31, 2020, the outstanding principal and
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capitalized PIK interest on the Note Purchase Agreement was $32.5 million, along with $0.6 million of accrued PIK interest not subject to capitalization as of such date. The loan was able to be prepaid in an amount equal to the outstanding principal, accrued cash and PIK interest, and the end of term fee equal to 1% of the principal amount being prepaid. This loan was repaid in March 2021 and is no longer outstanding.
As part of the Note Purchase and Security Agreement, the Company issued warrants for up to 8,669,076 of Series E convertible preferred shares, which the Company estimated to have a fair value of $12.5 million at issuance which was recorded as a discount to the debt and was amortized to interest expense over the term of the debt. These warrants were exercised in February 2021 and are no longer outstanding.
2019 Loan and Security Agreement
In December 2019, the Company entered into a Loan and Security Agreement (the “2019 Loan and Security Agreement”) with a group of lenders for a term loan in the amount of $25.0 million. Minimum payments of interest were due monthly through December 2021. Beginning in January 2022, equal payments of principal would have been due monthly in an amount necessary to fully amortize the loan by June 5, 2024. An end of term payment of $0.6 million was due at maturity or date of any prepayment. At the time of origination, the lender was granted a warrant to purchase Series E convertible preferred stock, estimated to have a fair value of $0.5 million at issuance. The warrants were exercised in February 2021 and are no longer outstanding. The loan was secured by substantially all assets of the Company. The Company was required to obtain the lender’s consent regarding certain dispositions, and changes in business, management, or ownership including mergers and acquisitions, as more fully described in the 2019 Loan Agreement. The balance outstanding net of debt issuance costs for the 2019 Loan Agreement was $24.3 million as of December 31, 2020. The loan was prepaid in February 2021 and is no longer outstanding.
The loan was able to be prepaid in an amount equal to the outstanding principal, accrued interest, and the end of term fee, plus a prepayment charge of 3% if paid in the first year after the effective date, 2% if paid in the second year after the effective date, or 1% if prepaid after the second year subsequent to the effective date.
10. Commitments and Contingencies
The Company leases facilities in San Francisco, California, which is the corporate headquarters, Tempe, Arizona and Boston, Massachusetts, as well as certain equipment. The leases are non-cancellable operating leases that expire on various dates through 2030.
Future minimum lease payments relating to these agreements as of September 30, 2021 (unaudited), are as follows (in thousands):
For the three months ended September 30, 2021 and 2020 (unaudited), rent expense was approximately $0.7 million. For the nine months ended September 30, 2021 and 2020 (unaudited), rent expense was approximately $2.1 million and $2.2 million, respectively. It was included as part of other operating expenses on the Company’s consolidated statements of operations.
The Company was not a party to any material litigation, regulatory actions, or arbitration other than what is routinely encountered in claims activity and routine regulatory examinations, none of which is expected by the Company to have a materially adverse effect on the Company’s financial position or operations and/or cash flow as of September 30, 2021 (unaudited) and December 31, 2020.
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11. Stockholders’ Equity
Common Stock
As of September 30, 2021, the Company had authorized a total of 640,000,000 shares for issuance as common stock. As of September 30, 2021, the Company had 127,737,209 shares of common stock issued and outstanding.
Preferred Stock
As of September 30, 2021, the Company had authorized a total of 10,000,000 shares for issuance as preferred stock. The Company’s board of directors has the authority to issue preferred stock and to determine the rights, privileges, preferences, restrictions, and voting rights of those shares. As of September 30, 2021, the Company had no shares of preferred stock outstanding.
12. Public and Private Warrants
As of September 30, 2021, the Company had 7,666,646 public warrants and 180,000 private placement warrants outstanding. Each whole warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment, at any time commencing on September 8, 2021, which was the later of 30 days after the completion of the Business Combination or 12 months from INSU’s IPO closing date. The public warrants will expire on the fifth anniversary of the Business Combination, or earlier upon redemption or liquidation.
The Company may call the public warrants for redemption:
● | in whole or in part; |
● | at a price of $0.01 per warrant; |
● | Upon a minimum of 30 days’ prior written notice of redemption; and |
● | if, and only if, the last reported closing price of the ordinary shares equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders. |
If the Company calls the public warrants for redemption, management will have the option to require all holders that wish to exercise the public warrants to do so on a “cashless basis,” as described in the warrant agreement.
The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of common stock at a price below its exercise price.
13. Stock Option Plans
Restricted Stock Units (“RSUs”)
During the nine months ended September 30, 2021 (unaudited), the Company granted 9,848,048 restricted stock units (“RSUs”) under the 2021 Plan of which 1,301,843 RSUs were fully vested at the time of grant and vesting of 8,546,205 RSU grants is conditional based on continued employment or service for a specified period. Compensation cost related to RSU grants is recognized on a straight-line basis over the vesting period and is calculated using the closing price per share of the Company’s common stock on the grant date. For the three months and nine months ended September 30, 2021 (unaudited), the Company recorded compensation expense of $6.8 million and $14.6 million, respectively, and related to non-performance based RSUs.
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A summary of the Company’s RSUs as of September 30, 2021 (unaudited) is presented in the table below:
As of September 30, 2021 (unaudited), there was $73.9 million of total unrecognized compensation cost related to RSUs. That cost is expected to be recognized over a weighted-average period of 2.97 years. The total grant date fair value of shares vested during the nine months ended September 30, 2021 (unaudited) was $23.7 million.
Performance Based Awards
As of December 31, 2020, the Company had issued 150,000 outstanding performance-based awards (“PSUs”) to Dan Preston, Metromile’s Chief Executive Officer (“CEO”). As of the Closing, the performance-based provision was achieved for the outstanding performance-based awards as the Company completed a change in control event, and the Company recognized the expense related to these PSUs on the Closing date as there were no remaining vesting provisions. As a result, the Company recorded $2.5 million in stock-based compensation expense for the nine months ended September 30, 2021 (unaudited).
In the nine months ended September 30, 2021 (unaudited), the Company has issued 2,761,087 PSUs most of which each have a term of five years, subject to continuous services by each holder. One third of PSUs that vest are based on a specific number of policies in force achieved by the Company. One third of the PSUs that vest are based on the Company achieving positive operating cash flow for a period of at least one financial quarter. One third of the PSUs vest based on a market condition of the Company achieving a specific price per share for at least 20 days in a 30-day trading window. Once the performance targets are met, the PSUs that relate to the specific performance target vest immediately. For the nine months ended September 30, 2021 (unaudited), the Company had recorded $1.6 million in expense from the PSUs related to the market condition. None of the performance conditions were probable of being satisfied as of September 30, 2021 and, therefore, there is no unrecognized stock compensation related to PSUs.
In the nine months ended September 30, 2021 (unaudited), the Company granted separate tranches of PSU’s subject to a Monte Carlo simulation. The following table provides a range of the assumptions for shares granted in 2021:
|
|
|
|
|
|
2021 |
|
Expected volatility |
|
65% - 70 |
% |
Expected term (years) |
|
0.60 - 1.90 |
|
Expected dividend yield |
|
n/a |
|
Risk-free interest rate |
|
.3% - .6 |
% |
2011 Stock Plan
In 2011, the Company’s Board of Directors adopted the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provides for the granting of stock options to officers, directors, employees, and consultants of the Company. Options granted under the 2011 Plan may be Incentive Stock Options (“ISO”) or non-statutory Stock Options (“NSO”) as determined by the Board of Directors at the time of the option grant. The remaining unallocated shares reserved under the 2011 Plan were cancelled and no new awards will be granted under the 2011 Plan. Awards outstanding under the 2011 Plan were assumed by the Company upon the closing and continue to be governed by the terms of the 2011 Plan.
2021 Stock Plan
In connection with the Closing, the Company adopted the 2021 Equity Incentive Plan (the “2021 Plan”), under which 38,018,247 shares of common stock were initially reserved for issuance for ISOs. The 2021 Plan allows for the issuance of ISOs, NSOs, restricted stock awards, stock appreciation rights, restricted stock units (“RSUs”), and performance awards. The Board of Directors determines
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the period over which options become exercisable and options generally vest over a four-year period. The 2021 Plan became effective immediately following the closing.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each option grant on the date of grant or modification. The Company amortizes the estimated fair value to stock compensation expense using the straight-line method over the vesting period of the option. The following is a description of the significant assumptions used in the option pricing model:
● | Expected term — The expected term is the period of time when granted options are expected to be outstanding. In determining the expected term of options, the Company utilized the midpoint between the vesting date and contractual expiration date. |
● | Volatility — Because the Company’s stock has limited trading history, the Company calculates volatility by using the historical stock prices of comparable public companies. |
● | Risk-free interest rate — The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the rate of treasury securities with the same term as the options. |
● | Forfeiture rate — The weighted average forfeiture rate of unvested options. |
● | Expected dividends — The Company does not have plans to pay cash dividends in the future. Therefore, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. |
The following assumptions were used to estimate the value of options granted during the nine months ended September 30, 2021 (unaudited) and year ended December 31, 2020:
|
|
|
|
|
|
Nine months |
|
|
|
ended September 30, |
|
|
|
2021 (unaudited) |
|
Forfeiture rate |
|
26.2 |
% |
Volatility |
|
62.00 |
% |
Expected term (years) |
|
5.33 |
|
Risk-free interest rate |
|
0.53 |
% |
Expected dividends |
|
— |
|
Stock Option Activity
The following table summarizes the activity of the Company’s stock option plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Aggregate |
||
|
|
Stock |
|
Average |
|
Contractual |
|
Intrinsic |
||
|
|
Number of |
|
Exercise |
|
Term |
|
Value |
||
|
|
Options |
|
Price |
|
(Years) |
|
(in thousands) |
||
Outstanding as of December 31, 2020 |
|
5,931,024 |
|
$ |
2.61 |
|
8.10 |
|
$ |
70,192 |
Options granted |
|
4,231 |
|
$ |
14.45 |
|
|
|
|
|
Options exercised |
|
(1,095,567) |
|
$ |
2.21 |
|
|
|
|
|
Options cancelled or expired and returned to plan |
|
(1,987,158) |
|
$ |
2.24 |
|
|
|
|
|
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Outstanding as of September 30, 2021 (unaudited) |
|
2,852,530 |
|
$ |
3.00 |
|
8.48 |
|
$ |
1,611 |
Vested and exercisable to vest as of September 30, 2021 |
|
643,414 |
|
$ |
2.96 |
|
8.22 |
|
$ |
400 |
Vested and expected as of September 30, 2021 (unaudited) |
|
1,986,567 |
|
$ |
2.99 |
|
8.36 |
|
$ |
1,146 |
The fair value of stock options granted are recognized as compensation expense in the consolidated statements of operations over the related vesting periods. The weighted-average grant date fair value per share of stock options granted during the nine months ended September 30, 2021 (unaudited) was $7.69. As of September 30, 2021 (unaudited), there was approximately $2.2 million of unrecognized stock-based compensation cost related to stock options granted under the Plan, respectively, which is expected to be recognized over an average period of 2.28 years.
The following table illustrates stock-based compensation expense for employee and non-employee RSUs and options for the nine months ended September 30, 2021 and 2020 (unaudited) (in thousands).
14. Income Taxes
The consolidated effective tax rate for the nine months ended September 30, 2021 and 2020 (unaudited), was 0% and 0%, respectively. The main driver of the difference between the federal statutory tax rate of 21% and the effective tax rate for both periods was primarily related to a full valuation allowance against the deferred tax assets.
15. Segment and Geographic Information
The Company operates in the following two reportable segments, which are the same as its operating segments:
o | Insurance Services. Providing insurance policies for automobile owners |
o | Enterprise Business Solutions. Providing access to its developed technology under SaaS arrangements along with professional services to third party customers. |
Operating segments are based upon the nature of the Company’s business and how its business is managed. The Company’s Chief Operating Decision Maker (“CODM”) is its CEO. The CODM uses the Company’s operating segment financial information to evaluate segment performance and to allocate resources. The CODM does not evaluate the performance of the Company’s assets on a segment basis for internal management reporting and, therefore, such information is not presented.
Contribution is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Segment contribution is segment revenue less the related costs of revenue and sales and marketing expenses. It excludes certain operating expenses that are not allocated to segments because they are separately managed at the consolidated corporate level. These unallocated costs include stock-based compensation expense, research and development expenses, and general and administrative expenses such as legal and accounting.
The total assets of the Insurance services and Enterprise business solutions segments are $133.7 million and $4.9 million, respectively as of September 30, 2021 (unaudited), and $133.8 million and $6.1 million, respectively as of December 31, 2020. The consolidated total assets of Operating segments are $138.6 million and $139.9 million as of September 30, 2021 (unaudited) and December 31, 2020, respectively.
F-78
The following table summarizes the operating results of the Company’s reportable segments (in thousands):
The following table provides a reconciliation of the Company’s total reportable segments’ contribution to its total loss from operations (in thousands):
Geographical Breakdown of Direct Earned Premiums
Direct earned premium by state is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||
|
|
(unaudited) |
|
(unaudited) |
||||||||
California |
|
$ |
16,352 |
|
$ |
15,737 |
|
$ |
47,832 |
|
$ |
43,343 |
Washington |
|
|
3,567 |
|
|
3,086 |
|
|
9,931 |
|
|
8,410 |
New Jersey |
|
|
2,853 |
|
|
2,475 |
|
|
8,061 |
|
|
6,718 |
Oregon |
|
|
1,821 |
|
|
1,862 |
|
|
5,330 |
|
|
5,466 |
Illinois |
|
|
1,133 |
|
|
1,179 |
|
|
3,193 |
|
|
3,381 |
Arizona |
|
|
1,410 |
|
|
1,170 |
|
|
3,923 |
|
|
3,332 |
Pennsylvania |
|
|
735 |
|
|
792 |
|
|
2,133 |
|
|
2,197 |
Virginia |
|
|
622 |
|
|
459 |
|
|
1,670 |
|
|
1,284 |
Total premiums earned |
|
$ |
28,493 |
|
$ |
26,760 |
|
$ |
82,073 |
|
$ |
74,131 |
During the three months ended September 30, 2021 and 2020 (unaudited), the Company recognized $1.3 million and $1.1 million of revenue earned from customers outside the United States, respectively. During the nine months ended September 30, 2021 and 2020 (unaudited), the Company recognized $3.3 million and $3.6 million of revenue earned from customers outside the United States, respectively. Revenue generated outside of the United States is related to the Company’s Enterprise business solutions segment. Long-lived assets are all held in the U.S. For the three months and nine months ended September 30, 2020 and 2021 (unaudited), substantially all of the Company’s revenue was earned from customers residing in the United States.
F-79
16. Net Loss per Share
Net loss per share calculations and potentially dilutive security amounts for all periods prior to the Merger have been retrospectively adjusted to the equivalent number of shares outstanding immediately after the Merger to effect the reverse recapitalization. Historically, reported weighted average shares outstanding have been multiplied by 1.01547844, which is the share exchange ratio established by the Merger Agreement.
The following table sets forth the computation of basic and diluted net loss per share attributable to the Company’s common stockholders:
As the Company has reported net loss for each of the periods presented, all potentially dilutive securities are antidilutive. The following potential outstanding shares of Common Stock were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
17. Related-Party Transactions
In August 2014, the Company loaned the CEO $0.4 million with interest at 3.09% and adjusted to 1.5% in April 2020, which was used to early exercise stock options issued to the CEO and was due at the earlier of one year after termination of employment, upon an Initial Public Offering or change in control, or ten years from the date issued. The loan was full recourse, and also collateralized by the underlying shares of common stock. For accounting under GAAP, the note receivable is presented as contra-equity in the accompanying consolidated balance sheets. This loan was paid in full in February 2021 and is no longer outstanding.
In March 2018, the Company entered into an agreement with a third party under which the Company developed proprietary software solutions and provides access to and use of such software solutions and related services. In July 2018, the third party became an investor of the Company as part of the Series E convertible preferred stock Financing. During the three months ended September 30, 2021 and 2020 (unaudited), the Company recognized $1.3 million and $1.1 million of revenue from the investor, respectively. During the nine months ended September 30, 2021 and 2020 (unaudited), the Company recognized $3.3 million and $3.6 million of revenue from the investor, respectively. The Company had $0.0 million in accounts receivable balances from the investor as of September 30, 2021 (unaudited) and December 31, 2020, respectively. The Company continues to enter into contracts with the investor related to the Company’s Enterprise business solutions (see Note 15, Segment and Geographic Information).
An executive of Hudson, who the Company entered into a Note Purchase and Security Agreement with in 2020 (see Note 9, Notes Payable, net), is on the Company’s Board of Directors. This loan was repaid in March 2021 and is no longer outstanding.
F-80
18. Subsequent Events
As described above in Note 1, the Company and Lemonade have entered into the Agreement, pursuant to which Lemonade will acquire the Company in an all-stock transaction that implies a fully diluted equity value of approximately $500 million, or an enterprise value of about $340 million net of unrestricted cash and cash equivalents as of September 30, 2021.
In accordance with the Agreement, at the First Effective Time, each share of the Company’s common stock issued and outstanding immediately prior to the First Effective Time will be converted into the right to receive 0.05263 (the “Exchange Ratio”) validly issued, fully paid and non-assessable shares of common stock of Lemonade, par value $0.00001 per share (“Lemonade Common Stock”).
At the First Effective Time, (i) each Metromile stock option that is held by an individual who, as of November 8, 2021, was not employed or providing services to the Company or its subsidiaries shall be cancelled and converted into the right to receive an amount in cash, without interest, equal to (A) (1) the Lemonade stock price multiplied by the Exchange Ratio (the “Per Metromile Share Price”) less (2) the per share exercise price thereof, multiplied by (B) the total number of shares of the Company’s common stock subject to such option; (ii) each other Company stock option shall be assumed by Lemonade and converted into a corresponding option with respect to Lemonade Common Stock (with the number of shares and exercise price thereof equitably adjusted based on the Exchange Ratio); (iii) each award of Company restricted stock units that (A) is held by any non-employee director of the Company or (B) subject to performance vesting conditions shall be cancelled and converted into the right to receive an amount in cash, without interest, equal to (1) the Per Metromile Share Price multiplied by (2) the number of shares of the Company’s common stock subject to such award (in the case of any award subject to performance vesting conditions, based on actual performance as determined by the Compensation Committee of the Company’s Board of Directors prior to the First Effective Time); (iv) each other award of Company restricted stock units shall be assumed by Lemonade and converted into a corresponding award with respect to Lemonade Common Stock (with the number of shares subject to such award equitably adjusted based on the Exchange Ratio); and (v) each Metromile warrant exercisable for shares of the Company’s common stock shall be assumed by Lemonade and converted into a corresponding warrant denominated in shares of Lemonade Common Stock (with the number of warrants and exercise price being adjusted based on the Exchange Ratio). Except as otherwise set forth above, each Metromile stock option, restricted stock unit award, and warrant assumed by Lemonade shall continue to have the same terms and conditions as applied immediately prior to the First Effective Time.
The consummation of the Proposed Transaction is subject to the satisfaction or waiver of certain closing conditions, including, among others (i) the effectiveness of the registration statement on Form S-4 registering the shares of Lemonade Common Stock issuable in the Proposed Transaction and absence of any stop order or proceedings by the SEC with respect thereto; (ii) the adoption of the Agreement by holders of a majority of the outstanding shares of the Company’s common stock; (iii) the expiration or earlier termination of any applicable waiting period of review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iv) receipt of other material regulatory consents and approvals; (v) the approval for listing on the New York Stock Exchange of the shares of Lemonade Common Stock to be issued pursuant to the Agreement; (vi) the absence of governmental restraints or prohibitions preventing the consummation of the Proposed Transaction; (vii) subject to specified materiality standards, the truth and accuracy of the representations and warranties made by each party; (viii) the compliance with or performance by the other party in all material respects of the covenants in the Agreement; and (ix) the absence of a material adverse effect on each party.
Contemporaneously with the execution of the Agreement, certain stockholders of the Company holding approximately 11.3% of the outstanding shares of the Company’s common stock, including all members of the Company’s Board of Directors and certain of the Company’s officers (the “Stockholders”), entered into voting and support agreements (the “Voting and Support Agreements”) with Lemonade, pursuant to which the Stockholders agreed to, among other things, vote all of their shares in the Company (“Voting Shares”) (i) in favor of the adoption of the Agreement and approval of the Proposed Transaction; (ii) in favor of any adjournment or postponement recommended by the Company with respect to any Company stockholders meeting to the extent permitted or required pursuant to the Agreement; (iii) against any alternative acquisition proposal or transaction; (iv) against any merger, sale of substantial assets or liquidation of the Company; and (v) against any proposal, action or agreement that would reasonably be expected to impede, interfere with, delay or postpone, prevent or otherwise impair the Proposed Transaction.
Upon the consummation of the Proposed Transaction, the Company will cease to be a publicly traded company. The Company has agreed to various customary covenants and agreements, including, among others, agreements to conduct business in the ordinary course during the period between the execution of the agreement and the effective time of the Proposed Transaction. The Company
F-81
does not believe these restrictions will impact the Company’s ability to meet its ongoing costs of operations, working capital needs, or capital expenditure requirements.
F-82
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. (and subsidiaries) (the "Company"), as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders' deficit, 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 present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, 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 Public Company Accounting Oversight Board (United States) ("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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
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.
/s/ Moss Adams LLP
San Francisco, California
March 30, 2021 (August 6, 2021 as to the effects of the reverse recapitalization described in Note 1 and subsequent events described in Note 19)
We have served as the Company's auditor since 2016
F-83
METROMILE OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
||
|
|
2019 |
|
2020 |
||
Assets |
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Marketable securities |
|
$ |
9,352 |
|
$ |
— |
Marketable securities - restricted |
|
|
36,963 |
|
|
24,651 |
Total investments |
|
|
46,315 |
|
|
24,651 |
Cash and cash equivalents |
|
|
18,687 |
|
|
19,150 |
Restricted cash and cash equivalents |
|
|
24,200 |
|
|
31,038 |
Receivable for securities |
|
|
225 |
|
|
— |
Premiums receivable |
|
|
16,602 |
|
|
16,329 |
Accounts receivable |
|
|
5,590 |
|
|
4,999 |
Reinsurance recoverable on paid loss |
|
|
12,541 |
|
|
8,475 |
Reinsurance recoverable on unpaid loss |
|
|
28,837 |
|
|
33,941 |
Prepaid reinsurance premium |
|
|
12,904 |
|
|
13,668 |
Prepaid expenses and other assets |
|
|
8,621 |
|
|
7,059 |
Deferred transaction costs |
|
|
— |
|
|
3,581 |
Deferred policy acquisition costs, net |
|
|
1,421 |
|
|
656 |
Telematics devices, improvements and equipment, net |
|
|
10,570 |
|
|
12,716 |
Website and software development costs, net |
|
|
16,481 |
|
|
18,401 |
Intangible assets |
|
|
7,500 |
|
|
7,500 |
Total assets |
|
$ |
210,494 |
|
$ |
202,164 |
Liabilities, Convertible Preferred Stock and Stockholders’ Deficit |
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
52,222 |
|
$ |
57,093 |
Ceded reinsurance premium payable |
|
|
36,864 |
|
|
27,000 |
Payable to carriers - premiums and LAE, net |
|
|
2,553 |
|
|
849 |
Unearned premium reserve |
|
|
15,171 |
|
|
16,070 |
Deferred revenue |
|
|
5,200 |
|
|
5,817 |
Accounts payable and accrued expenses |
|
|
5,911 |
|
|
8,222 |
Note payable |
|
|
24,102 |
|
|
51,934 |
Deferred tax liability |
|
|
84 |
|
|
— |
Warrant liability |
|
|
1,738 |
|
|
83,652 |
Other liabilities |
|
|
5,189 |
|
|
8,554 |
Total liabilities |
|
|
149,034 |
|
|
259,191 |
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value; 78,697,118, and 89,775,268 shares authorized as of December 31, 2019, and 2020, respectively; 68,776,614 shares issued and outstanding as of December 31, 2019 and 2020; liquidation preference of $302,397 as of December 31, 2019 and 2020 |
|
|
304,469 |
|
|
304,469 |
Stockholders’ equity (deficit): |
|
|
|
|
|
|
Common stock, $0.0001 par value; 97,485,929 and 111,702,628 shares authorized as of December 31, 2019 and 2020, respectively; 8,865,510 and 8,992,039 shares issued and outstanding as of December 31, 2019 and 2020 |
|
|
1 |
|
|
1 |
Accumulated paid-in capital |
|
|
3,816 |
|
|
5,482 |
Note receivable from executive |
|
|
(408) |
|
|
(415) |
Accumulated other comprehensive gain/(loss) |
|
|
60 |
|
|
11 |
Accumulated deficit |
|
|
(246,478) |
|
|
(366,575) |
Total stockholders’ deficit |
|
|
(243,009) |
|
|
(361,496) |
Total liabilities, convertible preferred stock and stockholders' deficit |
|
$ |
210,494 |
|
$ |
202,164 |
See notes to consolidated financial statements.
F-84
METROMILE OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
||||
|
|
2019 |
|
2020 |
||
Revenue |
|
|
|
|
|
|
Premiums earned, net |
|
$ |
23,807 |
|
$ |
12,464 |
Investment income |
|
|
1,898 |
|
|
523 |
Other revenue |
|
|
27,050 |
|
|
22,077 |
Total revenue |
|
52,755 |
|
|
35,064 |
|
Costs and expenses |
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
30,758 |
|
|
21,208 |
Policy servicing expense and other |
|
|
16,297 |
|
|
16,813 |
Sales, marketing and other acquisition costs |
|
|
23,954 |
|
|
5,483 |
Research and development |
|
|
9,055 |
|
|
8,211 |
Amortization of capitalized software |
|
|
10,648 |
|
|
11,188 |
Other operating expenses |
|
|
18,896 |
|
|
16,981 |
Total costs and expenses |
|
|
109,608 |
|
|
79,884 |
Loss from operations |
|
|
(56,853) |
|
|
(44,820) |
Other expense |
|
|
|
|
|
|
Interest expense |
|
|
247 |
|
|
6,067 |
Increase in fair value of stock warrant liability |
|
|
92 |
|
|
69,294 |
Total other expense |
|
|
339 |
|
|
75,361 |
Net loss before taxes |
|
|
(57,192) |
|
|
(120,181) |
Income tax provision/(benefit) |
|
|
37 |
|
|
(84) |
Net loss after taxes |
|
$ |
(57,229) |
|
$ |
(120,097) |
Net loss per share, basic and diluted |
|
$ |
(6.74) |
|
$ |
(13.51) |
Weighted-average shares used in computing basic and diluted net loss per share |
|
|
8,489,372 |
|
|
8,890,631 |
See notes to consolidated financial statements.
F-85
METROMILE OPERATING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
||||
|
|
2019 |
|
2020 |
||
Net loss |
|
$ |
(57,229) |
|
$ |
(120,097) |
Unrealized net gain (loss) on marketable securities |
|
|
61 |
|
|
(49) |
Total comprehensive loss |
|
$ |
(57,168) |
|
$ |
(120,146) |
See notes to consolidated financial statements.
F-86
METROMILE OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Convertible |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
||||
|
|
Preferred Stock |
|
Common Stock |
|
Note |
|
Comprehensive |
|
Accumulated |
|
|
|
||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
APIC |
|
Receivable |
|
Income |
|
Deficit |
|
Total |
|||||||
Balances as of December 31, 2018 |
|
67,728,286 |
|
$ |
304,469 |
|
7,942,833 |
|
$ |
1 |
|
$ |
1,030 |
|
$ |
(387) |
|
$ |
(1) |
|
$ |
(189,249) |
|
$ |
(188,606) |
Retroactive application of recapitalization |
|
1,048,328 |
|
|
— |
|
122,943 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
As adjusted, beginning of period |
|
68,776,614 |
|
|
304,469 |
|
8,065,776 |
|
|
1 |
|
|
1,030 |
|
|
(387) |
|
|
(1) |
|
|
(189,249) |
|
|
(188,606) |
Vested portion of common stock options |
|
— |
|
|
— |
|
799,734 |
|
|
— |
|
|
1,359 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,359 |
Stock-based compensation |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
1,427 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,427 |
Interest on stock purchase promissory note |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(21) |
|
|
— |
|
|
— |
|
|
(21) |
Unrealized net gain on marketable securities |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
61 |
|
|
— |
|
|
61 |
Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(57,229) |
|
|
(57,229) |
Balances as of December 31, 2019 |
|
68,776,614 |
|
$ |
304,469 |
|
8,865,510 |
|
$ |
1 |
|
$ |
3,816 |
|
$ |
(408) |
|
$ |
60 |
|
$ |
(246,478) |
|
$ |
(243,009) |
Vested portion of common stock options |
|
— |
|
|
— |
|
126,529 |
|
|
— |
|
|
209 |
|
|
— |
|
|
— |
|
|
— |
|
|
209 |
Stock-based compensation |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
1,457 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,457 |
Interest on stock purchase promissory note |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(7) |
|
|
— |
|
|
— |
|
|
(7) |
Unrealized net loss on marketable securities |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(49) |
|
|
— |
|
|
(49) |
Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(120,097) |
|
|
(120,097) |
Balances as of December 31, 2020 |
|
68,776,614 |
|
$ |
304,469 |
|
8,992,039 |
|
$ |
1 |
|
$ |
5,482 |
|
$ |
(415) |
|
$ |
11 |
|
$ |
(366,575) |
|
$ |
(361,496) |
See notes to consolidated financial statements.
F-87
METROMILE OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
||||
|
|
2019 |
|
2020 |
||
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ |
(57,229) |
|
$ |
(120,097) |
Adjustments to reconcile net loss to cash used in operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
|
15,651 |
|
|
17,004 |
Stock-based compensation |
|
|
1,427 |
|
|
1,457 |
Change in fair value of warrant liability |
|
|
92 |
|
|
69,294 |
Telematic devices unreturned |
|
|
989 |
|
|
682 |
Amortization of debt issuance costs |
|
|
30 |
|
|
687 |
Noncash interest and other (expense)/income |
|
|
(181) |
|
|
1,136 |
Changes in operating assets and liabilities |
|
|
|
|
|
|
Premiums receivable |
|
|
(1,041) |
|
|
273 |
Accounts receivable |
|
|
64 |
|
|
591 |
Reinsurance recoverable on paid loss |
|
|
(5,017) |
|
|
4,066 |
Reinsurance recoverable on unpaid loss |
|
|
(11,194) |
|
|
(5,104) |
Prepaid reinsurance premium |
|
|
(4,070) |
|
|
(764) |
Prepaid expenses and other assets |
|
|
(3,984) |
|
|
2,920 |
Deferred transaction costs |
|
|
— |
|
|
(3,581) |
Deferred policy acquisition costs, net |
|
|
(1,508) |
|
|
(976) |
Accounts payable and accrued expenses |
|
|
484 |
|
|
2,119 |
Ceded reinsurance premium payable |
|
|
13,821 |
|
|
(9,864) |
Loss and loss adjustment expense reserves |
|
|
11,037 |
|
|
4,871 |
Payable to carriers - premiums and LAE, net |
|
|
(435) |
|
|
(1,704) |
Unearned premium reserve |
|
|
1,042 |
|
|
899 |
Deferred revenue |
|
|
4,400 |
|
|
617 |
Deferred tax liability |
|
|
37 |
|
|
(84) |
Other liabilities |
|
|
4,844 |
|
|
3,365 |
Net cash used in operating activities |
|
|
(30,741) |
|
|
(32,193) |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of telematics devices, improvements, and equipment |
|
|
(7,970) |
|
|
(6,903) |
Payments relating to capitalized website and software development costs |
|
|
(12,167) |
|
|
(13,108) |
Purchase of securities |
|
|
(204,044) |
|
|
(26,646) |
Sales and maturities of marketable securities |
|
|
160,893 |
|
|
48,462 |
Net cash (used in) provided by investing activities |
|
|
(63,288) |
|
|
1,805 |
Cash flow from financing activities: |
|
|
|
|
|
|
Proceeds from notes payable |
|
|
24,441 |
|
|
37,480 |
Payment on notes payable |
|
|
(1,653) |
|
|
— |
Repurchase of unvested common stock options |
|
|
(22) |
|
|
— |
Proceeds from exercise of common stock options and warrants |
|
|
1,343 |
|
|
209 |
Net cash provided by financing activities |
|
|
24,109 |
|
|
37,689 |
Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents |
|
|
(69,920) |
|
|
7,301 |
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period |
|
|
112,807 |
|
|
42,887 |
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period |
|
$ |
42,887 |
|
$ |
50,188 |
Supplemental cash flow data: |
|
|
|
|
|
|
Cash paid for interest |
|
$ |
212 |
|
$ |
2,797 |
Non-cash investing and financing transactions: |
|
|
|
|
|
|
Purchases of telematics devices, improvements and equipment included in accounts payable at year end |
|
$ |
1 |
|
$ |
— |
Capitalized stock-based compensation |
|
$ |
400 |
|
$ |
522 |
Preferred stock warrant issued in conjunction with note payable |
|
$ |
499 |
|
$ |
12,620 |
Reclassification of liability to equity for vesting of stock options |
|
$ |
38 |
|
$ |
— |
See notes to consolidated financial statements.
F-88
METROMILE OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview and Basis of Presentation
Description of Business
Metromile Operating Company (“Metromile”) was incorporated in the State of Delaware on January 14, 2011 as Fair Auto, Inc. and changed its name to MetroMile, Inc. in May 2012 and to Metromile Operating Company in February 2021. Metromile, through its wholly owned subsidiary, Metromile Insurance Services LLC (the “GA Subsidiary”), sells pay-per-mile auto insurance to consumers in eight states: California, Washington, Oregon, Illinois, Pennsylvania, Virginia, New Jersey, and Arizona. Metromile has a wholly owned subsidiary, Metromile Insurance Company (the “Insurance Company”), which focuses on property and casualty insurance. In January 2019, Metromile formed Metromile Enterprise Solutions, LLC (“Enterprise”), a wholly owned subsidiary, which focuses on selling its insurance solution technology to third party customers. Metromile, the GA Subsidiary, the Insurance Company, and Enterprise collectively are referred to as the “Company.”
The Insurance Company provides automobile insurance to customers with premiums based on a flat rate plus an adjustable rate based on actual miles driven. To record miles driven, the GA Subsidiary may provide drivers with a telematics device, the Metromile Pulse, which plugs into a car’s on-board diagnostic system to capture mileage.
The GA Subsidiary acts as a full-service insurance General Agent (“GA”). As a full-service GA, the subsidiary provides all policy pricing, binding, and servicing (payments and customer service) for the policyholders. Until late 2016, the GA Subsidiary underwriting carrier was National General Insurance (“NGI”) and its related carriers. The GA Subsidiary began transitioning NGI-issued policies upon renewal in late 2016 to the Insurance Company and has only a small number of policies with NGI as of December 31, 2020. The GA Subsidiary is the sole agent for the Insurance Company.
NGI handles claims for the GA Subsidiary’s policies underwritten by NGI and its related carriers, for which it pays NGI a fee for the loss adjustment expense (“LAE”). NGI bears the risk of loss under these policies. Accordingly, the Company has no exposure to claims that would require an accrual for those NGI-related losses.
The Insurance Company bears risk of loss under all insurance policies it underwrites. The financial statements include reserves for future claims based on actuarial estimates for the Insurance Company. The Loss and LAE reserves as of December 31, 2019 and 2020 were $52.2 million and $57.1 million, respectively.
In February 2021, the Company completed a business combination (the “Merger”) with INSU Acquisition Corp. II (“INSU”), where the Metromile merged with a wholly-owned subsidiary of INSU, with Metromile surviving the Merger as a wholly-owned subsidiary of INSU. The Merger was accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States (“GAAP”). Under this method of accounting, INSU, who was the legal acquirer, is treated as the “acquired” company for financial reporting purposes and the Company is treated as the accounting acquirer. Accordingly, all historical financial information presented in the accompanying consolidated financial statements represents the accounts of Metromile and its wholly owned subsidiaries as if Metromile is the predecessor to the Company. The shares and net loss per common share, prior to the Merger, have been retroactively restated as shares reflecting conversion at the exchange ratio of 1.01547844 established in the Merger Agreement.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. of America (“GAAP”) and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). References to the Accounting Standard Codification (“ASC”) and Accounting Standard Updates (“ASU”) included hereinafter refer to the Accounting Standards Codification and Updates established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP. The consolidated financial statements include the accounts of Metromile, Inc. and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.
F-89
Liquidity and Capital Resources
The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has had recurring losses and an accumulated deficit since its inception, related primarily to the development of its website, technology, customer acquisition, insurance losses and other operations. The Company obtained additional funding of $310 million in 2021 to support its ongoing operations and fund future growth of the Company. Management has concluded that substantial doubt regarding the Company’s ability to continue as a going concern for the period January 2021 through March 2022 has been alleviated based upon the recent funding and future operational improvement plans.
In the first quarter of 2020, the global pandemic caused by COVID-19 breached the U.S. and resulted in Shelter-In-Place orders across the country and insurance department bulletins limiting the actions that insurance carriers may take and reducing the amount of premiums that will be promptly received in the short term. These factors resulted in a significant decline in both revenues and losses of the Insurance Company. In addition, in response to these events, the Company performed a reduction in force of 125 employees to further align costs with revenue and to extend the current capital runway. The Company will continue to monitor the situation closely, but given the uncertainty about the duration or magnitude of the pandemic, management cannot estimate the impact on its financial condition, operations, and workforce.
Revision to Previously Issued Financial Statements
The Company has made revisions to the table in Note 16, Segment and Geographic Information, which presents a reconciliation of the Company’s total reportable segments’ contributions to its total loss from operations .To reflect proper classification of certain income and expense amounts $1.9 million was reclassified from Policy services expenses and other to Other income within the reconciliation presented for the year ended December 31, 2019. The revisions had no effect on total liabilities, stockholders’ deficit or net loss after taxes as previously reported.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The Company’s principal estimates include unpaid losses and LAE reserves; the fair value of investments; the fair value of share-based awards; the fair value of the warrant liability; premium refunds to policyholders; reinsurance recoverable on unpaid loss; and the valuation allowance for income taxes. Because of uncertainties associated with estimating the amounts, timing and likelihood of possible outcomes, actual results could differ materially from these estimates.
Revenue Recognition
Insurance Services
The Company’s insurance services are accounted for in accordance with Topic 944, Insurance. Policies are written for six-month terms and are considered short-duration contracts for the purposes of accounting under U.S. GAAP. The premium for the policies provides for a base rate per month for the entire policy term, plus a per-mile rate multiplied by the mileage driven each day (based on data from the telematics device subject to a daily maximum). Upon the binding of the policy, the customer pays at least the first month’s base rate and then is billed monthly in arrears for the mileage-based premium portion of the policy plus each subsequent month’s base rate not otherwise prepaid upon binding of the policy. Base premiums are recognized ratably over the policy term and mileage-based premiums are recognized monthly as incurred. All earned premiums are presented net of bad debt expense in the Company’s consolidated statement of operations.
Investment Income
Investment income is recorded as earned. Investment income consists primarily of interest on the Company’s highly liquid fixed income securities and is recognized on an accrual basis.
F-90
Other Revenue
Other revenue principally consists of enterprise revenue discussed below, reinsurance profit commissions based on performance of the ceded business, commission on NGI policies, and revenue related to policy acquisition costs as part of the reinsurance arrangement as described in Note 9, Reinsurance.
The commission on NGI policies is recognized on a net basis and was insignificant in the periods presented. The revenue related to the acquisition costs for policies newly ceded to the reinsurers is recognized as the policies become part of the reinsurance arrangement. No amounts are due back to the reinsurers should a ceded policy cancel after entering the reinsurance arrangement.
Enterprise services are accounted for by applying the requirements of Topic 606, Revenue from Contracts with Customers. Topic 606 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, references to Topic 606 used herein refer to both Topic 606 and Subtopic 340-40.
The Company accounts for revenue contracts with customers by applying the requirements of Topic 606, which includes the following steps:
● | Identification of the contract, or contracts, with a customer |
● | Identification of the performance obligations in the contract |
● | Determination of the transaction price |
● | Allocation of the transaction price to the performance obligations in the contract |
● | Recognition of revenue when, or as, the Company satisfies a performance obligation |
The Company has developed technologies intended for internal use to service their insurance business and through its enterprise services started offering these products and services to third party customers during the year ended December 31, 2019. The Company also has referral agreements with third party carriers and ad exchange agreements whereby the Company can receive consideration for such services. As such, the Company has three categories of revenue agreements that are included within the scope of Topic 606: 1) subscription and professional services agreements, 2) referral agreements, and 3) ad exchange agreements. For the periods presented, the Company’s revenues from referral and ad exchange agreements have not been significant.
The Company’s technology agreements include software subscription-as-a-service (“SaaS”) which provides the customer with the right to access the Company’s core software via a hosted solution. Customers who purchase the SaaS service also receive technical support and access to updates and upgrades. The Company’s performance obligations related to its SaaS offering is a stand-ready obligation to provide the customer with continuous access to the hosted service as well as to provide updates/upgrades and technical support. Access to the platform represents a series of distinct services as the Company continually provides access to, and fulfills its obligation to, the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. The Company recognizes revenue ratably because the customer receives and consumes the benefits of the platform throughout the contract period.
During the year ended December 31, 2020, the Company sold a perpetual license for its software. Revenue for this license was recognized up-front upon delivery of the software license.
In addition, the Company offers customization and implementation services for customers. Customization services are provided when a customer requests the development of a specific feature and/or functionality that is not currently present within the solution as of the date of execution of the agreement. Implementation services include installation, custom builds, data migration, integration to other application programming interfaces, and training of customer personnel. Both customization and implementation services are priced based on mutual negotiation and subject to Company approvals. Occasionally, these services are offered at a discount or included as a bundle with pricing for the software or SaaS products. These services are not considered to represent distinct
F-91
performance obligations and when present are combined with the overall subscription service. Revenue recognition begins when all services have been completed and are made available to customers.
Deferred Contract Acquisition Costs
Prior to the adoption of Topic 606 on January 1, 2019, sales commissions associated with the Company’s technology agreements were not deferred and expensed as incurred. Under Topic 606, the Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the entity expects to recover such costs. Sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. Contract acquisition costs are accrued and capitalized upon execution of the sales contract by the customer. The Company allocates commission costs to the performance obligations in an arrangement consistent with the allocation of the transaction price. The portion of these costs that are attributed to performance obligations delivered over time are capitalized and recorded in prepaid expense and other current assets on the Company’s consolidated balance sheet.
Deferred contract costs on the Company’s consolidated balance sheets were approximately $0.2 million as of December 31, 2019 and 2020. Amortization expense related to deferred contract costs through the years ended December 31, 2019 and 2020 was not significant. There was no impairment loss in relation to the costs capitalized for the periods presented.
Deferred Revenue
The deferred revenue balance consists of subscription and professional services for the Company’s technology agreements which have been invoiced in advance of when the revenue recognition criteria are met. The Company’s subscription contracts are typically invoiced to its customers at the beginning of the term, or in some instances, such as in multi-year arrangements, in annual installments. Accordingly, the Company’s deferred revenue balance does not include revenues for future years of multi-year non-cancellable contracts that have not yet been billed.
The Company recognizes subscription revenue ratably over the contract term beginning on the date that services are made available to customers, which may be after the contract commencement date if additional customization or implementation services are required to make the subscription service available to customers. On the contract commencement date, the Company records amounts due in accounts receivable and in deferred revenue. To the extent the Company bills customers in advance of the contract commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on the consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.
The Company recognized $0.8 million and $2.3 million of revenue during the years ended December 31, 2019, and 2020, respectively, that was included in the deferred revenue balances at the beginning of the respective years.
Remaining Performance Obligations
Remaining performance obligations represent contracted revenues that are non-cancellable and have not yet been recognized due to unsatisfied or partially satisfied performance obligations. This includes deferred revenues and amounts that will be invoiced and recognized as revenues in future periods. As of December 31, 2019 and 2020, future estimated revenue related to performance obligations for subscriptions with terms of more than one year that are unsatisfied or partially unsatisfied at the end of the reporting periods was approximately $19.6 million and $17.2 million, respectively. As of December 31, 2019 and December 31, 2020 the Company expects to recognize revenue on approximately 40% and 51% of these unsatisfied performance obligations, respectively over the following 24 months and the remainder thereafter.
Losses and Loss Adjustment Expenses and Loss and Loss Adjustment Expenses Reserves
The Insurance Company’s losses and LAE are presented net of any reinsurance and charged to income as incurred. The liabilities for unpaid losses and LAE represent the estimated liabilities for reported claims, claims incurred but not yet reported, and the related LAE. Losses and loss adjustment expenses also includes the LAE related to NGI as well as LAE incurred directly, including claims personnel and related expenses, compensation related to customer experience, depreciation on telematics devices, packaging and postage for shipping devices to customers, fulfillment service center costs, and third-party web-hosting costs.
Liability for unpaid losses and LAE for policies underwritten by the Insurance Company represents management’s best estimate of the ultimate net cost of all reported and unreported losses incurred during the years ended December 31, 2019 and 2020. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses. Estimated reserves are
F-92
computed in accordance with accepted actuarial standards and principles. Several different actuarial approaches are considered, and reserve estimates may rely on a single or multiple techniques, depending on the appropriateness of the technique in a given situation. One branch of techniques that is frequently relied upon belongs to chain ladder methods in which data is aggregated into appropriate accident periods (when a claim occurred) and historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves as established by claim adjusters).
The chain ladder method uses a ratio of losses from consecutive periods to calculate a development factor amongst various accident periods at similar maturities. An age-to-age factor is the expected development for future accident periods at a similar maturity. This is judgmentally selected based on a variety of inputs including, but not limited to, industry trends, company-specific trends, changes in claims handling practices, and changes in judicial environment and other external influences. Age-to-age factors are then multiplied and applied to the known losses to estimate the ultimate loss. The primary assumption of this approach is that historical development patterns are predictive of how current and future accident periods will develop. Modifications and variations of this approach can be made to better address certain issues that may arise, such as a sudden change in claim reserving process from claim adjusters, changes in payment and closure rate of claims, and external factors. Large losses, severe weather events, and other catastrophic events may significantly increase the variance of development patterns. These may be capped or excluded in the data and analyzed separately.
The use of these methods on paid data as opposed to reported data has both benefits and drawbacks. For a sufficiently large dataset, paid data tends to be more stable, but may finalize later, creating additional uncertainty and potential to both over- and under-estimate reserves. For newer, immature accident periods, approaches using paid data may create very volatile estimates as a relatively small amount has been paid, which is then multiplied by a large multiplier from the age-to-age factors as described above. Reported data includes payments made to date as well as the best estimate from claim adjusters of future payments. The claim adjusters are able to review each claim and incorporate facts about each individual event to estimate losses on a claim-by-claim basis. Reported data tends to require less future development than paid data, which decreases the potential variance from the ultimate amount to be paid for a claim. It may however be influenced by changes in claims reserving and settlement practices, which need to be accounted for when using historical data to predict future liabilities.
The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes the reserves for losses and LAE are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in the current year’s operations. Salvage and subrogation recoverables are estimated using the case basis method or historical statistics. Salvage and subrogation estimated recoverables are deducted from the liability for unpaid losses and LAE.
Reinsurance
The Company enters into ceded reinsurance contracts to protect its business from losses due to concentration of risk and to manage its operating leverage ratios. The Company has entered into quota-share reinsurance agreements with reinsurers under which risks are covered on a pro-rata basis for all policies underwritten by the Insurance Company. Premiums ceded to reinsurers are reported as a reduction of premiums written, and expenses incurred in connection with ceded policies have been accounted for as a reduction of the Company’s related deferred policy acquisition costs.
The Company is exposed to credit risk from reinsurance recoverables and prepaid reinsurance premiums, which is mitigated by using a trust account.
Cash, Cash Equivalents and Restricted Cash
For purposes of the consolidated financial statements, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company’s operating cash is held in an overnight sweep account. The Company’s cash is maintained in checking accounts, money market funds, and other highly liquid fixed income investments.
Certain of the Company’s cash accounts are restricted. The Company holds certificates of deposits as collateral on its letters of credit in conjunction with its office leases and corporate credit cards. As part of the Company’s debt arrangement, a certain cash minimum must be maintained in a separate bank account as part of the debt covenants. The Company also collects insurance policy premiums that it holds in a segregated account for transmittal to the applicable underwriting carrier or for the benefit of policyholders
F-93
for insurance-related claims. Cash held by the Insurance Company is restricted for use by the Insurance Company for the benefit of its policyholders.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk, to the extent of the amounts recorded on the consolidated balance sheets, consist principally of cash and marketable securities. The Company, at times, maintains cash balances with its primary bank in excess of Federal Deposit Insurance Corporation limits. The Company places its cash and cash equivalents with financial institutions with high credit standing. The Company places its excess cash in marketable investment grade securities. There are no significant concentrations in any one issuer of debt securities.
The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policy coverage, and therefore the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. To minimize exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk.
The Company did not have any customers whose revenue or account receivable balance individually represented 10% or more of the Company’s total revenues or accounts receivable, respectively, during the years presented. However, one customer made up 99.8% of the Company’s Enterprise business solutions segment revenue (see Note 16, Segment and Geographic Information).
Marketable Securities
The Company classifies marketable investment securities as available-for-sale. Interest income and dividends on securities are recognized in income on an accrual basis. Premiums and discounts on debt securities are amortized as an adjustment to interest income using the interest method. These securities are reported at their estimated fair value with unrealized gains and losses reported as a separate component of comprehensive income in stockholders’ deficit and classified into unrestricted and restricted marketable securities. Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on the specific identification method. Certain marketable securities are restricted as they are held by the Insurance Company and are either pledged as statutory deposits for state licenses or restricted as to the distribution of the assets of the Insurance Company under the regulations of the State of Delaware.
Telematics Devices, Improvements, and Equipment, Net
Telematics devices, improvements, and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally estimated to be three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized.
Website and Software Development Costs, Net
Costs related to the planning and post-implementation phases of the Company’s website and software development efforts are recorded as an operating expense. Direct costs incurred in the development phase of major development efforts and upgrades are capitalized and amortized using the straight-line method over an estimated useful life, generally estimated to be three years.
Deferred Policy Acquisition Costs (“DPAC”)
The Company defers sales commissions and expenses, marketing and underwriting costs, net of reinsurance ceding commission, directly relating to the successful acquisition of policies that the GA Subsidiary binds, and costs related to written premiums to the extent they are considered recoverable. These costs are then expensed over the customer’s policy term including estimated renewal periods. The method followed to determine the deferred policy acquisition costs limits the deferral to its realizable value by considering estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any, are recorded in the accounting period in which changes are determined.
When anticipated losses, LAE, commissions, and other policy acquisition costs exceed recorded unearned premium, any future premiums on existing policies, and anticipated investment income on existing policies, a premium deficiency reserve is recognized by
F-94
recording a reduction to DPAC with a corresponding charge to operations. The Company does not include anticipated investment income as a factor in the premium deficiency calculations. The Company concluded that no premium deficiency adjustments were necessary through December 31, 2019 and 2020.
Any excess ceding commissions over and above the portion that represents a recovery of deferred policy acquisition costs is recorded as a deferred liability and amortized over the same period in which the related premiums are earned.
Impairment of Long-Lived Assets
The Company evaluates the carrying amount of its long-lived assets, primarily telematics devices, improvements, equipment, website and software development costs, and policy acquisition costs for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses recoverability using undiscounted cash flows attributed to that asset. If impairment has occurred, any excess of the carrying value over the fair value is recorded as a loss. No impairment occurred during the years presented.
Indefinite-lived intangible assets, such as the Company’s insurance licenses included as intangible assets on the accompanying consolidated balance sheet, are subject to annual impairment testing. On an annual basis or more frequently if a triggering event occurs, the fair value of indefinite-lived intangible assets are evaluated to determine if an impairment charge is required.
Warrants Exercisable for Preferred and Common Stock
The Company generally accounts for warrants to purchase common stock as a component of equity at its issued cost unless the warrants include a conditional obligation to issue a variable number of shares or there is a deemed possibility that the Company may need to settle the warrants in cash. For warrants issued with a conditional obligation to issue a variable number of shares or the deemed possibility of a cash settlement, the Company records the fair value of the warrants as a liability at each balance sheet date. The warrant liability is subsequently marked to estimated fair value at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
Freestanding warrants issued by the Company to purchase shares of its convertible preferred stock are classified as liabilities on the consolidated balance sheets and are measured at their estimated fair value, as the underlying convertible preferred stock is considered contingently redeemable. The initial liability recorded is adjusted for changes in fair value at each reporting date with an offsetting entry recorded as a component of other income, net in the accompanying consolidated statements of operations. The liability will continue to be adjusted for changes in fair value until the earlier of the exercise date or the conversion of the underlying convertible preferred stock into common stock, at which time the convertible preferred stock warrants will convert to common stock warrants, and the liability will be reclassified to stockholders’ deficit.
The Company estimates the fair value of these warrants at the respective dates using the Black-Scholes option valuation model based on the estimated fair value of the underlying common stock or convertible preferred stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividends, and the expected volatility of the price of the underlying convertible preferred stock. These estimates, especially the market value of the underlying common stock or convertible preferred stock and the related expected volatility, are highly judgmental and could differ materially in the future.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award. The expense recorded is based on awards ultimately expected to vest and, therefore, is reduced by estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company calculates the fair value of options using the Black-Scholes option pricing model and recognizes expense using the straight-line attribution approach. Awards with performance conditions and no service conditions are expensed when the performance condition is deemed probable of being achieved and is based on the fair value of the award at that time.
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Advertising Expenses
The Company expenses advertising costs as incurred. Advertising costs were approximately $18.6 million, and $7.2 million in the years ended December 31, 2019, and 2020, respectively, and are included in sales and marketing expense in the accompanying consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
All tax years remain open and subject to federal and state examination.
Net Loss per Share
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company considers all series of its redeemable convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common stockholders is not allocated to the redeemable convertible preferred stock as the holders of its redeemable convertible preferred stock do not have a contractual obligation to share in the Company’s losses. Under the two-class method, net income is attributed to common stockholders and participating securities based on their participation rights. Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options and redeemable convertible preferred stock. As the Company has reported losses for the years presented, all potentially dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share.
Recently Adopted Accounting Pronouncements
The Company adopted the following accounting standards during the year ended December 31, 2020:
In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal-use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact to the Company’s results of operations for the year ended December 31, 2020.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), to improve the effectiveness of disclosures in the note
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to the financial statements by facilitating clear communication of the information required by generally accepted accounting principles. The adoption of ASU 2018-13 is effective for the Company beginning January 1, 2020. The adoption of this standard did not have a material impact to the Company’s results of operations for the year ended December 31, 2020.
Recent Issued Accounting Pronouncements
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model and the new revenue recognition standard. The standard will be effective beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating this new standard and the impact it will have on its consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), intended to improve the timing, and enhance the accounting and disclosure, of credit losses on financial assets. This update modified the existing accounting guidance related to the impairment evaluation for available-for-sale debt securities, reinsurance recoverables, and premiums receivables and could result in the creation of an allowance for credit losses as a contra asset account. The ASU requires a cumulative-effect change to retained earnings in the period of adoption and prospective changes on previously recorded impairments, to the extent applicable. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating this new standard and believes that it will not have a material impact on the Company’s consolidated financial statements with its current investment portfolio.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued. The standard is effective upon issuance through December 31, 2022 and may be applied at the beginning of the interim period that includes March 12, 2020 or any date thereafter. The Company is currently evaluating this new standard and the impact it will have on its consolidated financial statements.
2. Fair Value of Financial Instruments
Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
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The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Cash and Cash Equivalents
The Company’s cash and cash equivalents are demand and money market accounts and other highly liquid investments with an original maturity of three months or less. Demand and money market accounts are at stated values. Fair values for other cash equivalents are classified as Level 1 or Level 2 and are based upon appropriate valuation methodology.
Marketable Securities — Available-for-sale
The Company classifies highly liquid money market funds, U.S. Treasury bonds and certificates of deposit within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets and upon models that take into consideration such market-based factors as recent sales, risk-free yield curves, and prices of similarly rated bonds. Commercial paper, corporate bonds, corporate debt securities, repurchase agreements, and asset backed securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which may not be actively traded. The Company did not hold any securities classified within Level 3 as of December 31, 2019 and 2020.
Assets measured on a recurring basis at fair value, primarily related to marketable securities, included in the consolidated balance sheets as of December 31, 2019 and 2020 (in thousands):
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Warrants
The Company estimated the fair value of warrants exercisable for convertible preferred stock measured at fair value on a recurring basis at the respective dates using the Black-Scholes option valuation model, based on the estimated fair value of the underlying convertible preferred stock at the valuation measurement date, the remaining contractual term of the warrant, the risk-free interest rates, the expected dividends, and the expected volatility of the price of the underlying stock using guideline companies for reference. These estimates, especially the market value of the underlying stock and the related expected volatility, are highly judgmental and could differ materially in the future.
There were no changes in the valuation techniques during the periods presented. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date and as such are classified as Level 3 liabilities.
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the years ended December 31, 2019 and 2020 (in thousands):
The fair value of the convertible preferred stock warrants was determined using the Black-Scholes option valuation model using the following assumptions for values as of December 31, 2019 and 2020:
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Through December 31, 2019 and 2020, there were no transfers to or from any Level. The carrying amounts of accounts payable, accrued expenses, notes payable, and convertible debt approximate their fair values because of the relatively short periods until they mature or are required to be settled.
3. Marketable Securities
The Company has investments in certain debt securities that have been classified as available-for-sale and recorded at fair value. These investments are included in both assets for securities with a maturity of one-year or less and assets for securities with a maturity of more than one-year. These securities are held in the Insurance Company and shown as restricted given that the transfer of these assets is subject to the approval of the state regulators. As of December 31, 2019 and 2020, deposits with various states consisted of bonds with carrying values of $4.6 million and $4.9 million, respectively.
When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of December 31, 2019 and 2020, the Company does not consider any of its investments to be other-than-temporarily impaired. Unrealized gains and losses arising from the revaluation of available-for-sale securities are included in the consolidated statements of other comprehensive loss. Realized gains and losses on sales of investments are generally determined using the specific identification method and are included in the consolidated statements of operations.
The cost basis and fair value of available-for-sale securities as of December 31, 2019 and 2020 are presented below (in thousands):
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The amortized cost and estimated fair value of marketable securities as of December 31, 2019 and 2020 are shown below by contractual maturity (in thousands):
|
|
|
|
|
|
|
|
|
As of December 31, |
||||
|
|
2019 |
||||
|
|
Amortized |
|
Estimated |
||
|
|
Cost |
|
Fair Value |
||
Due within one year |
|
$ |
44,057 |
|
$ |
44,105 |
Due between one to five years |
|
|
2,198 |
|
|
2,210 |
|
|
$ |
46,255 |
|
$ |
46,315 |
|
|
|
|
|
|
|
|
|
As of December 31, |
||||
|
|
2020 |
||||
|
|
Amortized |
|
Estimated |
||
|
|
Cost |
|
Fair Value |
||
Due within one year |
|
$ |
21,603 |
|
$ |
21,629 |
Due between one to five years |
|
|
3,031 |
|
|
3,022 |
|
|
$ |
24,634 |
|
$ |
24,651 |
4. Telematics Devices, Improvements, and Equipment, Net
Telematics devices, improvements, and equipment consist of the following (in thousands):
For the years ended December 31, 2019 and 2020, total depreciation and amortization expense was approximately $3.3 million, and $4.0 million respectively, included as part of policy servicing expense and other expense on the Company’s consolidated statements of operations.
The Company has one major vendor that supplies all telematics devices. The Company expects to maintain this relationship with the vendor for the foreseeable future. As of December 31, 2019 and 2020 , the Company had approximately 48,800 and 49,200 telematics devices available to send to policyholders, respectively.
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5. Website and Software Development Costs, Net
Website and software development costs consist of the following (in thousands):
For the years ended December 31, 2019 and 2020 total amortization expense was approximately $10.6 million and $11.2 million respectively. For the years ended December 31, 2019 and 2020 the net amount of capitalized website and software development costs written off was approximately $0.2 million and $0 respectively.
6. Deferred Policy Acquisition Costs, Net
DPAC consists of the following (in thousands):
For the years ended December 31, 2019 and 2020, total amortization expense was approximately $1.7 million and $1.5 million, respectively, included as part of sales, marketing and other acquisition costs on the Company’s consolidated statements of operations.
7. Intangible Assets
Intangible assets of $7.5 million as of December 31, 2019 and 2020, are primarily related to the state insurance licenses acquired in 2016. These intangibles carry an indefinite life and are evaluated at least annually for impairment. For the years ended December 31, 2019 and 2020, the Company did not record an impairment charge.
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8. Loss and Loss Adjustment Expense Reserves
The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE, net of reinsurance recoverable, as of December 31, 2019 and 2020 (in thousands):
These reserve estimates are generally the result of ongoing analysis of recent loss development trends and emerging historical experience. Original estimates are increased or decreased as additional information becomes known regarding individual claims. In setting reserves, the Company reviewed its loss data to estimate expected loss development. Management believes that the use of sound actuarial methodology applied to its analyses of historical experience provides a reasonable estimate of future losses. However, actual future losses may differ from the Company’s estimates, and future events beyond the control of management, such as changes in law, judicial interpretations of law and inflation, may favorably or unfavorably impact the ultimate settlement of the Company’s losses and LAE.
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends.
The estimation of unpaid losses and LAE reserves is based on existing factors at the date of estimation. Accordingly, future events may result in ultimate losses and LAE significantly varying from a reasonable provision as of the date of estimation. Unfavorable development of claims in future years could result in a significant negative impact on operations, stockholders’ surplus, and risk-based capital. Such development, if not offset by other increases in stockholders’ surplus, could result in the insurance departments of the state of domicile taking regulatory actions against the Company.
In 2019, the Company experienced favorable development on losses and LAE from prior accident years driven by lower-than-estimated severity of collision claims in 2018. In 2020, the Company experienced unfavorable development on losses and LAE from prior accident years as a result of adverse LAE development. The Company has not had any unfavorable prior year claim experience on retrospectively rated policies. However, the business to which the development relates is subject to premium adjustments.
The following is supplementary information about average historical claims duration as of December 31, 2020. Given the stage of the Insurance Company, historical data for claims is limited to five years.
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|
|
|
|
|
|
|
|
|
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
||||||||||||||||||||
Years |
|
1 |
|
2 |
|
3 |
|
4 |
|
5 |
|
6 |
|
7 |
|
8 |
|
9 |
|
10 |
Automobile |
|
47 |
% |
28 |
% |
11 |
% |
9 |
% |
3 |
% |
|
|
|
|
|
|
|
|
|
F-103
The following is information about incurred and paid claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported (“IBNR”) liabilities plus expected development on reported claims included within the net incurred claims amounts.
The information about incurred and paid claims development for the years ended December 31, 2011 to December 31, 2020, including claim frequency, is presented below. The Company tracks claim frequency by individual claimant (dollars in thousands).
* |
Unaudited required supplemental information |
F-104
The following table reconciles the incurred and paid claims development to the liability for losses and loss adjustment expenses for the year ended December 31, 2020 (in thousands):
9. Reinsurance
The Company uses reinsurance contracts to protect itself from losses due to concentration of risk and to manage its operating leverage ratios. Effective May 1, 2017, two quota-share reinsurance agreements were entered into under which 85% of the Company’s premiums and losses related to its renewal business occurring May 1, 2017 through April 30, 2018 were ceded to two unaffiliated reinsurers. Effective May 1, 2018, three quota-share reinsurance agreements were in place whereby 85% of the Company’s premiums and losses related to its second term renewal business occurring May 1, 2018 through April 30, 2019, but not covered by the earlier quota-share agreements, were ceded to three unaffiliated reinsurers. Effective May 1, 2019, four quota-share reinsurance agreements were in place whereby 85% of the Company’s premiums and losses, subject to a loss corridor, related to its new and renewal business occurring May 1, 2019 through April 30, 2020, but not covered by the earlier quota-share agreements, were ceded to four unaffiliated reinsurers. Effective May 1, 2020, four quota-share reinsurance agreements were in place whereby 85% of the Company’s premiums and losses, subject to a loss corridor for one agreement, related to its new and renewal business occurring May 1, 2020 through April 30, 2021, but not covered by the earlier quota-share agreements, were ceded to five unaffiliated reinsurers. In addition, under the reinsurance agreements effective May 1, 2017 and May 1, 2018, LAE is ceded at a fixed rate of 3% of ceded earned premium. Under the reinsurance agreement effective May 1, 2019, LAE is ceded at a fixed rate of 6% of ceded earned premium and will be revalued effective May 1, 2021. Under the reinsurance agreement effective May 1, 2020, LAE is ceded at a fixed rate of 4.75 – 6.0% of ceded earned premium. For the reinsurance agreements effective May 1, 2017 and May 1, 2018, the Company receives a 10.2% ceding commission, sliding based on loss ratios of the ceded business. For the reinsurance agreement effective May 1, 2019, the Company receives a 10.0% ceding commission. For the reinsurance agreement effective May 1, 2020, the Company receives a 10.0 – 11.75% ceding commission, sliding based on loss performance of the ceded business.
In addition, the Company receives revenue from the reinsurers related to the acquisition costs incurred related to the ceded policies. The revenue is based on the number of policies newly ceded to the reinsurers. During the years ended December 31, 2019 and 2020 the Company received $25.2 million and $11.3 million respectively, for acquisition costs from the reinsurers, pursuant to the existing reinsurance agreements. This revenue is recorded in other revenue on the consolidated statements of operations.
The insurance company is not relieved of its primary obligations to policyholders as a result of any reinsurance agreements. The credit risk associated with the Company’s reinsurance contracts is mitigated by using a diverse group of reinsurers and monitoring their financial strength ratings. The reinsurance counterparties and their A.M. Best financial strength rating are as follows: Mapfre Re (A), Cincinnati Insurance Company (A+), Partner Re (A+), Horseshoe Re (not rated), and Topsail Re (not rated). For reinsurance counterparties not rated, adequate levels of collateral are required either in the form of a letter of credit or funded trust account.
The effect of the Company’s reinsurance agreements on premiums, loss and LAE related to the insurance company for the years ended December 31, 2019 and 2020 is as follows (in thousands):
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10. Notes Payable, net
The following table summarizes the Company’s debt outstanding, net of issuance costs (in thousands):
Paycheck Protection Program Loan
In April 2020, the Company was granted a loan under the Paycheck Protection Program offered by the Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), section 7(a)(36) of the Small Business Act for approximately $5,900,000. The loan was evidenced by a promissory note and bore interest at 1% with payments deferred for 10 months after the covered period of 24 weeks months. Monthly payments of principal and interest of approximately $330,000 would have begun in September 2021 and continued through maturity in April 2022, if required. The loan was subject to partial or full forgiveness if the Company: used all proceeds for eligible purposes; maintained certain employment levels; and maintained certain compensation levels in accordance with and subject to the CARES Act and the rules, regulations and guidance. This loan was repaid in February 2021 and is no longer outstanding (see Note 19).
Subordinated Note Purchase and Security Agreement
In April 2020, the Company entered into a subordinated debt transaction (the “Note Purchase and Security Agreement”) with Hudson Structured Capital Management and an affiliate (collectively, “Hudson”) with borrowings totaling $31.6 million through December 31, 2020 in the aggregate, along with $0.9 million of capitalized payment in kind (“PIK”) interest. The transaction further provided for additional funds up to $15.0 million over time, from Hudson, the timing of which was subject to reinsurance settlement timing. The outstanding principal under the Note Purchase and Security Agreement was due in April 2025 and bore interest at the following rates: 2% per annum payable quarterly in arrears in cash, and a varying interest rate of 9.0% to 11.0% of PIK interest. The PIK interest was based on the aggregate outstanding principal balance as follows: (i) 11.0% if the outstanding balance was less than $5.0 million; (ii) 10.0% if the outstanding balance was greater than or equal to $5.0 million but less than $10.0 million, and (iii) 9.0% if the outstanding balance was greater than or equal to $10.0 million. PIK interest represents contractually deferred interest that is added to the principal balance outstanding and due at maturity. The loan was secured by substantially all assets of the Company. As of December 31, 2020, the outstanding principal and capitalized PIK interest on the Note Purchase and Security Agreement was $32.5 million, along with $0.6 million of accrued PIK interest not subject to capitalization as of such date. This loan was repaid in March 2021 and is no longer outstanding (see Note 19).
As part of the Note Purchase and Security Agreement, the Company issued warrants for up to 8,669,076 of Series E convertible preferred shares, which the Company estimated to have a fair value of $12.5 million at issuance which was recorded as a discount to the debt and is being amortized to interest expense over the term of the debt. These warrants were exercised in February 2021 and are no longer outstanding (see Note 19).
2019 Loan and Security Agreement
In December 2019, the Company entered into a Loan and Security Agreement (the “2019 Loan and Security Agreement”) with a group of lenders for a term loan in the amount of $25.0 million. Minimum payments of interest were due monthly through
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December 2021. Beginning in January 2022, equal payments of principal would have been due monthly in an amount necessary to fully amortize the loan by June 5, 2024. An end of term payment of $0.6 million was due at maturity or date of any prepayment. At the time of origination, the lender was granted a warrant to purchase Series E convertible preferred stock, estimated to have a fair value of $0.5 million at issuance. The warrants were exercised in February 2021 and are no longer outstanding (see Note 19). The loan was secured by substantially all assets of the Company. The Company was required to obtain the lender’s consent regarding certain dispositions, and changes in business, management, or ownership including mergers and acquisitions, as more fully described in the 2019 Loan Agreement. The balance outstanding net of debt issuance costs for the 2019 Loan Agreement was $24.1 million and $24.3 million as of December 31, 2019 and 2020, respectively.
The loan was able to be prepaid in an amount equal to the outstanding principal, accrued interest, and the end of term fee, plus a prepayment charge of 3% if paid in the first year after the effective date, 2% if paid in the second year after the effective date, or 1% if prepaid after the second year subsequent to the effective date. The following table summarizes the principal amounts due on the Company’s outstanding debt as of December 31, 2020 (in thousands):
|
|
|
|
Year Ended December 31, |
|
Amount |
|
2021 |
|
$ |
1,307 |
2022 |
|
|
14,573 |
2023 |
|
|
10,000 |
2024 |
|
|
5,000 |
2025 |
|
|
32,461 |
Thereafter |
|
|
— |
Total minimum principal payments |
|
$ |
63,341 |
This loan was prepaid in February 2021 and is no longer outstanding (see Note 19).
11. Commitments
The Company leases facilities in San Francisco, California, which is the corporate headquarters, Tempe, Arizona and Boston, Massachusetts, as well as certain equipment. The leases are non-cancellable operating leases that expire on various dates through 2030.
Future minimum lease payments relating to these agreements as of December 31, 2020, are as follows (in thousands):
In 2019, the company entered into a new lease for office space in San Francisco, CA. This lease commenced in August 2019 and includes minimum lease payments of approximately $22.6 million in total through March 2030.
The Company moved into the new San Francisco office space in March 2020. The Company exited the prior office space in February 2020 and ceased lease payments at that time in accordance with an executed updated lease agreement. For the years ended December 31, 2019, and 2020, rent expense was approximately $3.2 million, and $2.9 million, respectively, included as part of other operating expenses on the Company’s consolidated statements of operations.
The Company was not a party to any material litigation, regulatory actions, or arbitration other than what is routinely encountered in claims activity and routine regulatory examinations, none of which is expected by the Company to have a materially adverse effect on the Company’s financial position or operations and/or cash flow as of December 31, 2019 and 2020.
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12. Convertible Preferred Stock and Common Stock
Series E-1 Conversion to Series D
In April 2020, the Company amended the conversion rights of non-voting convertible Series E-1 preferred stock to provide for conversion on a 1:1 basis into shares of convertible Series D preferred stock. In December 2020, holders of non-voting convertible Series E-1 preferred stock elected to convert 6,293,581 shares into an equivalent number of shares of convertible Series D preferred stock in accordance with the amended convertible Series E-1 preferred stock conversion rights. Upon conversion of the Series E-1 convertible preferred stock to Series D convertible preferred stock, which had an equivalent fair value on the date of conversion, approximately $31.9 million was reclassified within the Company’s consolidated balance sheets for the balances of such classes of shares of convertible preferred stock, based on an original issue price and liquidation preference of $5.0763 per share for both classes of convertible preferred stock.
Authorized, Issued, and Outstanding Shares and Liquidation Preference
The authorized, issued, and outstanding shares of common stock and the authorized, issued, outstanding, and aggregate liquidation preference of the Company’s convertible preferred stock as of December 31, 2019 were as follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
||||||||
|
|
Number of Shares |
|
|
|
|
Aggregate |
|||
|
|
|
|
Issued and |
|
Aggregate |
|
Liquidation |
||
Series |
|
Authorized |
|
Outstanding |
|
Balance |
|
Preference |
||
Series A Senior |
|
7,260,666 |
|
6,939,098 |
|
$ |
4,032 |
|
$ |
4,100 |
Series B Senior |
|
5,805,056 |
|
5,805,057 |
|
|
9,949 |
|
|
10,000 |
Series C Senior |
|
9,304,900 |
|
9,224,670 |
|
|
39,613 |
|
|
39,840 |
Series D Senior |
|
19,371,524 |
|
18,915,820 |
|
|
93,727 |
|
|
96,023 |
Series E Senior |
|
23,850,034 |
|
14,787,031 |
|
|
90,468 |
|
|
93,001 |
Series E-1 Senior (non-voting) |
|
11,412,474 |
|
11,412,474 |
|
|
57,933 |
|
|
57,933 |
Junior Preferred |
|
1,692,464 |
|
1,692,464 |
|
|
1,479 |
|
|
1,500 |
|
|
78,697,118 |
|
68,776,614 |
|
$ |
297,201 |
|
$ |
302,397 |
Common stock: |
|
|
|
|
|
|
|
|
|
|
Shares |
|
97,485,929 |
|
8,865,933 |
|
|
|
|
|
|
Less shares subject to restriction |
|
— |
|
(423) |
|
|
|
|
|
|
Total |
|
97,485,929 |
|
8,865,510 |
|
|
|
|
|
|
The authorized, issued, and outstanding shares of common stock and the authorized, issued, outstanding, and aggregate liquidation preference of the Company’s convertible preferred stock as of December 31, 2020 were as follows (dollars in thousands):
Convertible Preferred Stock
All convertible preferred stock converted into common stock in February 2021 and is no longer outstanding (see Note 19). Significant terms of the outstanding convertible preferred stock series were as follows:
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Dividends — Each share of Series A, Series B, Series C, Series D, Series E, and Series E-1 convertible preferred stock (“Senior convertible preferred stock”) was entitled to receive, when and if declared by the Company’s Board of Directors, noncumulative dividends at an annual rate of $0.0473 for Series A convertible preferred stock, $0.1378 for Series B convertible preferred stock, $0.3456 for Series C convertible preferred stock, $0.4061 for Series D convertible preferred stock, $0.5031 for Series E convertible preferred stock, and $0.4061 for Series E-1 convertible preferred stock payable in preference and priority to any distributions made to holders of Junior convertible preferred stock or common stock. After the payment of dividends to holders of Senior convertible preferred stock, the holders of Junior convertible preferred stock were entitled to receive, when and if declared by the Company’s Board of Directors, noncumulative dividends at an annual rate of $0.0720 per share. Additional dividends or distributions would have been distributed among all holders of common stock and convertible preferred stock pro-rata on the number of shares of common stock held by each assuming full conversion of all preferred stock. No dividends could have been paid on the common stock until the dividends on the Senior preferred stock and Junior preferred stock were paid. No dividends have been declared to date.
Voting Rights — Each holder of common stock is entitled to one vote for each share. The holders of each share of Series A convertible preferred Stock, Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock, Series E convertible preferred stock, and Junior convertible preferred stock (collectively, the “Voting convertible preferred stock”) were entitled to the number of votes equal to the number of shares of common stock into which such shares could then be converted and have voting rights and powers equal to the voting rights and powers of the common stock. The holders of the Voting convertible preferred stock, voting as a separate class, were entitled to elect three directors to the Company’s Board of Directors. The holders of the Company’s common stock were entitled to elect two directors to the Company’s Board of Directors. The holders of the common stock and Senior convertible preferred stock, voting as a single class of stock, assuming a full conversion, elected all remaining directors of the Company. The Company was prohibited from taking certain material actions unless approved by the holders of 60% of the then outstanding shares of Voting convertible preferred stock. The holders of Series E-1 convertible preferred stock did not have any voting rights.
For so long as any shares of Series E convertible preferred stock remained outstanding (as adjusted for any recapitalization), the Company could not (by amendment, merger, consolidation, or otherwise), without first obtaining the approval (by vote or written consent as provided by law) of the holders of at least 60% of the outstanding shares of the Series E convertible preferred stock (voting together as a single class and on an as-converted basis), have taken any action that altered or changed the rights, preferences, privileges, or powers of the Series E convertible preferred stock in a manner that adversely affects the holders thereof differently than the holders of any other series of convertible preferred stock.
Liquidation - In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of Senior convertible preferred stock were entitled to receive, prior and in preference to any distributions of assets to the holders of the Junior convertible preferred stock or the common stock, an amount equal to the sum of any declared but unpaid dividends plus a liquidation preference per share of $0.5909 for Series A convertible preferred stock, $1.7226 for Series B convertible preferred stock, $4.3189 for Series C convertible preferred stock, $5.0763 for Series D convertible preferred stock, $6.2894 for Series E convertible preferred stock, and $5.0763 for Series E-1 convertible preferred stock.
If upon any liquidation, dissolution, or winding up of the Company, the available funds and assets to be distributed to the holders of the Senior convertible preferred stock were insufficient to permit the payment to such stockholders of their full preferential amount, then all of the available funds and assets were to be distributed among the holders of Senior convertible preferred stock pro-rata according to the number of outstanding shares held by each holder thereof.
The Junior convertible preferred stockholders had a preference to common stockholders upon liquidation, dissolution, or winding up of the Company of $0.8863 per share plus any declared but unpaid dividends.
Redemption Rights - No shares of Senior convertible preferred stock, Junior convertible preferred stock, or common stock had redemption rights.
Conversion - The holders of the Senior and Junior convertible preferred stock had the option to convert each share into one share of common stock. The conversion price for the Senior and Junior convertible preferred stock was subject to adjustment to account for certain dilutive issuances including stock splits.
Shares of Senior and Junior convertible preferred stock would have converted automatically into shares of common stock at the conversion price at the time in effect for such Senior and Junior convertible preferred stock (i) immediately prior to the closing of a firm commitment underwritten initial public offering pursuant to a registration statement under the Securities Act of 1933, as
F-109
amended, provided that the offering price per share was not less than $10.00 (as may be adjusted for stock splits, recapitalizations, and the like) and the aggregate gross proceeds to the Company were not less than $90.0 million, or (ii) upon the Company’s receipt of the written consent of the holders of at least 60% of the then outstanding shares of Voting convertible preferred stock (voting as a single class and on an as-converted basis) or, if later, the effective date for conversion specified in such requests to the conversion of all then outstanding shares of convertible preferred stock.
Pro-rata Participation and Other Rights - Pursuant to an Investor Rights Agreement between the Company and the holders of convertible preferred stock, “Significant Holders” (those holding more than 1,000,000 shares of convertible preferred stock) had the right to purchase their pro-rata portion of securities offered by the Company in the future, subject to customary exceptions. In the event that a Significant Holder did not purchase its pro-rata share, then the other participating Significant Holders could have elected to purchase the declined pro-rata allocation. The related agreements also contained various rights and obligations such as registration rights, obligations with respect to voting for director or in connection with a change of control, right of first refusal and co-sale rights, and anti-dilution adjustments, including price-based anti-dilution adjustments and adjustments for stock splits, stock dividends, and reclassifications, as more fully described therein.
The terms of all classes of convertible preferred stock included embedded conversion features related to anti-dilution. These conversion option provisions met the “fixed for fixed” and “clearly and closely related” criteria so the feature was not bifurcated from the host. The voting rights of the preferred stockholders provided for share redemption upon the occurrence of an event such as liquidation that was not solely within the control of the issuer. Accordingly, the preferred stock series have been presented as temporary or mezzanine equity in the accompanying consolidated balance sheets.
Common Stock
Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock then outstanding.
The Company has adequate authorized but unissued common stock available for outstanding instruments convertible into common stock as of December 31, 2019 and 2020.
Warrants
As of December 31, 2019, the following warrants were issued and outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
|
Underlying |
|
Reason |
|
Warrants |
|
Price |
|
|
|
Subject to Warrants |
|
Issue Date |
|
Security |
|
for Grant |
|
Outstanding |
|
per Share |
|
Expiration |
|
Series A Preferred |
|
September 7, 2012 |
|
Series A Preferred |
|
Financing |
|
321,568 |
|
$ |
0.5909 |
|
5 years post IPO |
Common |
|
July 30, 2015 |
|
Common Stock |
|
Services |
|
77,176 |
|
$ |
0.8567 |
|
July 30, 2020 |
Series C Preferred |
|
December 14, 2015 |
|
Series C Preferred |
|
Financing |
|
80,229 |
|
$ |
4.3189 |
|
December 14, 2025 |
Series D Preferred |
|
July 16, 2018 |
|
Series D Preferred |
|
Financing |
|
114,241 |
|
$ |
5.0763 |
|
June 30, 2025 |
Series D Preferred |
|
December 12, 2018 |
|
Series D Preferred |
|
Financing |
|
7,139 |
|
$ |
5.0763 |
|
December 12, 2025 |
Series E Preferred |
|
December 5, 2019 |
|
Series E Preferred |
|
Financing |
|
346,762 |
|
$ |
6.2894 |
|
December 31, 2029 |
As of December 31, 2020, the following warrants were issued and outstanding:
F-110
A discussion of the valuation methodology for the warrants exercisable for convertible preferred stock issued through 2020 is provided in Note 2, Fair Value of Financial Instruments. The value of these warrants at inception has been recorded as debt issuance costs on the loans with which they were issued, which have been accounted for as an adjustment to the effective rate of interest. The periodic adjustments to mark each warrant to fair value are recorded in the accompanying consolidated statements of operations. All warrants were exercised in February 2021 and are no longer outstanding (see Note 19).
13. Stock Option Plan
In 2011, the Company’s Board of Directors adopted the 2011 Equity Incentive Plan (the “Plan”). The Plan provides for the granting of stock options to officers, directors, employees, and consultants of the Company. Options granted under the Plan may be Incentive Stock Options (“ISO”) or Nonstatutory Stock Options (“NSO”) as determined by the Board of Directors at the time of the option grant. Only employees are eligible for the grant of ISOs. Only employees, consultants, and outside directors will be eligible for the grant of NSOs or the award or the sale of shares.
The Board of Directors determines the period over which options become exercisable and options generally vest over a four-year period. However, no option will become exercisable after the expiration of ten years from the date of grant. The term of an ISO granted to a 10% stockholder will not exceed five years from the date of the grant. The exercise price of an ISO granted to a 10% stockholder will not be less than 110% of the estimated fair value of the shares on the date of the grant. The exercise price of an ISO granted to any employee other than 10% stockholder will not be less than 100% of the estimated fair value of the shares on the date of grant.
The exercise price of an NSO granted to a 10% stockholder will not be less than 100% of the estimated fair value of the shares on the date of the grant. The exercise price of an NSO granted to any grantee other than 10% stockholder will not be less than 85% the estimated fair value of the shares on the date of the grant. In the case of options intended to qualify as performance-based compensation, the exercise price will not be less than 100% of the estimated fair value of the shares on the date of the grant.
The Plan allows employees with the ability to “early exercise” stock options (the underlying shares of common stock are referred to as “restricted stock units” or “RSUs”). Early exercise allows employees to exercise a stock option into an RSU and remit cash consideration or a recourse note to the Company for the exercise price in exchange for the RSU but before the requisite service is provided (e.g., before the award is vested). Although on early exercise the employee is deemed to own the resulting shares for tax and legal purposes, the employee has exercised the stock option award before the employee actually vests in the award under its original terms. The RSU received by the employee contains a repurchase provision contingent on the employee’s termination prior to vesting. The repurchase price is the original exercise price. Consequently, the early exercise is not considered to be a substantive exercise for accounting purposes, and, therefore, the payment received by the employer for the exercise price is initially recognized as a liability and the shares are not deemed to be “outstanding” for accounting reporting purposes. As the RSU vests, the liability and underlying shares are reclassified from a liability to equity.
Pursuant to the Plan, the Company had reserved 14,397,027 shares of common stock for issuance as of December 31, 2019 and 2020. There were 2,524,399 and 2,043,123 shares of common stock available for future issuance as of December 31, 2019 and 2020, respectively.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each option grant on the date of grant or modification. The Company amortizes the estimated fair value to stock compensation expense using the straight-line method over the vesting period of the option. The following is a description of the significant assumptions used in the option pricing model:
● | Expected term - The expected term is the period of time when granted options are expected to be outstanding. In determining the expected term of options, the Company utilized the midpoint between the vesting date and contractual expiration date. |
● | Volatility - Because the Company’s stock is not traded in an active market, the Company calculates volatility by using the historical stock prices of comparable public companies. |
● | Risk-free interest rate - The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the rate of treasury securities with the same term as the options. |
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● | Forfeiture rate - The weighted average forfeiture rate of unvested options. |
● | Expected dividends - The Company does not have plans to pay cash dividends in the future. Therefore, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. |
The following assumptions were used to estimate the value of options granted during the years ended December 31, 2019 and 2020:
The following table summarizes the activity of the Company’s stock option plan:
The fair value of stock options granted are recognized as compensation expense in the consolidated statements of operations over the related vesting periods. The weighted-average grant date fair value per share of stock options granted during the years ended December 31, 2019 and 2020 was $2.95 and $3.13, respectively. As of December 31, 2019 and 2020, there was approximately $2.8 million and $3.3 million of unrecognized stock-based compensation cost related to stock options granted under the Plan, respectively, which is expected to be recognized over an average period of 2.62 years and 2.83 years, respectively.
Awards with performance conditions and no service conditions are expensed when the performance condition is deemed probable of being achieved and is based on the fair value of the award at that time. As of December 31, 2020, the Company had granted 558,513 options with performance conditions. These options have no required service period. As of December 31, 2020, the performance conditions were not deemed probably of being met and therefore no corresponding stock-based compensation expense was recorded.
The contingent obligation related to RSUs as of December 31, 2019, and 2020 was $1,000, and $0, respectively.
F-112
The following table illustrates stock-based compensation expense for employee and nonemployee options for the years ended December 31, 2019 and 2020 (in thousands).
The amounts capitalized as part of website and software development costs for the years ended December 31, 2019 and 2020 was $0.4 million and $0.5 million, respectively.
14. 401(k)
The Company has a 401(k) retirement plan that covers all employees who have met certain eligibility requirements. The 401(k) plan provides for voluntary contributions by employees of up to 90% of their eligible compensation, subject to the maximum allowed by law. The Company is not required to make contributions to the plan but can make discretionary contributions. The Company did not make any contributions to the plan during the years ended December 31, 2019 or 2020.
15. Income Taxes
The components of the Company’s federal income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
As of December 31, |
||||
|
|
2019 |
|
2020 |
||
Current |
|
$ |
— |
|
$ |
— |
Deferred |
|
|
37 |
|
|
(84) |
Income tax expense (benefit) |
|
$ |
37 |
|
$ |
(84) |
The following table presents a reconciliation of the tax expense (benefit) based on the statutory rate to the Company’s actual tax expense (benefit) in the consolidated statements of operations:
The effective income tax rate differs from the statutory federal rate, primarily due to non-deductible warrants and valuation allowance.
F-113
The following table summarizes information regarding the Company’s net deferred tax assets and the valuation allowance (in thousands):
Realization of deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company is also in a cumulative loss position. Accordingly, net deferred tax assets have been fully offset by a valuation allowance.
As of December 31, 2020, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $279 million and $258 million, respectively. As of December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately $236 million and $217 million, respectively. Of the Company’s NOLs, $142 million of federal losses will begin to expire in the years 2031 through 2040 and $137 million of losses can be carried forward indefinitely. State NOL’s have varying expiration periods, beginning from 2027 to 2038.
As of December 31, 2020, the company had federal and state research and development tax credit carryforwards of approximately $4 million and $3 million, respectively. As of December 31, 2019, the company had federal and state research and development tax credit carryforwards of approximately $3 million and $2 million, respectively. The federal tax credit carryforwards expire at various dates beginning in 2033 if not utilized. The state tax credit carryforwards do not expire.
In October 2016, the Company underwent a change of control under Section 382 of the Internal Revenue Code by the purchase of interest by additional investors. The company is not expected to lose any deferred tax assets as a result of these limitations. The Company may experience ownership changes in the future as a result of subsequent shifts in its stock ownership.
Uncertain Tax Positions
The following is a reconciliation of the beginning and ending amount of the Company’s total gross unrecognized tax benefit liabilities (in thousands):
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
||||
|
|
2019 |
|
2020 |
||
Gross unrecognized tax benefit, beginning of the year |
|
$ |
854 |
|
$ |
1,364 |
Increases related to tax positions taken during current year |
|
|
510 |
|
|
390 |
Gross unrecognized tax benefit, ending balance |
|
$ |
1,364 |
|
$ |
1,754 |
As of December 31, 2020, all unrecognized tax benefits, if realized, would be subject to a full valuation allowance and, and would not affect the Company’s tax rate.
The Company does not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
F-114
A number of the Company’s tax returns remain subject to examination by taxing authorities for tax years from 2011 to 2017 with respect to the amount of tax attribute carryovers only and 2018 and later under general statutes of limitation.
The Company is not currently under examination by income tax authorities in any federal or state jurisdictions.
16. Segment and Geographic Information
The Company operates in the following two reportable segments, which are the same as its operating segments:
● | Insurance Services. Providing insurance policies for automobile owners |
● | Enterprise Business Solutions. Providing access to its developed technology under SaaS arrangements along with professional services to third party customers. |
Operating segments are based upon the nature of the Company’s business and how its business is managed. The Company’s Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer. The CODM uses the Company’s operating segment financial information to evaluate segment performance and to allocate resources. The CODM does not evaluate the performance of the Company’s assets on a segment basis for internal management reporting and, therefore, such information is not presented.
Contribution is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Segment contribution is segment revenue less the related costs of revenue and sales and marketing expenses. It excludes certain operating expenses that are not allocated to segments because they are separately managed at the consolidated corporate level. These unallocated costs include stock-based compensation expense, research and development expenses, and general and administrative expenses such as legal and accounting.
The total assets of Insurance services and Enterprise business solutions segments are $196.1 million and $6.1 million respectively. The consolidated total assets of Operating segments are $202.2 million.
The following table summarizes the operating results of the Company’s reportable segments (in thousands):
The following table provides a reconciliation of the Company’s total reportable segments’ contribution to its total loss from operations (in thousands):
F-115
Geographical Breakdown of Direct Earned Premiums
Direct earned premium by state is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
||||
|
|
2019 |
|
2020 |
||
California |
|
$ |
59,287 |
|
$ |
58,276 |
Washington |
|
|
10,765 |
|
|
11,391 |
New Jersey |
|
|
10,353 |
|
|
9,155 |
Oregon |
|
|
8,066 |
|
|
7,232 |
Illinois |
|
|
5,168 |
|
|
4,474 |
Arizona |
|
|
3,304 |
|
|
4,527 |
Pennsylvania |
|
|
3,418 |
|
|
2,932 |
Virginia |
|
|
1,877 |
|
|
1,725 |
Total premiums earned |
|
$ |
102,238 |
|
$ |
99,712 |
During the years ended December 31, 2019 and 2020, the Company recognized $0.8 million, and $5.7 million of revenue earned from customers outside the United States, respectively. Long-lived assets are all held in the U.S. For the years ended December 31, 2019 and 2020, substantially all of the Company’s revenue was earned from customers residing in the United States.
17. Related-Party Transactions
In August 2014, the Company loaned the Chief Executive Officer (“CEO”) $0.4 million with interest at 3.09% and adjusted to 1.5% in April 2020, which was used to early exercise stock options issued to the CEO and was due at the earlier of one year after termination of employment, upon an Initial Public Offering or change in control, or ten years from the date issued. The loan was full recourse, and also collateralized by the underlying common shares. For accounting under GAAP, the note receivable is presented as contra-equity in the accompanying consolidated balance sheets. This loan was paid in full in February 2021 and is no longer outstanding (see Note 19).
In March 2018, the Company entered into an agreement with a third party under which the Company developed proprietary software solutions and provides access to and use of such software solutions and related services. In July 2018, the third party became an investor of the Company as part of the Series E convertible preferred stock Financing. During the years ended December 31, 2019 and 2020, the Company recognized $0.8 million and $5.7 million of revenue from the investor, respectively. The Company had no outstanding accounts receivable balances from the investor as of December 31, 2019 and 2020. The Company continues to enter into contracts with the investor related to the Company’s Enterprise business solutions (see Note 16, Segment and Geographic Information).
An executive of Hudson, who the Company entered into a Note Purchase and Security Agreement with in 2020 (see Note 10, Notes Payable, net), is on the Company’s Board of Directors. This loan was repaid in March 2021 and is no longer outstanding (see Note 19).
18. Statutory Financial Information
The Insurance Company is subject to regulation and supervision in each of the jurisdictions where it is domiciled and licensed to conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, reserves for unpaid loss and LAE, reinsurance, minimum capital and surplus requirements, dividends and other distributions to stockholders, periodic examinations, and annual and other report filings. Such regulation is generally for the protection of the policyholders rather than stockholders. The NAIC uses risk-based capital standards for property and casualty insurers as a means of monitoring the financial strength of insurance companies.
F-116
The Company maintained statutory capital and surplus and had statutory net loss as of and for the years ended December 31, 2019 and 2020 as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
||||
|
|
2019 |
|
2020 |
||
Statutory capital and surplus |
|
$ |
25,076 |
|
$ |
22,453 |
Statutory net loss |
|
$ |
(3,595) |
|
$ |
(2,078) |
The policyholder’s surplus of the Insurance Company as of December 31, 2020 included capital contributions from Metromile of $18.6 million.
Dividend payments are restricted by the laws of the State of Delaware. The maximum amount that can be paid without prior notice or approval is the greater of 10% of surplus as regards policyholders as of the preceding December 31 or net income not including realized capital gains for the twelve-month period ending the preceding December 31. Because the Company has an unassigned deficit at December 31, 2019 and 2020, the Company’s dividend policy is governed by Section 5005(B) of the Delaware insurance code whereby a domestic insurer may not declare or pay a dividend or other distribution from any source other than earned surplus without the commissioner’s prior approval. The Insurance Company paid no dividends to the Company in 2019 or 2020.
The Insurance Company is subject to certain risk-based capital (“RBC”) requirements as specified by the National Association of Insurance Commissioners (“NAIC”). Under these requirements, the amount of capital and surplus maintained by an insurance company is to be determined based on the various risk factors related to it. As of December 31, 2019 and 2020, the Insurance Company’s capital and policyholders’ surplus exceeded the minimum RBC requirements.
19. Subsequent Events
In January 2021, the Company received additional loan proceeds of $2.0 million related to the Note Purchase and Security Agreement (see Note 10) with Hudson. In March 2021, the Company repaid its outstanding obligations on this loan in the amount of $37.0 million.
In February 2021, the Company completed a business combination (“Merger”) with INSU Acquisition Corp. II (“INSU”), where the Company merged with the subsidiary INSU, with Metromile surviving the merger as a wholly owned subsidiary of INSU. In connection with the transaction, the Company repaid its outstanding obligations on Paycheck Protection Program Loan and 2019 Loan (see Note 10) in the amount of $5.9 million and $26.5 million respectively.
In February 2021, Metromile Insurance Company entered into a settlement agreement with Horseshoe Re Limited (“Horseshoe”) to commute the reinsurance agreements between the two parties with effective dates beginning May 1, 2017, May 1, 2018, and May 1, 2019. Pursuant to the settlement, Metromile Insurance Company paid approximately $9 million, net, for commutation of the underlying agreements.
In February 2021, the loan to the CEO was repaid in full, including interest using shares of common stock.
In February 2021, a performance-based stock option award with the CEO was amended such that the performance condition was met upon consummation of the Merger.
In June and July 2021, Metromile Insurance Company entered into settlement agreements with Horseshoe Re Limited, Partner Reinsurance Company of the U.S., Topsail Reinsurance SPC Ltd., The Cincinnati Insurance Company and Mapfre Re to commute the reinsurance agreements between the parties with effective dates beginning May 1, 2017, May 1, 2018, May 1, 2019, and May 1, 2020. Commutations were effective April 30, 2021. Pursuant to the settlements, Metromile Insurance Company paid approximately $6.3 million, net, for commutation of the underlying agreements.
During the second quarter of 2021, the Company issued a total of 943,061 shares of performance-based RSUs granted under the 2021 Plan to a director and two members of senior management. The performance-based RSUs have a term of five years, subject to continuous services by the members of senior management to whom the awards have been issued. One third of RSUs that vest are based on a specific number of policies in force achieved by the Company. One third of the RSUs that vest are based on the Company achieving positive operating cash flow for a period of at least one financial quarter. One third of the RSUs vest based on the Company
F-117
achieving a specific price per share for at least 20 days in a 60-day trading window. Once the performance targets are met, the RSUs that relate to the specific performance target vest immediately.
F-118
Annex A
EXECUTION VERSION
AGREEMENT AND PLAN OF MERGER
by and among
LEMONADE, INC.,
a Delaware corporation;
CITRUS MERGER SUB A, INC.,
a Delaware corporation;
CITRUS MERGER SUB B, LLC,
a Delaware limited liability company;
and
METROMILE, INC.,
a Delaware corporation
________________________
Dated as of November 8, 2021
________________________
A-1
TABLE OF CONTENTS
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Treatment of Equity Awards; Company Warrants; Additional Shares |
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A-8 |
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Exchange of Certificates and Cancellation of Book-Entry Positions |
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A-28 |
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A-28 |
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REPRESENTATIONS AND WARRANTIES OF PARENT AND THE ACQUISITION SUBS |
A-29 |
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A-29 |
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A-29 |
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Meeting of the Company’s Stockholders; Company Change in Recommendation |
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Additional Conditions Precedent to the Company’s Obligations |
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Exhibits
Exhibit ACertain Definitions
Exhibit BForm of Certificate of Formation of the Surviving Company
Exhibit CForm of Limited Liability Company Agreement of the Surviving Company
Exhibit DVoting and Support Agreement
A-3
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made and entered into as of November 8, 2021, by and among Lemonade, Inc., a Delaware corporation (“Parent”); Citrus Merger Sub A, Inc., a Delaware corporation and a direct, wholly owned Subsidiary of Parent (“Acquisition Sub I”); Citrus Merger Sub B, LLC, a Delaware limited liability company and a direct, wholly owned Subsidiary of Parent (“Acquisition Sub II,” and together with Acquisition Sub I, the “Acquisition Subs”); and Metromile, Inc., a Delaware corporation (the “Company”). Certain capitalized terms used in this Agreement are defined in Exhibit A.
RECITALS
A.The parties intend to enter into an integrated transaction pursuant to which, first, Acquisition Sub I will be merged with and into the Company (the “First Merger”) in accordance with this Agreement and the General Corporation Law of the State of Delaware (the “DGCL”), and second, the Company, as the surviving corporation in the First Merger, will be merged with and into Acquisition Sub II (the “Second Merger,” and together with the First Merger, the “Mergers”) in accordance with this Agreement, the DGCL and the Delaware Limited Liability Company Act (the “DLLCA”), with Acquisition Sub II as the surviving limited liability company. Upon consummation of the First Merger, Acquisition Sub I will cease to exist and the Company will continue as the Initial Surviving Corporation and a wholly owned Subsidiary of Parent. Upon consummation of the Second Merger, the Company will cease to exist and Acquisition Sub II will continue as the Surviving Company and a wholly owned Subsidiary of Parent.
B.The Company Board has unanimously (i) determined that the Mergers are fair to and in the best interests of the Company and its stockholders; (ii) approved and declared advisable the execution and delivery of this Agreement, the performance by the Company of its covenants and agreements contained herein and the transactions contemplated by this Agreement, including the Mergers, on the terms and subject to the conditions contained herein; (iii) directed that the adoption of this Agreement be submitted to a vote at a meeting of the Company’s stockholders and (iv) recommended that the Company’s stockholders adopt this Agreement.
C.The Parent Board has unanimously approved the execution and delivery of this Agreement, the performance by Parent of its covenants and agreements contained herein and the consummation of the transactions contemplated by this Agreement, including the Mergers, and the issuance of shares of Parent Common Stock in connection therewith, each on the terms and subject to the conditions set forth herein.
D.The board of directors of Acquisition Sub I has (i) approved the execution and delivery of this Agreement, the performance by Acquisition Sub I of its covenants and agreements contained herein and the transactions contemplated by this Agreement, including the Mergers, upon the terms and subject to the conditions contained herein; and (ii) recommended that its sole stockholder adopt this Agreement.
E.Parent, as the sole member of Acquisition Sub II, has (i) determined that it is advisable and in the best interests of Acquisition Sub II and its sole member to enter into this Agreement and (ii) approved and declared advisable this Agreement and the consummation of the transactions contemplated hereby, including the Mergers.
F.Concurrently with the execution and delivery of this Agreement and as an inducement to Parent’s willingness to enter into this Agreement, certain stockholders of shares of Company Common Stock have entered into a voting and support agreement in the form attached as Exhibit D hereto (the “Voting and Support Agreement”), pursuant to which, and subject to the terms and limitations thereof, among other things, the foregoing stockholders agreed to vote the shares of Company Common Stock beneficially owned by each of them in favor of the adoption of this Agreement and approval of the Mergers at the Company Stockholder Meeting.
G.It is intended that, for U.S. federal income Tax purposes, (a) the First Merger will be treated as part of a single integrated transaction that includes the Second Merger, (b) the Mergers, taken together, should qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and (c) this Agreement will be a “plan of reorganization” within the meaning of Treasury Regulations Section 1.368-2(g) and 1.368-3(a).
AGREEMENT
The parties to this Agreement, in consideration of the representations, warranties, covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, agree as follows:
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SECTION 1. |
THE MERGERS |
1.1The Mergers. At the First Effective Time, Acquisition Sub I shall be merged with and into the Company in accordance with the DGCL and upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, whereupon the separate existence of Acquisition Sub I shall cease, and the Company shall be the surviving corporation (the “Initial Surviving Corporation”) in the First Merger and a wholly owned Subsidiary of Parent. At the Second Effective Time, the Company shall be merged with and into Acquisition Sub II in accordance with the DGCL and the DLLCA, whereupon the separate existence of the Company shall cease, with Acquisition Sub II continuing its existence as the surviving limited liability company (the “Surviving Company”). From and after the Second Effective Time, all the property, rights, powers, privileges and franchises of the Company and the Acquisition Subs shall be vested in the Surviving Company and all of the debts, obligations, liabilities, restrictions and duties of the Company and the Acquisition Subs shall become the debts, obligations, liabilities and duties of the Surviving Company, all as provided under the DGCL and DLLCA.
1.2Closing. The consummation of the Mergers (the “Closing”) shall be held (a) at the offices of Latham & Watkins LLP, 1271 Avenue of the Americas, New York, NY 10020, or (b) remotely by exchange of documents and signatures (or their electronic counterparts), in either case unless another place is agreed to in writing by the parties to this Agreement, on a date to be designated jointly by Parent and the Company, which shall be no later than the second (2nd) Business Day after the satisfaction or, to the extent permitted hereunder and by applicable Legal Requirements, waiver of the last to be satisfied or waived of all conditions to the parties’ respective obligations to effect the Mergers set forth in Sections 5.1, 5.2 and 5.3, other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of each of such conditions at the Closing, unless another time or date is agreed to in writing by Parent and the Company. The date on which the Closing actually takes place is referred to as the “Closing Date”. Subject to the provisions of this Agreement, at the Closing, the parties shall cause a certificate of merger with respect to the First Merger (the “First Certificate of Merger”) and immediately thereafter a certificate of merger with respect to the Second Merger (the “Second Certificate of Merger,” and, together with the First Certificate of Merger, the “Certificates of Merger”) to be duly executed and filed with the Secretary of State of the State of Delaware (the “Delaware Secretary of State”) and make all other filings or recordings required by the DGCL and DLLCA in connection with effecting the Mergers. The Mergers shall become effective on the date and at such time as the Certificates of Merger are filed with the Delaware Secretary of State or at such later time as may be mutually agreed to in writing by Parent and the Company and specified in the Certificates of Merger (the time at which the First Merger becomes effective being referred to in this Agreement as the “First Effective Time” and the time at which the Second Merger becomes effective being referred to in this Agreement as the “Second Effective Time”).
1.3Certificate of Incorporation and Bylaws.
(a)Subject to the requirements set forth in Section 4.10(a), at the First Effective Time and by virtue of the First Merger, the certificate of incorporation of the Company, as in effect immediately prior to the First Effective Time, shall continue to be the certificate of incorporation of the Initial Surviving Corporation until thereafter changed or amended as set forth therein or by applicable Legal Requirements.
(b)Subject to the requirements set forth in Section 4.10(a), at the First Effective Time, the bylaws of the Company, as in effect immediately prior to the First Effective Time, shall continue to be the bylaws of the Initial Surviving Corporation until thereafter changed or amended as set forth therein or by applicable Legal Requirements.
(c)Subject to the requirements set forth in Section 4.10(a), at the Second Effective Time and by virtue of the Second Merger, the certificate of formation of Acquisition Sub II, as in effect immediately prior to the Second Effective Time, shall be amended and restated in its entirety to read as set forth in the form of certificate of formation of the Surviving Company attached hereto as Exhibit B and, as so amended and restated, shall be the certificate of formation of the Surviving Company until thereafter changed or amended as set forth therein or by applicable Legal Requirements.
(d)Subject to the requirements set forth in Section 4.10(a), at the Second Effective Time, the limited liability company agreement of Acquisition Sub II shall be amended and restated in its entirety to read as set forth in the form of liability company agreement of the Surviving Company attached hereto as Exhibit C, and, as so amended and restated, shall be the limited liability company agreement of the Surviving Company until thereafter changed or amended as set forth therein or by applicable Legal Requirements.
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1.4Directors and Officers.
(a)From and after the First Effective Time, until their respective successors are duly elected or appointed and qualified in accordance with applicable Legal Requirements and the Initial Surviving Corporation’s Organizational Documents (i) the directors of Acquisition Sub I immediately prior to the First Effective Time shall be the directors of the Initial Surviving Corporation; and (ii) the officers of Acquisition Sub I immediately prior to the First Effective Time shall be the officers of the Initial Surviving Corporation.
(b)From and after the Second Effective Time, until their respective successors are duly elected or appointed and qualified in accordance with applicable Legal Requirements and the Surviving Company’s Organizational Documents (i) the directors of Acquisition Sub II immediately prior to the Second Effective Time shall be the directors of the Surviving Company; and (ii) the officers of Acquisition Sub II immediately prior to the Second Effective Time shall be the officers of the Surviving Company.
1.5Conversion of Securities. Subject to the terms and conditions of this Agreement, at the First Effective Time, automatically, by virtue of the First Merger and without any further action on the part of Parent, Acquisition Sub I, the Company or any stockholder of the Company:
(a)all shares of Company Common Stock that are held in the Company’s treasury or are held directly by Parent or Acquisition Sub I immediately prior to the First Effective Time shall be cancelled and shall cease to exist, and no consideration shall be paid or payable in respect thereof;
(b)except as provided in Section 1.5(a), each share of Company Common Stock that is issued and outstanding immediately prior to the First Effective Time (for the avoidance of doubt, including for all purposes hereunder, the “Earnout Shares”, as such term is defined in that certain Sponsor Share Cancellation and Vesting Agreement, dated as of November 24, 2020, by and among INSU Acquisition Corp. II, Insurance Acquisition Sponsor II, LLC, and Dioptra Advisors II, LLC (the “Sponsor Share Cancellation and Vesting Agreement”), which Parent acknowledges and agrees shall fully vest upon the First Effective Time pursuant to Section 1.2(c) of the Sponsor Share Cancellation and Vesting Agreement) shall be converted into the right to receive, without interest, a number of validly issued, fully paid and non-assessable shares of Parent Common Stock equal to the Exchange Ratio (the per share consideration payable in accordance with this Section 1.5(b), the “Merger Consideration”); and
(c)each share of common stock, par value $0.01 per share, of Acquisition Sub I that is issued and outstanding immediately prior to the First Effective Time shall be converted into one (1) validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of the Initial Surviving Corporation.
(d)Subject to the terms and conditions of this Agreement, at the Second Effective Time, automatically, by virtue of the Second Merger and without any action on the part of Parent, the Initial Surviving Corporation or Acquisition Sub II, each share of common stock, par value $0.01 per share, of the Initial Surviving Corporation issued and outstanding immediately prior to the Second Effective Time shall be cancelled and shall cease to exist. Each limited liability company interest of Acquisition Sub II issued and outstanding immediately prior to the Second Effective Time shall remain outstanding as a limited liability company interest of the Surviving Company.
1.6Certain Adjustments. Notwithstanding anything in this Agreement to the contrary, if, during the period from the date of this Agreement through the First Effective Time, the outstanding shares of Parent Common Stock or Company Common Stock are changed or converted into a different number or class or series of shares by reason of any stock split, division, combination, distribution, exchange, exchange or subdivision of shares, stock dividend, reverse stock split, consolidation of shares, reorganization, reclassification, recapitalization or other similar transaction, or a record date with respect to any such event shall occur during such period, then the Merger Consideration shall be adjusted to the extent appropriate to provide the same economic effect as contemplated by this Agreement prior to such action. Nothing in this Section 1.6 shall be construed to permit the parties to take any action except to the extent consistent with, or not otherwise prohibited by, the terms of this Agreement.
1.7Treatment of Equity Awards; Company Warrant; Additional Shares.
(a)Effective as of the First Effective Time, each Company Option (other than any Cancelled Company Option) that is outstanding and unexercised, whether vested or unvested, immediately prior to the First Effective Time (each, an “Assumed Company Option”) shall cease to represent a right to acquire shares of Company Common Stock and shall be assumed by Parent and converted automatically into a Parent Option on the same terms and conditions (including applicable vesting, exercise and expiration provisions)
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as applied to such Assumed Company Option immediately prior to the First Effective Time, except that (i) the number of shares of Parent Common Stock subject to each Assumed Company Option shall be determined by multiplying (A) the number of shares of Company Common Stock subject to such Assumed Company Option immediately prior to the First Effective Time; by (B) the Exchange Ratio, and rounding such product down to the nearest whole share; and (ii) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of each Assumed Company Option shall be determined by dividing (A) the per share exercise price for the shares of Company Common Stock otherwise purchasable pursuant to such Assumed Company Option immediately prior to the First Effective Time; by (B) the Exchange Ratio, and rounding such quotient up to the nearest whole cent.
(b)Effective as of the First Effective Time, each Company Option held by any individual who, as of the date hereof, is not employed by or providing services to the Company or its Subsidiaries and that is outstanding and unexercised, whether vested or unvested, immediately prior to the First Effective Time (each, a “Cancelled Company Option”) shall cease to represent a right to acquire shares of the Company Common Stock and shall be cancelled and converted into the right to receive an amount in cash, without interest, equal to (i) (A) the Per Company Share Price, less (B) the exercise price per share attributable to such Company Option multiplied by (ii) the total number of shares of Company Common Stock issuable upon exercise in full of such Cancelled Company Option (the “Option Consideration”). Any Cancelled Company Option with an exercise price per share equal to or greater than the Per Company Share Price will be cancelled without any cash payment being made in respect thereof.
(c)Effective as of the First Effective Time, each award of Company RSUs (other than any Cancelled Company RSU Award) (each, an “Assumed Company RSU Award”) shall cease to represent a right to acquire shares of Company Common Stock upon vesting and shall be assumed by Parent and converted automatically into a Parent RSU and shall otherwise remain subject to the same vesting and other terms and conditions that applied to the underlying Company RSU immediately prior to the First Effective Time, except that the number of shares of Parent Common Stock subject to each such Assumed Company RSU Award shall be determined by multiplying (A) the number of shares of Company Common Stock subject to such award of Company RSUs immediately prior to the First Effective Time; by (B) the Exchange Ratio, rounded to the nearest whole number.
(d)Effective as of the First Effective Time, (i) each award of Company RSUs held by any non-employee director of the Company and (ii) each award of Company RSUs that is outstanding and vests based on the achievement of one or more performance criteria (each, a “Cancelled Company RSU Award”) shall cease to represent a right to acquire shares of Company Common Stock upon vesting and shall be cancelled and converted into the right to receive an amount in cash, without interest, and rounded to the nearest whole cent, equal to (A) the Per Company Share Price, multiplied by (B) the total number of shares of Company Common Stock subject to such Cancelled Company RSU Award (the “RSU Consideration”). With respect to each Cancelled Company RSU Award that vests based on the achievement of one or more performance criteria, the Company shall determine the number of earned Company RSUs subject to such award in accordance with the terms and conditions of the applicable award agreement prior to the First Effective Time.
(e)Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery with respect to all Assumed Company Options and Assumed Company RSU Awards. Parent shall file and cause to be effective as of no later than the Closing Date, one or more registration statements under the Securities Act on Form S-8, Form S-1 or other appropriate form under the Securities Act, relating to shares of Parent Common Stock issuable with respect to all Assumed Company Options and Assumed Company RSU Awards, and Parent shall use its best reasonable efforts cause such registration statements to remain in effect for so long as such Assumed Company Options and Assumed Company RSU Awards remain outstanding.
(f)At or prior to the Closing, Parent will deposit (or cause to be deposited or maintained) with the Company, by wire transfer of immediately available funds, the aggregate (i) Option Consideration owed to all holders of Cancelled Company Options and (ii) RSU Consideration owed to all holders of Cancelled Company RSU Award. As soon as practicable after the Closing Date but in any event no later than ten (10) Business Days following the Closing Date, the applicable holders of Cancelled Company Options and Cancelled Company RSU Awards will receive a payment from the Company or the Surviving Company, through its payroll system or payroll provider, of all amounts required to be paid to such holders in respect of Cancelled Company Options and Cancelled Company RSU Awards that are cancelled and converted pursuant to Section 1.7(b) and Section 1.7(d), respectively, net of any required withholding of Taxes.
(g)At the First Effective Time, each Company Warrant shall, automatically and without any required action on the part of the holder thereof, cease to represent a Company Warrant in respect of Company Common Stock and shall be assumed by Parent and converted into a warrant denominated in shares of Parent Common Stock (a “Parent Warrant”). The number of shares of Parent Common Stock subject to each such Parent Warrant shall be equal to the product (rounded to the nearest whole number) of (x) the
A-7
number of shares of Company Common Stock subject to such Parent Warrant immediately prior to the Effective Time multiplied by (y) the Exchange Ratio, and the exercise price of such Parent Warrant equal to the quotient of (1) the per share exercise price of such Company Warrant immediately prior to the First Effective Time divided by (2) the Exchange Ratio, which quotient shall be rounded to the nearest whole cent. Except as expressly provided above, following the First Effective Time, each such Parent Warrant shall continue to be governed by the same terms and conditions (including vesting terms) as were applicable to the applicable Company Warrant immediately prior to the First Effective Time.
(h)Treatment of Additional Shares.
(i)Notwithstanding anything to the contrary in this Agreement, if the transactions contemplated by this Agreement, including the Mergers, constitute an “Acceleration Event” (as such term is defined in the INSU Merger Agreement), (1) Parent agrees that the terms and conditions set forth in Section 2.17(g) of the INSU Merger Agreement will apply to the transactions contemplated by this Agreement, including the Mergers, (2) the “Additional Shares” (as such term is defined in Section 2.17(a) of the INSU Merger Agreement, the “Additional Shares”) will be issued in accordance with Section 2.17(g) of the INSU Merger Agreement as of immediately prior to the First Effective Time and (3) in accordance with Section 2.17(g) of the INSU Merger Agreement, as of the First Effective Time, each Additional Share will be converted into the right to receive the Merger Consideration pursuant to Section 1.5(b) of this Agreement. For the avoidance of doubt, the Additional Shares, when issued, will be subject to the same exchange procedures as all other shares of Company Common Stock pursuant to Section 1.10 of this Agreement.
(ii)Notwithstanding anything to the contrary in this Agreement, if the transactions contemplated by this Agreement, including the Mergers, do not constitute an “Acceleration Event” (as such term is defined in the INSU Merger Agreement), then, pursuant to, and in accordance with the terms of, Section 2.17 of the INSU Merger Agreement, if, (1) at any point following the First Effective Time and prior to February 9, 2023, the closing share price of the Parent Common Stock over any twenty (20) Trading Days within any thirty (30) Trading Day period is greater than the quotient of (A) $15.00 divided by (B) the Exchange Ratio, then, (2) as soon as practicable (but in any event within ten (10) Business Days) after such satisfaction, Parent shall issue, on a ratable basis to the Persons eligible to receive such Additional Shares under and pursuant to Section 2.17 of the INSU Merger Agreement (the “Legacy Company Equityholders”), a number of shares of Parent Common Stock in an amount equal to the product of (A) 10,000,000 multiplied by (B) the Exchange Ratio. If this Section 1.7(h)(ii) applies, then, from and after the First Effective Time, (A) for all purposes under this Agreement, “Additional Shares” will mean the shares of Parent Common Stock that will be subject to issuance pursuant to the prior sentence, (B) all other terms of Section 2.17 of the INSU Merger Agreement (and related definitions) shall apply with respect to Parent as if Parent were “Parent” under the INSU Merger Agreement and (C) if a Change of Control of Parent (as defined in Section 2.17(g) of the INSU Merger Agreement after giving effect to clause (B) above) occurs after the First Effective Time and prior to the Release Date (as defined in Section 2.17(b) of the INSU Merger Agreement), or if any other transaction with respect to Parent or the Parent Common Stock occurs prior to the Release Date that would impact the terms of the arrangement contemplated by Section 2.17 of the INSU Merger Agreement to the Legacy Company Equityholders, then Parent shall use its reasonable best efforts to ensure that appropriate arrangements will be made to ensure that the Legacy Company Equityholders will retain the benefits of the provisions of Section 2.17 of the INSU Merger Agreement (including by effecting adjustments to the target stock price and number of shares subject to issuance hereunder and thereunder in the manner contemplated by this Section 1.7(h) or in a substantially similar manner).
1.8No Fractional Shares.
(a)No fractional shares of Parent Common Stock shall be issued in connection with the First Merger, and no certificates or scrip for any such fractional shares shall be issued.
(b)Any holder of Company Common Stock who would otherwise be entitled to receive a fraction of a share of Parent Common Stock pursuant to Section 1.5(b) (after aggregating all fractional shares of Parent Common Stock otherwise issuable to such holder pursuant to Section 1.5(b)) shall, in lieu of such fraction of a share and upon surrender of such holder’s certificates representing shares of Company Common Stock outstanding as of immediately prior to the First Effective Time (“Company Stock Certificates”) or book-entry positions representing non-certificated shares of Company Common Stock outstanding as of immediately prior to the First Effective Time (“Company Book-Entry Shares”) in accordance with Section 1.10, be paid in cash the dollar amount (rounded to the nearest whole cent), without interest and subject to any required tax withholding, determined by multiplying such fraction by the Parent Stock Price. No such holder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share of Parent Common Stock that would otherwise have been issuable as part of the Merger Consideration. The payment of cash in lieu of
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fractional share interests pursuant to this Section 1.8(b) is not a separately bargained-for consideration but merely represents a mechanical rounding-off of the fractions in the exchange.
1.9Closing of Transfer Books.
At the First Effective Time:
(a)all shares of Company Common Stock outstanding immediately prior to the First Effective Time shall automatically be cancelled and shall cease to exist, and all holders of Company Stock Certificates and of Company Book-Entry Shares shall cease to have any rights as stockholders of the Company, except (unless such holder is subject to Section 1.5(a)) the right to receive the Merger Consideration pursuant to Section 1.5(b), cash in lieu of any fractional share of Parent Common Stock pursuant to Section 1.8(b) and any dividends or other distributions pursuant to Section 1.10(f); and
(b)the stock transfer books of the Company shall be closed with respect to all shares of Company Common Stock outstanding immediately prior to the First Effective Time and no further transfer of any such shares of Company Common Stock shall be made on such stock transfer books after the First Effective Time. If, after the First Effective Time, a valid Company Stock Certificate or a Company Book-Entry Share is presented to the Exchange Agent or to the Initial Surviving Corporation, the Surviving Company or Parent, such Company Stock Certificate or Company Book-Entry Share shall be cancelled and shall be exchanged as provided in Section 1.10.
1.10Exchange of Certificates and Cancellation of Book-Entry Positions.
(a)Prior to the Closing Date, Parent shall select Parent’s transfer agent or another reputable bank or trust company reasonably satisfactory to Parent to act as exchange agent with respect to the Mergers (the “Exchange Agent”). Prior to or substantially concurrent with the First Effective Time, Parent shall cause to be deposited with the Exchange Agent (i) certificates or evidence of book-entry shares representing the shares of Parent Common Stock issuable pursuant to Section 1.5; and (ii) cash sufficient to make payments in lieu of fractional shares in accordance with Section 1.8(b). The shares of Parent Common Stock and cash amounts so deposited with the Exchange Agent pursuant to this Section 1.10(a), together with any dividends or distributions received by the Exchange Agent with respect to such shares of Parent Common Stock, and any interest or other income with respect to such cash amount, are referred to collectively as the “Exchange Fund.” The Exchange Agent shall invest the cash available in the Exchange Fund in obligations, funds or accounts typical for (including having liquidity typical for) transactions of this nature as directed by Parent; provided that no losses on such investments shall affect the cash payable to former holders of shares of Company Common Stock pursuant to this Section 1 (and Parent shall promptly deliver to the Exchange Agent cash in an amount sufficient to replenish any deficiency in the Exchange Fund).
(b)With respect to Company Stock Certificates, as promptly as reasonably practicable after the First Effective Time (but in no event later than five (5) Business Days after the First Effective Time), Parent shall cause the Exchange Agent to mail to each holder of record of each such Company Stock Certificate (i) a notice advising such holder of the effectiveness of the Mergers; (ii) a letter of transmittal in customary form and reasonably acceptable to each of Parent and the Company specifying that delivery shall be effected, and risk of loss and title to a Company Stock Certificate shall pass, only upon delivery of the Company Stock Certificate (or affidavit of loss in lieu of a Company Stock Certificate as provided in Section 1.10(e)) to the Exchange Agent (the “Letter of Transmittal”); and (iii) instructions for surrendering a Company Stock Certificate (or affidavit of loss in lieu of a Company Stock Certificate as provided in Section 1.10(e)) to the Exchange Agent. Upon surrender to the Exchange Agent of a Company Stock Certificate (or affidavit of loss in lieu of a Company Stock Certificate as provided in Section 1.10(e)) together with a duly executed and completed Letter of Transmittal and such other documents as may reasonably be required pursuant to such instructions, Parent shall instruct, and use its reasonable best efforts to cause, the Exchange Agent to mail to each holder of record of any such Company Stock Certificate in exchange therefor, as promptly as reasonably practicable thereafter, (i) a statement reflecting the number of whole shares of Parent Common Stock, if any, that such holder is entitled to receive pursuant to this Section 1 in non-certificated book-entry form in the name of such record holder (subject to Section 1.10(i)) and (ii) a check in the amount (after giving effect to any required Tax withholdings as provided in Section 1.12) of (A) any cash in lieu of fractional shares plus (B) any unpaid cash dividends and any other dividends or other distributions that such holder has the right to receive pursuant to this Section 1. Any Company Stock Certificate that has been so surrendered shall be cancelled by the Exchange Agent.
(c)With respect to Company Book-Entry Shares not held through DTC (each, a “Non-DTC Book-Entry Share”), Parent shall instruct, and use its reasonable best efforts to cause, the Exchange Agent to pay and deliver to each holder of record of any Non-DTC Book-Entry Share, as promptly as reasonably practicable after the First Effective Time, but in any event within five (5) Business
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Days thereafter, the applicable Merger Consideration and a check in the amount (after giving effect to any required Tax withholdings as provided in Section 1.12) of any cash in lieu of fractional shares plus any unpaid cash dividends and any other dividends or other distributions that such holder has the right to receive pursuant to this Section 1, and each Non-DTC Book-Entry Share shall be promptly cancelled by the Exchange Agent. Subject to Section 1.10(i), payment of the Merger Consideration with respect to Non-DTC Book-Entry Shares shall only be made to the person in whose name such Non-DTC Book-Entry Shares are registered.
(d)With respect to Company Book-Entry Shares held through DTC, Parent and the Company shall cooperate to establish procedures with the Exchange Agent and DTC to ensure that the Exchange Agent will transmit to DTC or its nominees as soon as practicable after the First Effective Time, but in any event within five (5) Business Days thereafter, upon surrender of shares held of record by DTC or its nominees in accordance with DTC’s customary surrender procedures, the Merger Consideration, cash in lieu of fractional shares of Parent Common Stock, if any, and any unpaid cash dividends and any other dividends or other distributions, in each case, that such holder has the right to receive pursuant to this Section 1.
(e)In the event that any Company Stock Certificate shall have been lost, stolen or destroyed, then, upon the making of an affidavit of that fact by the Person claiming such Company Stock Certificate to be lost, stolen or destroyed and the posting by such Person of a bond in a reasonable and customary amount and upon such terms as may reasonably be required as indemnity against any claim that may be made against it with respect to such Company Stock Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Company Stock Certificate, the Merger Consideration, cash in lieu of fractional shares of Parent Common Stock, if any, and any unpaid cash dividends and any other dividends or other distributions, in each case, payable or issuable pursuant to this Section 1, as if such lost, stolen or destroyed Company Stock Certificate had been surrendered.
(f)No dividends or other distributions declared or made with respect to Parent Common Stock with a record date after the First Effective Time shall be paid or otherwise delivered to the holder of any unsurrendered Company Stock Certificate or Company Book-Entry Shares with respect to the shares of Parent Common Stock that such holder has the right to receive in the Mergers until the later to occur of (A) the date on which the holder surrenders such Company Stock Certificate or Company Book-Entry Shares in accordance with this Section 1.10; and (B) the payment date for such dividend or distribution with respect to Parent Common Stock (at which time such holder shall be entitled, subject to the effect of applicable abandoned property, escheat or similar laws, to receive all such dividends and distributions, without interest).
(g)Any portion of the Exchange Fund that remains undistributed to holders of Company Stock Certificates or Company Book-Entry Shares as of the date that is one (1) year after the date on which the Mergers becomes effective shall be delivered to Parent upon demand. Any holders of Company Stock Certificates or Company Book-Entry Shares who have not theretofore surrendered their Company Stock Certificates or Company Book-Entry Shares in accordance with this Section 1.10 shall thereafter be entitled to look to Parent for, and be entitled to receive from Parent, the Merger Consideration pursuant to the provisions of Section 1.5, cash in lieu of any fractional shares of Parent Common Stock in accordance with Section 1.8(b) and any dividends or distributions with respect to shares of Parent Common Stock pursuant to Section 1.10(f).
(h)Neither Parent, the Initial Surviving Corporation, nor the Surviving Company shall be liable to any holder or former holder of shares of Company Common Stock or to any other Person with respect to any portion of the Merger Consideration delivered to any public official pursuant to any applicable abandoned property law, escheat law or other similar Legal Requirement. If any Company Stock Certificate or Company Book-Entry Share has not been surrendered prior to the date on which any portion of the Merger Consideration and any dividends or distributions, in each case, that a holder of such Company Stock Certificates or Company Book-Entry Share has the right to receive pursuant to this Section 1 in respect of such Company Stock Certificate or Company Book-Entry Share would otherwise escheat to or become property of any Governmental Entity, any such shares, cash, dividends or distributions in respect of such Company Stock Certificate or Company Book-Entry Share shall, to the extent permitted by applicable Legal Requirement, become the property of Parent, free and clear of all claims or interests of any Person previously entitled thereto.
(i)In the event of a transfer of ownership of any shares of Company Common Stock that is not registered in the transfer records of the Company, the Exchange Agent may deliver the Merger Consideration (and, to the extent applicable, cash in lieu of fractional shares pursuant to Section 1.8(b) or any dividends or distributions pursuant to Section 1.10(f)) to such transferee if (A) in the case of Company Book-Entry Shares, written instructions authorizing the transfer of the Company Book-Entry Shares are presented to the Exchange Agent, (B) in the case of Company Stock Certificates, the Company Stock Certificates formerly representing such shares of Company Common Stock are surrendered to the Exchange Agent, and (C) the written instructions, in the case of clause (A), and Company Stock Certificates, in the case of clause (B), are accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer Taxes have been paid or are not applicable, in each case, in form and substance, reasonably satisfactory to Parent and the Exchange Agent. If any shares of Parent Common Stock are to be
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delivered to a Person other than the holder in whose name any shares of Company Common Stock are registered, it shall be a condition of such exchange that the Person requesting such delivery shall pay any transfer or other similar Taxes required by reason of the transfer of shares of Parent Common Stock to a Person other than the registered holder of any shares of Company Common Stock, or shall establish to the satisfaction of Parent and the Exchange Agent that such Tax has been paid or is not applicable.
1.11Further Action. If, at any time after the First Effective Time, any further action is determined by Parent, the Initial Surviving Corporation or the Surviving Company to be necessary to carry out the purposes of this Agreement, the officers and directors of Parent shall (in the name of the Acquisition Subs, in the name of the Company or otherwise) be fully authorized to take such action.
1.12Tax Withholding. Each of Parent, the Exchange Agent, Acquisition Sub I, Acquisition Sub II, the Company, the Initial Surviving Corporation and the Surviving Company, as applicable, shall be entitled to deduct and withhold from any amounts otherwise payable pursuant to this Agreement any amounts as are required to be deducted and withheld with respect to the making of such payment pursuant to the Code or any other applicable Legal Requirement relating to Taxes. To the extent that amounts are so deducted or withheld and, if required, paid over to the appropriate Governmental Entity, such amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding were made.
1.13No Appraisal Rights. In accordance with Section 262 of the DGCL, no appraisal rights shall be available with respect to the Mergers or the other transactions contemplated by this Agreement.
SECTION 2. |
REPRESENTATIONS AND WARRANTIES OF THE COMPANY |
The Company hereby represents and warrants to Parent and the Acquisition Subs that, except as set forth or incorporated by reference in the Company SEC Documents filed on or after January 1, 2020 and publicly available at least one (1) Business Day prior to the date of this Agreement (provided that in no event shall any risk factor disclosure under the heading “Risk Factors” or disclosure set forth in any “forward looking statements” disclaimer or other general statements to the extent they are cautionary, predictive or forward looking in nature that are included in any part of any Company SEC Document be deemed to be an exception to, or, as applicable, disclosure for purposes of, any representations and warranties of the Company contained in this Agreement) (it being agreed that any matter disclosed in such Company SEC Documents shall not be deemed disclosed for purposes of Section 2.1, Section 2.2, Section 2.3 or Section 2.4) or, subject to Section 7.12, in the disclosure schedule delivered to Parent prior to the execution of this Agreement (the “Company Disclosure Schedule”):
2.1Due Organization and Good Standing; Subsidiaries.
(a)The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has the requisite corporate power and authority to own, lease and operate its assets and to carry on its business as it is being conducted as of the date of this Agreement, except as, individually or in the aggregate, has not constituted or resulted in a Company Material Adverse Effect. The Company is duly qualified and has all necessary Governmental Authorizations to do business, and (where such concept is recognized under the laws of the jurisdiction in which it is organized) is in good standing, in each other jurisdiction where the nature of its business makes such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not constituted or resulted in a Company Material Adverse Effect.
(b)Exhibit 21.1 of the Most Recent Company 10-K/A is a true, correct and complete list of each Entity that is a Company Subsidiary as of the date of this Agreement (other than the Company Subsidiaries that, in the aggregate, would not constitute a “significant subsidiary” (as defined in Rule 1.02(w) of Regulation S-X)). Neither the Company nor any Company Subsidiary owns any equity interest or joint venture, partnership or similar interest in any other Entity, other than the Entities identified in Exhibit 21.1 of the Most Recent Company 10-K/A and any other wholly owned Company Subsidiary. Each Company Subsidiary is duly organized, validly existing and (where such concept is recognized under the laws of the jurisdiction in which it is organized) in good standing under the laws of the jurisdiction of its organization and has the requisite corporate or other organizational power and authority and (other than Company Insurance Subsidiaries) Governmental Authorizations to own, lease and operate its assets and to carry on its business as it is being conducted as of the date of this Agreement, except where the failure to be so organized, existing and in good standing or to have such power and authority, individually or in the aggregate, has not constituted or resulted in a Company Material Adverse Effect. Each Company Subsidiary is duly qualified and (other than Company Insurance Subsidiaries) has all necessary Governmental Authorizations to do business, and (where such concept is recognized under the laws of the jurisdiction in which it is organized) is in good standing, in each other jurisdiction where the nature of its business makes such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not
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constituted or resulted in a Company Material Adverse Effect. All of the outstanding shares of capital stock of each Company Subsidiary are duly authorized, validly issued, fully paid and nonassessable and are owned directly or indirectly by the Company free and clear of all Liens, except for restrictions on transfer under applicable securities laws.
2.2Organizational Documents. Prior to the date of this Agreement, the Company has made available to Parent copies of the Organizational Documents of the Company and each Company Subsidiary, including all amendments thereto, as in effect on the date hereof. The Organizational Documents of the Company and each Company Subsidiary are in full force and effect and neither (a) the Company nor (b) except as, individually or in the aggregate, has not constituted or resulted in a Company Material Adverse Effect, any Company Subsidiary is in violation of any of the provisions of such Organizational Documents.
2.3Capitalization.
(a)The authorized capital stock of the Company consists of (i) 640,000,000 shares of Company Common Stock, of which 127,741,367 were issued and outstanding as of November 5, 2021 (the “Company Capitalization Date”); and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share, none of which were outstanding as of the Company Capitalization Date. All of the outstanding shares of Company Common Stock have been, and all shares of Company Common Stock reserved for issuance pursuant to the Company Equity Agreements will be when issued, duly authorized and validly issued, and are, or will be when issued, fully paid and non-assessable.
(b)Except as set forth in the Company’s or any Company Subsidiary’s Organizational Documents, the Company Equity Agreements, the Company Warrant Agreements and the Sponsor Share Cancellation and Vesting Agreement, (i) none of the outstanding shares of Company Common Stock or capital or other equity interests of any Company Subsidiary is entitled or subject to any preemptive right, right of repurchase, right of participation or any similar right; (ii) none of the outstanding shares of Company Common Stock or capital or other equity interests of any Company Subsidiary is subject to any right of first refusal in favor of the Company or any Company Subsidiary; (iii) there are no bonds, debentures, notes or other indebtedness of the Company or any Company Subsidiary issued and outstanding having the right to vote (or convertible or exercisable or exchangeable for securities having the right to vote) on any matters on which stockholders of the Company may vote; and (iv) there is no Contract to which the Company or any Company Subsidiary is a party relating to the voting or registration of, or restricting any Person from purchasing, selling, pledging or otherwise disposing of (or from granting any option or similar right with respect to), any shares of Company Common Stock or capital or other equity interests of any Company Subsidiary. Except as set forth in the Company Equity Agreements and the Company Warrant Agreements, neither the Company nor any Company Subsidiary is under any obligation, nor is it bound by any Contract pursuant to which it will become obligated, to repurchase, redeem or otherwise acquire any outstanding shares of Company Common Stock, capital or other equity interests of any Company Subsidiary or any other securities.
(c)As of the Company Capitalization Date: (i) 7,666,646 shares of Company Common Stock were subject to issuance pursuant to outstanding Company Public Warrants; (ii) 180,000 shares of Company Common Stock were subject to issuance pursuant to outstanding Company Placement Warrants; (iii) 10,000,000 shares of Company Common Stock reserved for issuance pursuant to the INSU Merger Agreement; (iv) 2,709,873 shares of Company Common Stock were subject to issuance pursuant to outstanding Company Options, including 406,191 shares of Company Common Stock subject to issuance pursuant to outstanding Company Options that vest based on the achievement of performance goals (assuming achievement at maximum levels); (v) 12,907,346 shares of Company Common Stock were subject to issuance pursuant to outstanding Company RSUs, including 3,024,245 shares of Company Common Stock subject to Company RSUs that vest based on the achievement of performance goals (assuming achievement at maximum levels); (vi) 1,900,912 shares of Company Common Stock were reserved for issuance pursuant to the Company ESPP; and (vii) except as set forth in Section 2.3(a), no other shares of capital stock or other voting securities of the Company were issued, reserved for issuance or outstanding. Prior to the date of this Agreement, the Company has made available to Parent true, correct and complete copies of (A) the Company Warrant Agreements; (B) the Company Equity Plans; and (C) the forms of all stock option agreements evidencing Company Options, outstanding as of the date of this Agreement and the forms of all restricted stock unit agreements evidencing Company RSUs outstanding as of the date of this Agreement. The per share exercise price of each such Company Option was at least equal to the fair market value of one (1) share of Company Common Stock on the date of grant of such Company Option. Part 2.3(c) of the Company Disclosure Schedule sets forth a list, as of the Company Capitalization Date, of all Company Options and awards of Company RSUs, in each case, including the holder of such Company Option or award of Company RSUs, the number of shares of Company Common Stock subject to such Company Option or award of Company RSUs, the grant date of such Company Option or award of Company RSUs, the per share exercise price of such Company Option, the vesting schedule for such Company Option or award of Company RSUs, and the date on which such Company Option expires.
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(d)Except as set forth in this Section 2.3, as of the Company Capitalization Date, there were no (i) outstanding subscription, option, call, warrant or other right (whether or not currently exercisable) to acquire any shares of the capital stock or other equity interests, restricted stock unit, stock-based performance unit, shares of phantom stock, stock appreciation right, profit participation right or any other right that is linked to, or the value of which is based on or derived from, the value of any shares of capital stock or other equity interest of the Company or any Company Subsidiary, in each case, to which the Company or any Company Subsidiary is a party; (ii) outstanding security, instrument, bond, debenture or note that is or may become convertible into or exchangeable for any shares of the capital stock or other equity securities of the Company or any Company Subsidiary; or (iii) stockholder rights plan (or similar plan commonly referred to as a “poison pill”) or Contract under which the Company or any Company Subsidiary is or may become obligated to sell or otherwise issue any shares of its capital stock or other equity interest or any other securities.
(e)From the Company Capitalization Date through the date of this Agreement, neither the Company nor any of its Subsidiaries has issued any shares of Company Common Stock or other equity interests of the Company or any Company Subsidiary, other than pursuant to Company Options, Company RSUs or Company Warrants, in each case, that were outstanding as of the Company Capitalization Date.
2.4Authority; Binding Nature of Agreement. The Company has the requisite corporate power and authority to enter into and to perform its obligations under this Agreement and, subject to receipt of the Required Company Stockholder Vote and the Governmental Authorizations identified in Part 5.1(c) of the Company Disclosure Schedule, to consummate the Mergers. On or prior to the date hereof, the Company Board has unanimously (a) duly and validly authorized and approved the execution, delivery and performance of this Agreement and the consummation of the Mergers by the Company; (b) determined that the Mergers are fair to and in the best interests of the Company and its stockholders; (c) approved and declared advisable this Agreement and the transactions contemplated by this Agreement, including the Mergers; and (d) subject to the terms and conditions hereof, directed that this Agreement be submitted to a vote of the Company’s stockholders, recommended that the stockholders of the Company adopt this Agreement (the “Company Board Recommendation”), and resolved to include the Company Board Recommendation in the Proxy Statement/Prospectus, subject to Section 4.2. The execution and delivery of this Agreement by the Company and the consummation by the Company of the Mergers and other transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company (including the approval of the Company Board) and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement, in each case other than, with respect to the consummation of the Mergers, the receipt of the Required Company Stockholder Vote, the Governmental Authorizations identified in Part 5.1(c) of the Company Disclosure Schedule and the filing of the Certificates of Merger as required by the DGCL. This Agreement has been duly executed and delivered on behalf of the Company and, assuming the due authorization, execution and delivery of this Agreement on behalf of Parent and the Acquisition Subs, constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting creditors’ rights generally; and (ii) principles of law governing or relating to specific performance, injunctive relief and other equitable remedies, as from time to time in effect (the “Bankruptcy and Equity Exception”).
2.5Vote Required. The adoption of this Agreement by the affirmative vote of the holders of a majority of the shares of Company Common Stock issued and outstanding on the record date for the Company Stockholder Meeting and entitled to vote on the proposal to adopt this Agreement (the “Required Company Stockholder Vote”) is the only vote of the holders of any class or series of the Company’s capital stock necessary under applicable Legal Requirements and Organizational Documents of the Company to approve or adopt this Agreement or for the Company to consummate the transactions contemplated hereby, including the Mergers.
2.6Non-Contravention; Consents.
(a)The execution and delivery of this Agreement by the Company and, assuming receipt of the Required Company Stockholder Vote and the Governmental Authorizations identified in Part 5.1(c) of the Company Disclosure Schedule, the consummation by the Company of the Mergers will not (i) cause a violation of any of the provisions of the Organizational Documents of the Company or any Company Subsidiary; (ii) assuming the consents and filings referred to in Section 2.6(b) are made and obtained, conflict with or violate any applicable Legal Requirements; or (iii) subject to Section 4.5, result in any material loss, limitation or impairment of any right of the Company or any Company Subsidiary to own or use any assets, result in any material violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, first offer, first refusal, modification or acceleration of any material obligation or to the loss of a material benefit under any Contract binding upon the Company or any Company Subsidiary or by which any of their respective properties, rights or assets are bound or
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subject, or result in the creation of any Liens of any kind (other than Company Permitted Encumbrances) upon any of the properties, rights or assets of the Company or any Company Subsidiary.
(b)Except as may be required by the Securities Act, the Exchange Act, the DGCL, the HSR Act or other applicable Antitrust Laws, applicable state securities takeover and “blue sky” laws or the rules and regulations of Nasdaq, and except as set forth in Part 2.6(b) of the Company Disclosure Schedule, the Company and the Company Subsidiaries are not required to make any filing, registration, or declaration with, give any notice to, or obtain any consent, Order, license, permit, clearance, waiver or approval from, any Governmental Entity for the execution and delivery of this Agreement by the Company, the performance by the Company of its covenants and obligations hereunder or the consummation by the Company of the Mergers in each case, except as would not, individually or in the aggregate, be material to the Company and the Company Subsidiaries, taken as a whole.
2.7Reports; Financial Statements; Internal Controls.
(a)All reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated by reference therein) required to be filed or furnished by the Company with the SEC under the Exchange Act or Securities Act since January 1, 2019 (the “Company SEC Documents”) have been filed or furnished with the SEC on a timely basis. As of the time it was filed with the SEC (and, in the case of registration statements and proxy statements, on the dates of effectiveness and the dates of mailing, respectively) (or, with respect to clause (i) below, if amended or superseded, then on the date of such amended or superseding filing) (i) each of the Company SEC Documents complied in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the Sarbanes-Oxley Act (as the case may be) and the applicable regulations promulgated thereunder and the listing requirements and corporate governance rules and regulations of Nasdaq, each as in effect on the date such Company SEC Document was filed (and, in the case of registration statements and proxy statements, on the dates of effectiveness and the dates of mailing, respectively, or, if amended prior to the date of this Agreement, the date of the filing of such amendment, with respect to the disclosures that are amended); and (ii) none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No Company Subsidiary has been required to file any forms, reports or other documents with the SEC at any time since November 24, 2020. Since November 24, 2020, no executive officer of the Company has failed in any respect to make the certifications required of him or her under Section 302 or 906 of the Sarbanes-Oxley Act with respect to the Company SEC Documents. Neither the Company nor any of its executive officers has received notice from any Governmental Entity challenging or questioning the accuracy, completeness, form or manner of filing of such certifications.
(b)The financial statements (including any related notes) contained or incorporated by reference in the Company SEC Documents (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with GAAP applied on a consistent basis throughout the periods covered (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q or any successor form under the Exchange Act, and except that unaudited financial statements may not contain footnotes and are subject to normal year-end adjustments); (iii) fairly present, in all material respects, the financial position of the Company and the Company’s consolidated Subsidiaries as of the respective dates thereof and the results of operations and consolidated cash flows of the Company and the Company’s consolidated Subsidiaries for the periods covered thereby subject, with respect to unaudited interim statements, to normal year-end adjustments and (iv) have been prepared from the books and records of the Company and the Company’s consolidated Subsidiaries in all material respects. No financial statements of any Person other than the Company and the Company’s consolidated Subsidiaries are required by GAAP to be included in the consolidated financial statements of the Company. The books and records of the Company and the Company Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements. As of the date hereof, Moss Adams LLP has not resigned (or informed the Company that it intends to resign) or been dismissed as independent public accountants of the Company.
(c)The Company maintains, and at all times since January 1, 2019, has maintained, a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) which is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company and the Company Subsidiaries; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and that receipts and expenditures are being made in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of the Company and the Company Subsidiaries that could have a material effect on the financial
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statements. To the knowledge of the Company, the Company has not engaged in any material transactions that have not been properly recorded in the accounting records underlying its consolidated financial statements and there are no significant deficiencies or material weaknesses in the design or operation of the Company’s internal control over financial reporting. The Company has maintained the integrity of its financial reporting through proper access and change management procedures, along with customary reconciliations, reperformance and recalculations of key formulas, and detailed reviews performed by competent and qualified individuals. Management of the Company has disclosed to the Company’s auditors and the audit committee of the Company Board (x) any significant deficiencies or material weaknesses in the design and operation of internal controls over financial reporting and (y) any fraud, whether or not material, that involves management or any other employees who have a significant role in the Company’s internal control over financial reporting, and each such deficiency, weakness and fraud so disclosed to auditors, if any, has been disclosed to Parent prior to the date hereof.
(d)Since January 1, 2019, (i) none of the Company or any Company Subsidiary nor, to the knowledge of the Company, any director or officer of the Company or any Company Subsidiary has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or, to the Company’s knowledge, oral, regarding accounting, internal accounting controls or auditing practices, procedures, methodologies or methods of the Company or any Company Subsidiary or any material complaint, allegation, assertion or claim from employees of the Company or any Company Subsidiary regarding questionable accounting or auditing matters with respect to the Company or any Company Subsidiary, and (ii) to the knowledge of the Company, no attorney representing the Company or any Company Subsidiary, whether or not employed by the Company or any Company Subsidiary, has reported evidence of a violation of securities laws, breach of fiduciary duty or similar violation by the Company, any Company Subsidiary or any of their respective officers, directors, employees or agents to the Company Board or any committee thereof, or to the General Counsel or Chief Executive Officer of the Company.
(e)The Company maintains disclosure controls as required by Rule 13a-15 or 15d-15 under the Exchange Act. As of the date hereof, the Company is in compliance in all material respects with all current listing requirements of the Nasdaq Global Select Market (“Nasdaq”).
(f)Neither the Company nor any Company Subsidiary is a party to, or has a commitment to effect, enter into or create, any joint venture, or “off-balance sheet arrangement” (as defined in Item 303(a) of Regulation S-K under the Exchange Act).
(g)As of the date of this Agreement, there are no outstanding or unresolved comments in comment letters received from the SEC with respect to the Company SEC Documents, and none of the Company SEC Documents is, to the knowledge of the Company, the subject of ongoing SEC review or investigation.
(h)Neither the Company nor any Company Subsidiary has any liabilities of any nature or type, whether accrued, absolute, determined, contingent or otherwise and whether due or to become due, except for (i) liabilities disclosed in the financial statements (including any related notes) contained in the Most Recent Company Balance Sheet; (ii) liabilities incurred in the ordinary course of business since the date of the Most Recent Company Balance Sheet; (iii) liabilities that, individually or in the aggregate, have not constituted or resulted in a Company Material Adverse Effect; and (iv) liabilities and obligations incurred in connection with the transactions contemplated by this Agreement.
2.8Absence of Certain Changes.
(a)Since the date of the Most Recent Company Balance Sheet to the date of this Agreement, there has not been any fact, event, change, effect, circumstance, occurrence or development that, individually or in the aggregate, has had a Company Material Adverse Effect.
(b)Except in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, from the date of the Most Recent Company Balance Sheet to the date of this Agreement, the businesses of the Company and the Company Subsidiaries have been conducted in all material respects in the ordinary course of business (other than with respect to any Pandemic Measures), and neither the Company nor any Company Subsidiary has undertaken any action that if proposed to be taken after the date of this Agreement would require Parent’s consent pursuant to Sections 4.1(a)(i), (ii), (iii), (iv), (vi), (viii), (xi), (xii), (xiv), (xvi), (xxiii), or clause (xxiv) or, as it relates to any of the foregoing clauses, Section 4.1(a)(xxv).
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2.9Intellectual Property and Related Matters.
(a)Part 2.9(a) of the Company Disclosure Schedule sets forth a true, correct and complete list as of the date of this Agreement, of all Company IP that is Registered IP (collectively, the “Company Registered IP”), including for each item (i) the current owner; (ii) the jurisdiction of application or registration; (iii) the application or registration number, and, where applicable, the title; and (iv) the date of filing or of registration.
(b)To the knowledge of the Company, the material Company Registered IP is valid (or in the case of applications, applied for), subsisting and enforceable; and to the knowledge of the Company, none of the material Company Registered IP has lapsed or been abandoned or cancelled (other than on the expiration of the full term for such Registered IP). Since January 1, 2017, neither the Company nor any Company Subsidiary has received any notice or claim challenging the validity of enforceability of any material Company Registered IP or indicating an intention on the part of any Person to bring a claim that any of the Company Registered IP is invalid or unenforceable, and there is currently no Legal Proceeding pending or threatened in writing, in which the validity, enforceability or ownership of any Company Registered IP is being contested or challenged. All of the registrations and pending applications to Governmental Entities or regulatory bodies with respect to any material Company Registered IP have been timely and duly filed, prosecution for such applications has been attended to, all maintenance and related fees have been paid, and the Company and Company Subsidiaries have taken all other actions required to maintain their validity and effectiveness.
(c)All material Company IP is owned exclusively by the Company or a Company Subsidiary free and clear of all Liens other than Company Permitted Encumbrances. The Company and the Company Subsidiaries are duly licensed under or are otherwise authorized to use all material Third Party Intellectual Property used in, held for use in or necessary for the conduct of the businesses of the Company and the Company Subsidiaries, and such material Third Party Intellectual Property, together with the material Company IP, collectively constitutes all of the Intellectual Property that is necessary for the conduct of the businesses of the Company and the Company Subsidiaries as it has been conducted in the twelve (12) months prior to the date of this Agreement. All such material licensed Third Party Intellectual Property will not cease to be valid and enforceable rights of the Company or Company Subsidiaries, as applicable, by reason of the execution, delivery and performance of this Agreement or by any ancillary agreements executed in connection with this Agreement or the consummation of the transactions contemplated hereby or thereby.
(d)Neither the Company nor any Company Subsidiary is subject to any outstanding Order that restricts in any material manner the use, transfer or licensing of any material Company IP. The execution, delivery and performance of this Agreement, and the Closing, will not, with or without notice or the lapse of time, result in or give any other Person the right or option to cause, or otherwise result in (i) a loss of, or Lien on, any material Company IP or material Parent IP; (ii) a material breach of, material termination of, or material acceleration or material modification of any right under any Contract listed or required to be listed in Part 2.9(k) of the Company Disclosure Schedule; (iii) the release, disclosure, or delivery of any material Company IP by or to any escrow agent or other Person; or (iv) the grant, assignment or transfer to any other Person of any license or other right or interest under, to or in any of the material Company IP or material Parent IP.
(e)To the knowledge of the Company, the operations of the businesses of the Company and the Company Subsidiaries as currently conducted, including the Company’s and the Company Subsidiaries’ design, manufacture, provision, and sale of any Company Products, do not infringe, misappropriate or otherwise violate, and, since January 1, 2017, have not infringed, misappropriated or otherwise violated, any Intellectual Property owned by any other Person. No Legal Proceeding is pending or threatened in writing against the Company or any Company Subsidiary, and there have been no written complaints, claims or notices received by the Company or any Company Subsidiary since January 1, 2017, alleging any infringement, misappropriation or violation of any Intellectual Property of any other Person by the Company or any Company Subsidiary. No written requests or demands for indemnification or defense as a result of a claim that a Company Product infringes Third Party Intellectual Property has been received by the Company or any Company Subsidiary from any third Person since January 1, 2017 that have resulted, or could reasonably be expected to result, in material liability to the Company or a Company Subsidiary. To the knowledge of the Company, there is no unauthorized use, unauthorized disclosure, infringement or misappropriation of any material Company IP by any third Person. Since January 1, 2017, neither Company nor any Company Subsidiary has brought any Legal Proceeding against any other Person, or provided any other Person with written notice, alleging any Person is infringing, misappropriating or otherwise violating any material Company IP.
(f)Neither the Company nor any Company Subsidiary has received any material support, funding, resources or assistance from any government entities, or from any university, college, other academic institutions, or non-profit research centers (other than in connection with customer agreements in the ordinary course of business) in the development of any (i) Company Product or (ii) Software or other Technology of the Company and the Company Subsidiaries, in each case (i) and (ii) that resulted in,
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or is reasonably expected to result in, such third parties being granted any rights or licenses to, or ownership interest in, any material Company IP.
(g)(i) Neither the Company nor any Company Subsidiary is nor has ever been a member of, a contributor to, or in any way affiliated with, any industry standards organization, body, working group, patent pool, trade association, or similar organization, and (ii) neither the Company nor any Company Subsidiary, nor any material Company IP is subject to any licensing, assignment, contribution, disclosure, or other requirements or restrictions of any industry standards organization, body, working group, patent pool, trade association, or similar organization.
(h)The Company and each Company Subsidiary have taken commercially reasonable steps to protect all Trade Secrets that are material to the Company or the Company Subsidiaries and, to the knowledge of the Company, there have been no unauthorized uses or disclosures of any such material Trade Secrets. Each current and former employee of, and each current and former consultant to, the Company or any Company Subsidiary, in each case, who has been engaged in the development of any (i) Company Product, or (ii) material Software or other material Technology of the Company and the Company Subsidiaries, has entered into a valid and enforceable proprietary information and invention assignment agreement with the Company or a Company Subsidiary for whom such employee or consultant provides or provided services containing an assignment to the Company or the Company Subsidiaries, as applicable, of all Intellectual Property in such Person’s contribution to the Company IP except to the extent such Intellectual Property is not legally assignable, and the Company and Company Subsidiaries have obtained waivers of all non-assignable rights. Since January 1, 2017, to the knowledge of the Company, no such employee or consultant has materially violated such agreement or otherwise misappropriated any Trade Secret that constitutes material Company IP. No Person has notified the Company or any Company Subsidiary in writing that it is claiming any ownership of or right to use any material Company IP (other than the right to use Company IP expressly granted to such Person under a Contract with the Company or a Company Subsidiary).
(i)Neither the Company nor any Company Subsidiary is in breach of any material terms or conditions of any relevant Open Source Licenses for Open Source incorporated into the material proprietary Software of the Company or the Company Subsidiaries, including notice and attribution obligations. No Software that is material Company IP is subject to any “copyleft” or other obligation or condition (including any obligation or condition under any “open source” license such as the GNU Public License, Lesser GNU Public License, or Mozilla Public License) that (i) requires, or conditions the use or distribution of such Software on, (A) the disclosure, licensing, or distribution of the source code for such Software or portion thereof or (B) the granting to licensees of the right to make derivative works or other modifications to such Software or portion thereof; (ii) imposes any restriction on the consideration to be charged for the distribution thereof; (iii) creates, or purports to create, obligations for Company or any Company Subsidiary with respect to any such Software or grants, or purports to grant, to any third party, any rights or immunities under any such Software; or (iv) imposes any other material limitation, restriction, or condition on the right of Company or any Company Subsidiary with respect to its use or distribution.
(j)To the knowledge of the Company, any Software or firmware incorporated in or provided with the products, and any media used to distribute it, contain at delivery no computer instructions, circuitry or other technological means whose purpose or effect is to disrupt, damage or negatively interfere with any use of any customer’s computer and communications facilities or equipment (“Harmful Code”), and Company and the Company Subsidiaries have used reasonable best efforts to prevent the introduction of such Harmful Code to all Software, firmware and media distributed or sold by the Company and the Company Subsidiaries. “Harmful Code” includes (a) any instrumentality that could cause the Software or firmware to fail to be operative upon command of or by design by the Company or the Company Subsidiaries, and (b) any code containing viruses, trojan horses, worms, or like destructive code or code that self-replicates. Neither the Company nor any Company Subsidiary has entered into any agreement requiring the Company or the Company Subsidiary to place the Software source code or any other material Company IP in escrow so that a licensee might obtain access to it upon the occurrence of any release condition.
(k)Part 2.9(k) of the Company Disclosure Schedule sets forth a true, correct and complete list as of the date of this Agreement of, (i) all Contracts pursuant to which a third Person has licensed (including covenants not to sue) to the Company or a Company Subsidiary any material Intellectual Property, or licenses to IP blocks included in Company Products (other than Open Source Licenses and licenses to Generally Available Software) (“In-Bound Licenses”); and (ii) each Contract pursuant to which the Company has granted to any third Person any right or license (including covenants not to sue) to any material Company IP (other than non-exclusive licenses granted in the ordinary course in connection with the sale or use of any Company Products) (“Out-Bound Licenses” and, together with the In-Bound Licenses, the “Company IP Licenses”). Neither the Company nor any Company Subsidiary is bound by, and no material Company IP is subject to, any Contract containing any covenant or other provision that in any way limits or restricts the ability of the Company or a Company Subsidiary to use, exploit, assert, or enforce any of its material
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Intellectual Property in any material respect anywhere in the world. Without limiting the foregoing, neither the Company nor any Company Subsidiary has granted any exclusive licenses to any material Company IP.
(l)(i) The Company and each Company Subsidiary is in compliance, and has since January 1, 2017 complied, with all applicable Legal Requirements and Privacy and Security Laws regarding Business Data; (ii) neither the Company nor any Company Subsidiary has, since January 1, 2017, received any written notice from any applicable Governmental Entity alleging any violation of Legal Requirements regarding Business Data by the Company or any Company Subsidiary, nor has the Company or any of the Company Subsidiaries been threatened in writing to be charged with any such violation by any Governmental Entity; (iii) the Company and each Company Subsidiary, has, since January 1, 2017, taken reasonable steps (including, as appropriate, implementing reasonable technical, physical or administrative safeguards) designed to protect Business Data in their possession or under their control against loss and unauthorized access, use, modification or disclosure, and, to the knowledge of the Company, neither the Company nor any Company Subsidiary has suffered a material Data Security Incident; and (iv) the Company and each Company Subsidiary, has, since January 1, 2017, taken reasonable steps with respect to all third party service providers, outsourcers, processors or other third parties who process, store or otherwise handle Business Data for or on behalf of the Company and the Company Subsidiaries (each, a “Data Service Provider”) to obligate such Persons to take steps to protect and secure Business Data from loss or unauthorized use, access, modification or disclosure, and, to the knowledge of the Company, no Data Service Provider has suffered a material Data Security Incident.
(m)The Company and each Company Subsidiary at all times have posted the applicable Company Privacy Policy(ies) on each of their websites, applications, and other online services (“Company Sites”), in a manner readily available to visitors and current and potential users and customers and in compliance with all Privacy and Security Laws. No statement on any Company Site, or in any Company Privacy Policy, has been misleading, deceptive, or in violation of any Privacy and Security Law. The Company and each of the Company Subsidiaries materially complies and has complied at all times with all Company Privacy Policies, all Privacy and Security Laws, all filings, registrations, and certifications made with respect to such Privacy and Security Law and, to the extent applicable, the Payment Card Industry Data Security Standards with respect to any payment card data that the Company has collected, processed, or handled. The execution, delivery and performance of this Agreement complies and will comply with all Privacy and Security Laws and the Company’s and each of the Company Subsidiaries’ applicable published privacy policies in each case.
(n)There is not and has not been any Legal Proceeding against, or to the Company’s Knowledge, investigation (formal or informal) of the Company or any Company Subsidiaries, by any private party, the Federal Trade Commission, any state attorneys general, or any other Governmental Entity, with respect to the collection, storage, hosting, use, disclosure, transmission, transfer, disposal, possession, interception, other processing or security of any Business Data. To the knowledge of the Company, there are no facts or circumstances that could constitute a reasonable basis for such Legal Proceeding against or investigation of the Company or any Company Subsidiary. There has been no Order or government or third-party settlement affecting the collection, storage, hosting, use, disclosure, transmission, transfer, disposal, possession, interception, other processing or security of any Business Data by or for the Company or any Company Subsidiary.
(o)The Company and the Company Subsidiaries each have written agreements in place with all Data Service Providers in which each Data Service Provider has provided guarantees, warranties, or covenants in relation to processing of Business Data, confidentiality, and security measures, and has agreed to comply with those obligations in a manner sufficient for the Company’s compliance with Privacy and Security Laws. To the extent the subject of such agreements relates to the processing of Personal Data on behalf of the Company or any Company Subsidiaries, each Contract contains all material contractual provisions required under the Privacy and Security Laws, including but not limited to contractual provisions regarding the use, disclosure and retention of Personal Data.
(p)The information technology systems used by the Company and any Company Subsidiaries (“IT Systems”) are designed, implemented, operated and maintained in accordance with customary industry standards and practices for entities operating businesses similar to the business of the Company and the Company Subsidiaries, including with the respect to redundancy, reliability, scalability and security, and constitute all the information and communications technology and other systems infrastructure reasonably necessary to carry on the business of the Company and Company Subsidiaries as conducted since January 1, 2017. The Company and each Company Subsidiary have materially complied with all data security requirements under the Privacy and Security Laws, including, but not limited to: (i) conducting regular network monitoring and/or system vulnerability scans of the IT Systems; (ii) maintaining a comprehensive written information security program covering the IT Systems; (iii) utilizing all physical, administrative and technical safeguards applicable to the Company or any Company Subsidiaries under the Privacy and Security Laws, including, multifactor authentication and encryption, to protect Business Data contained in the IT Systems; and (iv) certifying compliance with
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such requirements to a Governmental Entity where required under applicable Privacy and Security Laws. Without limiting the foregoing, (i) the Company and the Company Subsidiaries have taken reasonable steps and implemented reasonable procedures to ensure that their IT Systems are free from malicious code, and (ii) the Company and the Company Subsidiaries have in effect industry standard disaster recovery plans, procedures and facilities for their business and have taken all reasonable steps to safeguard the security and the integrity of their IT Systems. There has been no material failure, breakdown, loss or impairment of, or any unauthorized intrusions or breaches of the security with respect to the IT Systems that (i) has resulted in a material disruption or material interruption in the operation of the business of the Company or any Company Subsidiary or (ii) to the knowledge of the Company, has resulted in a material Data Security Incident. The IT Systems currently used by the Company are in good working condition and operate and perform as necessary to conduct all business operations of the Company. All Business Data will continue to be available by the Company following the Closing on substantially the same terms and conditions as existed immediately before the Closing.
2.10Title to Assets; Real Property. The Company or a Company Subsidiary owns, and has good and marketable title to, or in the case of assets purported to be leased by the Company or a Company Subsidiary, leases and has valid leasehold interest in, each of the material tangible assets owned or leased by the Company or a Company Subsidiary, free and clear of all Liens (other than Company Permitted Encumbrances). The Company or a Company Subsidiary does not own any real property. Either the Company or a Company Subsidiary has a good and valid binding leasehold interest in each material property leased, subleased or other material agreement under which the Company or any Company Subsidiary uses or occupies or has the right to use or occupy any real property (such real property, collectively, the “Company Leased Real Property”), in each case pursuant to a written lease, sublease, license, or other use or occupancy agreement, in each case that is a valid and binding obligation of the Company or a Company Subsidiary and, to the knowledge of the Company, each other party thereto, and (i) none of the Company or any Company Subsidiary is in default of any provision of any such lease, except for such defaults which would not, individually or in the aggregate, reasonably be expected to be material to the Company and (ii) the Company has delivered to the Acquisition Subs a true, correct and complete copy of each such material lease. All buildings, structures, improvements, fixtures, building systems and improvements situated on the Company Leased Real Property comprise all of the material real property used in the conduct of the business of the Company or the Company Subsidiaries.
2.11Contracts. Part 2.11 of the Company Disclosure Schedule contains a list as of the date of this Agreement of each of the following Contracts to which the Company or a Company Subsidiary is a party (each such Contract (x) required to be listed in Part 2.11 of the Company Disclosure Schedule, (y) that is a Company IP License, or (z) that is required to be filed as a “material contract” (as such term is defined in Item 601(b)(10) of Regulation S-K under the Exchange Act) as an exhibit to the Most Recent Company 10-K/A under the Exchange Act (other than any Company Plan), being referred to as a “Material Contract”):
(a)each Contract that restricts in any material respect the ability of the Company, any Company Subsidiary or any Affiliate of any of them to (i) engage or compete in any geographic area or line of business, market or field, or to develop, sell, supply, manufacture, market, distribute, or support any material product or service, or to make use of any Company IP, including any grants by the Company or any Company Subsidiary of exclusive rights or licenses, (ii) transact with any Person or (iii) solicit any client or customer (or that would so restrict Parent, any Parent Subsidiary or any Affiliate of any of them following the Closing);
(b)each joint venture agreement, partnership agreement or similar agreement with a third party;
(c)each Contract (other than any Organizational Document) between the Company or any Company Subsidiary, on the one hand, and any director, officer or Affiliate of the Company or any Company Subsidiary or any of their respective “associates” or “immediate family” members (as such terms are defined in Rule 12b-2 and Rule 16a-1 of the Exchange Act), on the other hand, including (but not limited to) any Contract pursuant to which the Company or any Company Subsidiary has an obligation to indemnify such director, officer, Affiliate or “associate” or “immediate family” member, but excluding any Company Plan;
(d)each Contract evidencing indebtedness for money borrowed by the Company or any Company Subsidiary from a third party lender, and each Contract pursuant to which any such indebtedness for borrowed money is guaranteed by the Company or any Company Subsidiary, in each case in excess of $250,000;
(e)each Contract expressly limiting or restricting the ability of the Company or any Company Subsidiary (i) to make distributions or declare or pay dividends in respect of their capital stock, partnership interests, membership interests or other equity interests, as the case may be, (ii) to pledge their capital stock or other equity interests, (iii) to issue any guaranty, (iv) to make loans to the Company or any Company Subsidiary, or (v) to grant Liens on the property of the Company or any Company Subsidiary;
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(f)each Contract that obligates the Company or any Company Subsidiary to make any loans, advances or capital contributions to, or investments in, any Person;
(g)each Contract that grants any right of first refusal, first notice, first negotiation or right of first offer or similar right with respect to any assets, rights or properties of the Company or any Company Subsidiary, taken as a whole;
(h)each Contract or series of related Contracts (excluding (i) purchase orders given or received in the ordinary course of business and (ii) Contracts between the Company and any wholly owned Company Subsidiary or among any wholly owned Company Subsidiaries) under which the Company or any Company Subsidiary (A) paid in excess of $250,000 in fiscal year 2021 or (B) received in excess of $250,000 in fiscal year 2021;
(i)each material “single source” supply Contract pursuant to which goods or materials are supplied to the Company or a Company Subsidiary from a sole source;
(j)each Contract containing any “take or pay”, minimum commitments or similar provisions;
(k)each collective bargaining or other labor or works council agreement covering employees of the Company or a Company Subsidiary;
(l)each lease involving real property pursuant to which the Company or any Company Subsidiary is required to pay a monthly base rental in excess of $250,000;
(m)each lease or rental Contract involving personal property (and not relating primarily to real property) pursuant to which the Company or any Company Subsidiary is required to make rental payments in excess of $150,000 per month (excluding leases or rental Contracts for office equipment entered into in the ordinary course of business);
(n)each Contract relating to the acquisition, sale or disposition of any business unit or product line of the Company or any Company Subsidiary and with any outstanding obligations that are material to the Company and the Company Subsidiaries, taken as a whole, as of the date of this Agreement;
(o)each Contract (i)(A) between the Company or any Company Subsidiary and any Governmental Entity or (B) between the Company or any Company Subsidiary, as a subcontractor and any prime contractor to any Governmental Entity or (ii) financed by any Governmental entity and subject to the rules and regulations of any Governmental Entity concerning procurement;
(p)each Contract with any “most favored nation” provision or that otherwise requires the Company or any Company Subsidiary (or, following the Closing, would require Parent or any Parent Subsidiary) to conduct business with any Person on a preferential or exclusive basis or that includes a price protection or rebate provision in favor of the counterparty to such Contract, excluding, for clarity, commissions payable with respect to the sale of Insurance Contracts;
(q)each settlement agreement entered into since January 1, 2019 (i) with a Governmental Entity, (ii) that requires the Company or any Company Subsidiary to pay more than $250,000 after the date of this Agreement or (iii) that imposes any material restrictions on the business of the Company or any Company Subsidiary;
(r)each Contract with any Top Producer of the Company and its Subsidiaries;
(s)each Reinsurance Agreement; and
(t)each Contract relating to the creation of a Lien (other than Company Permitted Encumbrances) with respect to any material asset of the Company or any Company Subsidiary.
There are no existing breaches or defaults on the part of the Company or any Company Subsidiary under any Material Contract, and, to the knowledge of the Company, there are no existing breaches or defaults on the part of any other Person under any Material Contract, in each case except where such breaches or defaults would not, individually or in the aggregate, reasonably expected to be material to the Company and the Company Subsidiaries, taken as a whole. No event has occurred or not occurred through the Company’s or any Company Subsidiary’s action or inaction or, to the knowledge of the Company, through the action or inaction of any third party, that, with notice or the lapse of time or both, would constitute a breach of or default under the terms of any
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Material Contract, in each case except where such breaches or defaults, individually or in the aggregate, has not been and would not reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole. Each Material Contract is valid, has not been terminated other than in accordance with the terms and conditions of such Material Contract, is enforceable against the Company or the applicable Company Subsidiary that is a party to such Material Contract, and, to the knowledge of the Company, is enforceable against the other parties thereto, in each case subject to the Bankruptcy and Equity Exception, except as, individually or in the aggregate, has not and would not reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole. Prior to the date of this Agreement, the Company has made available to Parent true, correct and complete copies of each Material Contract in effect as of the date of this Agreement, together with all material amendments and supplements thereto in effect as of the date of this Agreement. None of the Company or any Company Subsidiary has any outstanding material disputes with a Top Supplier. No Top Supplier to the Company or a Company Subsidiary has materially modified any Contract with the Company or any Company Subsidiary or canceled, terminated, materially reduced the scale of its business conducted with the Company or any Company Subsidiary, given notice to the Company or any Company Subsidiary of any intention to materially modify any Contract with the Company or any Company Subsidiary or to cancel, terminate or materially reduce the scale of its business conducted with the Company or any Company Subsidiary, or, to the knowledge of the Company, threatened to do any of the foregoing or, to the knowledge of the Company, been threatened with bankruptcy or insolvency.
2.12Compliance with Legal Requirements.
(a)The Company and the Company Subsidiaries are, and since January 1, 2019 have been, in compliance with all Legal Requirements applicable to them and their businesses, except where the failure to comply with such Legal Requirements, individually or in the aggregate, has not been or would not reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole. Neither the Company nor any Company Subsidiary has, during the three (3)-year period prior to the date of this Agreement (i) to the knowledge of the Company, received any written notice or verbal notice from any Governmental Entity regarding any material violation by the Company or any Company Subsidiaries of any Legal Requirement; or (ii) provided any notice to any Governmental Entity regarding any material violation by the Company or any Company Subsidiary of any Legal Requirement.
(b)The Company and the Company Subsidiaries hold, and have at all times since January 1, 2019 held, all material Governmental Authorizations necessary for the lawful operation of the businesses of the Company and the Company Subsidiaries, and have filed all tariffs, reports, notices and other documents with all Governmental Entities necessary for the Company and the Company Subsidiaries to own, lease and operate their properties and assets and to carry on their businesses as currently conducted (the “Company Permits”) and have paid all fees and assessments due and payable in connection therewith, except where the failure to have, file, pay or hold such Company Permits has not had and would not reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole. Except as would not reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole, (i) all Company Permits are valid and in full force and effect, are not subject to any administrative or judicial proceeding that could result in any modification, termination or revocation thereof and, to the knowledge of the Company, no suspension or cancellation of any such Company Permit is threatened; and (ii) the Company and each Company Subsidiary is in compliance with the terms and requirements of all Company Permits.
(c)Part 2.12(c) of the Company Disclosure Schedule sets forth a true and complete list, by Company Insurance Subsidiary, of all jurisdictions in which each such Company Insurance Subsidiary is licensed or authorized to write insurance business as of the date hereof.
(d)The Company and each Company Subsidiary have at all times since January 1, 2019 complied in all material respects with applicable Sanctions Laws and Export Control Laws. Neither the Company or any Company Subsidiary has been the subject of or otherwise involved in investigations or enforcement actions by any Governmental Entity or other Legal Proceedings with respect to any actual or alleged violations of Export Control Laws or Sanctions Laws, and neither the Company or any Company Subsidiary has been notified in writing of any such pending or threatened actions. Neither the Company nor any Company Subsidiary, nor any director, officer or employee, nor to the knowledge of the Company, any independent contractor, consultant, agent or other person acting on behalf of the Company or any Company Subsidiary, is a Prohibited Person or is subject to debarment or any list-based designations under the Export Control Laws. Since January 1, 2019, the Company and the Company Subsidiaries have secured and maintained all necessary permits, registrations, agreements or other authorizations, including amendments thereof pursuant to the Export Control Laws or Sanctions Laws, including for (i) the export, import and re-export of its products, services, software and technologies, and (ii) releases of technologies and software to foreign nationals located in the United States and abroad (the “Export Approvals”), and each of the Company and the Company Subsidiaries is and, since January 1, 2019, has been in compliance in all material respects with the terms of all Export Approvals. To the knowledge of the Company, there are no pending or threatened claims against the Company or any Company Subsidiary with respect to such Export Approvals.
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(e)None of the officers, directors, employees or majority owners of the Company or any of its Subsidiaries is a foreign or domestic Government Official.
2.13Legal Proceedings; Investigations; Orders.
(a)Other than ordinary course claims and related Legal Proceedings or ordinary course claims and related Legal Proceedings in connection with Insurance Contracts issued by any Company Insurance Subsidiary, there is no Legal Proceeding pending or, to the knowledge of the Company, threatened against the Company or any Company Subsidiary or affecting any of their respective properties or assets that (i) would adversely affect the Company’s or any Company Subsidiary’s ability to perform any of its obligations under, or consummate any of the transactions contemplated by, this Agreement; or (ii) individually or in the aggregate, has been or would reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole.
(b)There are no subpoenas, civil investigative demands or other written requests for information issued by a Governmental Entity to the Company or any Company Subsidiary relating to potential or actual violations of any Legal Requirement that are pending or, to the knowledge of the Company, threatened, or, to the knowledge of the Company, any governmental investigations of the Company or any Company Subsidiary, or any of their respective properties, relating to violations of any Legal Requirement that, individually or in the aggregate, has been or would reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole.
(c)There is no Order under which the Company or any Company Subsidiary is subject to ongoing obligations that, individually or in the aggregate, has been or would reasonably be expected to be material to the Company and the Company Subsidiaries, taken as a whole.
2.14Certain Business Practices. Since January 1, 2019, neither the Company nor any Company Subsidiary, nor any director or officer or, to the knowledge of the Company, any employee, agent or other person acting on behalf of the Company or any Company Subsidiary has, directly or indirectly, (a) violated or taken any action that would result in a violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, the UK Bribery Act of 2010 or its predecessor laws, or any other Legal Requirements concerning corrupt payments applicable to the Company or any Company Subsidiary (collectively, the “Anti-Corruption Laws”) or (b) (i) used, offered to use or authorized the use of any funds of the Company or a Company Subsidiary for unlawful contributions, unlawful gifts or unlawful entertainment, or for other unlawful payments, related to political activity or otherwise; (ii) made, offered to make or authorized any unlawful payment to foreign or domestic Government Officials or employees or to foreign or domestic political parties or campaigns from funds of the Company or any Company Subsidiary; (iii) established or maintained any unlawful fund of monies or other assets of the Company or any Company Subsidiary; (iv) made any inaccurate entry on the books or records of the Company or any Company Subsidiary; or (v) made, offered to make or authorized any bribe, unlawful rebate, unlawful payoff, unlawful influence payment, unlawful kickback or other unlawful payment to any person, private or public, in any form. Neither the Company nor any Company Subsidiary is or within the past three (3) years has been (i) to the knowledge of the Company, under external or internal investigation by any Governmental Entity for any potential or actual violation of any Anti-Corruption Laws or (ii) has received any written or other notice from any Governmental Entity regarding any potential or actual violation of, or failure to comply with, any Anti-Corruption Laws. Since January 1, 2019, neither the Company nor any Company Subsidiary has made any disclosure (voluntary or otherwise) to any Governmental Entity with respect to any alleged irregularity, misstatement or omission or other violation or liability arising under or relating to any potential Anti-Corruption Laws.
2.15Tax Matters.
(a)Except as would not, individually or in the aggregate, have a Company Material Adverse Effect:
(i)The Company and the Company Subsidiaries have timely filed (taking into account any extension of time within which to file) all Tax Returns that are required to be filed by or with respect to any of them (the “Company Returns”) and all such Company Returns are true, correct and complete.
(ii)The Company and the Company Subsidiaries have timely paid in full to the appropriate Governmental Entity all Taxes required to be paid by any of them (whether or not shown on any Tax Return), have established adequate accruals and reserves, in accordance with GAAP, on the financial statements included in the Company SEC Documents for all Taxes payable by the Company and the Company Subsidiaries for all taxable periods and portions thereof through the date of such financial statements.
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(iii)Each of the Company and the Company Subsidiaries has (i) timely paid, deducted, withheld and collected all amounts required to be paid, deducted, withheld or collected by any of them with respect to any payment owing to, or received from, their employees, creditors, independent contractors, customers and other third parties (and have timely paid over any amounts so withheld, deducted or collected to the appropriate Governmental Entity) and (ii) otherwise complied with all applicable Legal Requirements relating to the withholding, collection and remittance of Taxes (including information reporting requirements).
(iv)No claim has been made in writing by any taxing authority in a jurisdiction where the Company or any Company Subsidiary has not filed a Tax Return of a particular type that the Company or any Company Subsidiary is or may be subject to Tax by, or required to file Tax Returns in, such jurisdiction with respect to Taxes that are the subject to such Tax Return.
(v)Neither the Company nor any Company Subsidiary will be required to include an item of income (or exclude an item of deduction) in any taxable period (or portion thereof) beginning after the Closing Date as a result of (i) a change in, or use of improper, method of accounting occurring prior to the Closing Date, (ii) a prepaid amount received or paid (or deferred revenue accrued) outside of the ordinary course of business prior to the Closing Date, or (iii) as a result of having entered into a “gain recognition agreement” within the meaning of Treasury Regulation Section 1.367(a)-8. Neither the Company nor any Company Subsidiary has made an election pursuant to Section 965(h) of the Code.
(vi)Neither the Company nor any Company Subsidiary is the subject of any currently ongoing Tax audit or other proceeding with respect to Taxes nor has any audit or other proceeding with respect to Taxes been proposed against any of them in writing, and any deficiencies asserted or assessments made as a result of any audit or other proceeding with respect to Taxes have been paid in full, are being contested in good faith, or adequate accruals or reserves for such deficiencies or assessments have been established in accordance with GAAP on the financial statements included in the Company SEC Documents.
(vii)There are no Liens in respect of or on account of Taxes upon any of the property or assets of the Company or any Company Subsidiary, except for Taxes not yet due and payable.
(viii)Neither the Company nor any of the Company Subsidiaries (i) is or has been a member of any affiliated, combined, consolidated, unitary or similar group for purposes of filing Tax Returns or paying Taxes, except for any such group of which the Company is the common parent or (ii) has any liability for Taxes of any Person (other than the Company or any Company Subsidiary) under Treasury Regulations Section 1.1502-6 (or any similar state, local or non-U.S. Legal Requirement) or as a transferee or successor.
(ix)Neither the Company nor any Company Subsidiary is a party to or bound by, or has any obligation under, any Tax indemnity, sharing, allocation, or reimbursement agreement or arrangement, other than (i) customary tax provisions in ordinary course commercial agreements, the principal purpose of which is not related to Taxes; and (ii) any agreement or arrangement solely between or among the Company and/or the Company Subsidiaries.
(x)Neither the Company nor any Company Subsidiary is bound with respect to the current or any future taxable period by any closing agreement (within the meaning of Section 7121(a) of the Code or any similar or analogous state, local or non-U.S. Legal Requirement) or other ruling or written agreement with a Tax authority, in each case, with respect to Taxes.
(xi)Neither the Company nor any Company Subsidiary (i) has filed any extension of time within which to file any Tax Returns that have not been filed, except in the ordinary course of business, (ii) has entered into any agreement or other arrangement waiving or extending the statute of limitations or the period of assessment or collection of any Taxes, (iii) has granted any power of attorney that is in force with respect to any matters relating to any Taxes, (iv) has applied for a ruling from a taxing authority relating to any Taxes that has not been granted or has proposed to enter into an agreement with a taxing authority that is pending or (v) has been issued any private letter rulings, technical advice memoranda or similar agreement or rulings by any Tax authority.
(xii)Neither the Company nor any Company Subsidiary has participated in any “listed transaction” within the meaning of Treasury Regulations Section 1.6011-4(b)(2) (or any similar state, local or non-U.S. Legal Requirement).
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(b)Neither the Company nor any Company Subsidiary has constituted a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code or otherwise as part of a plan (or series of related transactions), within the meaning of Section 355(e) of the Code, that includes the Mergers, in the two (2) years prior to the date of this Agreement.
(c)Neither the Company nor any Company Subsidiary has knowledge of any facts, agreements, plans or other circumstances or has taken or agreed to take any action that would reasonably be expected to prevent or impede the Mergers, taken together, from qualifying for the Intended Tax Treatment.
2.16Employee Benefit Plans.
(a)Part 2.16(a) of the Company Disclosure Schedule sets forth a list of all Company Plans as of the date of this Agreement. Part 2.16(a) of the Company Disclosure Schedule separately identifies each Company Plan that is governed by the laws of any jurisdiction other than the United States or provides compensation or benefits to any employee or former employee of the Company or any Company Subsidiary (or any dependent thereof) who resides outside of the United States (each, a “Foreign Plan”).
(b)The Company has made available to Parent copies of, to the extent applicable (i) the plan document for each material Company Plan; (ii) the most recent annual reports (Form Series 5500 and all schedules and financial statements attached thereto) with respect to each Company Plan; (iii) the most recent summary plan description with respect to each Company Plan; (iv) the most recent IRS determination or opinion letter issued with respect to each Company Plan intended to be qualified under Section 401(a) of the Code; and (v) all material correspondence from any Governmental Entity regarding any active or threatened Legal Proceeding regarding any Company Plan.
(c)No Company Plan is, and neither the Company nor any Company Subsidiary contributes to, has at any time in the previous six (6) years contributed to or has any liability or obligation, whether fixed or contingent, with respect to (i) a multiemployer plan, as defined in Section 3(37) of ERISA, (ii) a single employer plan or other pension plan that is subject to Title IV of ERISA or Section 302 of ERISA or Section 412 of the Code, (iii) a multiple employer plan (within the meaning of Section 413(c) of the Code), (iv) a multiple employer welfare arrangement (within the meaning of Section 3(40) of ERISA), or (v) voluntary employee benefit association under Section 501(a)(9) of the Code. No Company Plan is a defined benefit pension plan or scheme.
(d)Each Company Plan that is intended to be qualified under Section 401(a) of the Code is so qualified and has received a favorable determination letter (or opinion letter, if applicable) from the IRS stating that such Company Plan is so qualified and nothing has occurred since the date of issuance of such letter that would reasonably be expected to adversely affect the qualified status of such Company Plan. Each Company Plan has been operated in material compliance with its terms and with all applicable Legal Requirements in all material respects. Without limiting the foregoing, no liability under Title IV of ERISA has been incurred by the Company or any Commonly Controlled Entity that has not been satisfied in full and, to the knowledge of the Company, no condition exists that presents risk to the Company of incurring a material liability under such Title.
(e)Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or together with any other event) (i) entitle any current or former employee, officer, director or independent contractor of the Company or any Company Subsidiary to any payment or benefit under any Company Plan; (ii) increase the amount of any compensation or other benefits otherwise payable by the Company or any Company Subsidiary under any Company Plan; (iii) result in the acceleration of the time of payment, funding or vesting of any compensation or other benefits under any Company Plan; (iv) result in any breach or violation of or default under or limit the Company’s or the Parent’s right to amend, modify or terminate any Company Plan; or (v) result in any “excess parachute payment” (within the meaning of Section 280G of the Code) becoming due to any current or former employee, officer, director or independent contractor of the Company or any Company Subsidiary. No Company Plan provides for any gross-up, make-whole or other similar payment or benefit in respect of any taxes under Section 4999 of the Code or Section 409A of the Code.
(f)Each Company Plan has been maintained and operated in documentary and operational compliance in all material respects with Section 409A of the Code or an available exemption therefrom. No material Tax penalties or additional Taxes have been imposed or would be reasonably expected to be imposed on any employee, as a result of a failure to comply with Section 409A of the Code with respect to any Company Plan that is a “nonqualified deferred compensation plan” within the meaning of Section 409A of the Code.
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(g)The Company is in compliance in all material respects with (i) the applicable requirements of Section 4980B of the Code and any similar state law and (ii) the applicable requirements of the Patient Protection and Affordable Care Act of 2010, as amended. No Company Plan provides health, medical or other welfare benefits after retirement or other termination of employment (other than for continuation coverage required under Section 4980B(f) of the Code).
(h)With respect to each Foreign Plan, (i) such Foreign Plan has been maintained, funded and administered in material compliance with applicable laws and the requirements of such Foreign Plan’s governing documents and any applicable collective bargaining or other works council agreements, and (ii) such Foreign Plan has obtained from the Governmental Entity having jurisdiction with respect to such Foreign Plan any required determinations, if any, that such Foreign Plan is in compliance in all material respects with the applicable Legal Requirements of the relevant jurisdiction if such determinations are required in order to give effect to such Foreign Plan. No Foreign Plan has unfunded liabilities that will not be offset by insurance or that are not fully accrued on the financial statements of the Company.
2.17Labor Matters.
(a)Neither the Company nor any Company Subsidiary is a party to, nor does the Company or any Company Subsidiary have a duty to bargain for, any collective bargaining agreement with a labor organization or works council representing any of its employees and, as of the date of this Agreement, there are no labor organizations or works councils representing, purporting to represent or, to the knowledge of the Company, seeking to represent any employees of the Company or any Company Subsidiary.
(b)As of the date of this Agreement in the past three (3) years, there has not been any strike, slowdown, work stoppage, lockout, job action, picketing, material labor dispute, union organizing activity, or any similar activity or dispute, affecting the Company, or to the knowledge of the Company, any threat thereof involving the employees of the Company or any Company Subsidiary. There is not now pending, and, to the knowledge of the Company, no Person has currently threatened in writing to commence, any such strike, slowdown, work stoppage, lockout, job action, picketing, labor dispute or union organizing activity or any similar activity or dispute.
(c)As of the date of this Agreement there is no material Legal Proceeding pending or, to the knowledge of the Company, threatened relating to any employment Contract, wages and hours, mass layoffs or reductions in force, plant closing notification, employment statute or regulation, privacy right, labor dispute, workers’ compensation policy or long-term disability policy, safety, employee classification, child labor, disability, affirmative action, unemployment insurance, secondment, employee leave issues and the payment of social security and other employment-related Taxes, retaliation, immigration or discrimination matters involving any employee of the Company or any Company Subsidiary, including charges of unfair labor practices or harassment complaints, claims or judicial or administrative proceedings, in each case, which are pending or, to the knowledge of the Company, threatened by or on behalf of any current or former employees or other individual service providers of the Company or any Company Subsidiary.
(d)The Company and the Company Subsidiaries are in compliance in all material respects with all applicable Legal Requirements respecting employment and employment practices, terms and conditions of employment of employees, former employees and prospective employees, wages and hours, pay equity, discrimination in employment, wrongful discharge, collective bargaining, mass layoffs or reductions in force, plant closing notification, fair labor standards, occupational health and safety, employee classification, child labor, disability, affirmative action, unemployment insurance, secondment, employee leave issues and the payment of social security and other employment-related Taxes, or any other labor and employment-related Legal Requirements. Neither the Company nor any of the Company Subsidiaries has any material liability under applicable Legal Requirements with respect to any misclassification of any individual in the past three (3) years as an independent contractor or other non-employee for the Company rather than as an employee, with respect to any individual employed, engaged, or leased by the Company or any of its Company Subsidiaries from another employer, or with respect to any misclassification of any employee of the Company as exempt versus non-exempt.
(e)Prior to the date of this Agreement, the Company has made available to Parent a complete and correct list of all employees by name, title or position, status (part-time, full-time, exempt, non-exempt); whether paid on a salaried, hourly or other basis; current annual salary; start date; and work location (including city and state for employees in the United States). All employees of the Company or any Company Subsidiary employed at a work location in the United States are authorized to work in the United States under applicable Legal Requirements. Prior to the date of this Agreement, the Company has made available to Parent a complete and correct list of all individual independent contractors of the Company and all “leased employees” (as such term is defined
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in Section 414(n) of the Code) of the Company by job title; work location (including city and state for employees in the United States); compensatory arrangement; start date; and term of engagement.
(f)Within the last two (2) years, no employee of the Company or any Company Subsidiary has transferred into employment with the Company or any Company Subsidiary by means of a relevant transfer pursuant to the Acquired Rights Directive pursuant to EC Directive no. 2001/23 dated March 12, 2001, as amended from time to time, or domestic legislation implementing such directive into the national applicable law of any country in the EEA, as amended from time to time, or any legislation that has substantially the same effect in any country outside the EEA. For purposes of this Section, “EEA” means European Economic Area, as constituted from time to time, and shall be deemed to include Switzerland.
2.18Environmental Matters. The Company and the Company Subsidiaries are, and since January 1, 2019 have been, in compliance with all applicable Environmental Laws (which compliance includes the possession, and the compliance with the terms and conditions, by the Company and each Company Subsidiary of all Company Permits required under applicable Environmental Laws to conduct their respective business and operations), and there are no investigations, actions, suits or proceedings pending or, to the knowledge of the Company, threatened against the Company or any Company Subsidiary, in each case, except as, individually or in the aggregate, has not constituted or resulted in a Company Material Adverse Effect. During the three (3)-year period prior to the date of this Agreement, neither the Company nor any Company Subsidiary has received any written notice from a Governmental Entity that alleges that the Company or any Company Subsidiary is violating, or has or may have, violated any Environmental Law, or may have any liability or obligation arising under, retained or assumed by contract or by operation of law, except for such violations, liabilities and obligations that would not have, individually or in the aggregate, a Company Material Adverse Effect. Since January 1, 2019, there has been no release of any hazardous materials by the Company or any Company Subsidiary at or from any facilities owned or leased by the Company or any Company Subsidiary or, to the knowledge of the Company, at any other locations where any hazardous materials were generated, manufactured, refined, transferred, stored, produced, imported, used, processed or disposed of by the Company or any Company Subsidiary and, in each case, for which the Company or any Company Subsidiary would reasonably be expected to be subject to any liability, except as, individually or in the aggregate, has not constituted or resulted in a Company Material Adverse Effect. For purposes of this Section 2.18, “Environmental Law” shall mean any Legal Requirement relating to pollution or protection, preservation or restoration of the environment (including air, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), including any such Legal Requirement regulating emissions, discharges or releases of pollutants, contaminants, wastes, toxic substances, exposure to or release of, or the management of any hazardous materials.
2.19Insurance Coverage. Part 2.19 of the Company Disclosure Schedule contains a true, correct and complete list of all material policies or programs of property, fire and casualty, product liability, workers’ compensation and other forms of insurance, including all material self-insurance programs and arrangements, held by, or for the benefit of, the Company or any Company Subsidiary as of the date of this Agreement. As of the date of this Agreement, there is no pending material claim by the Company or any Company Subsidiary against any insurance carrier under any insurance policy held by the Company or any Company Subsidiary. The Company and the Company Subsidiaries maintain insurance with reputable insurers in such amounts and against such risks as the management of the Company has in good faith determined to be prudent and appropriate in all material respects. Except as, individually or in the aggregate, has not constituted or result in a Company Material Adverse Effect, all insurance policies maintained by or on behalf of the Company or any of the Company Subsidiaries are in full force and effect and all premiums and other payments due on such policies have been paid by the Company or a Company Subsidiary.
2.20Takeover Statutes. Assuming the accuracy of Parent’s representation in Section 3.11, the Company Board has taken all action necessary to render the provisions of any “fair price,” “moratorium,” “control share acquisition” or any other takeover or anti-takeover statute or similar federal or state law (including Section 203 of the DGCL) and any similar provisions of the Company’s Organizational Documents inapplicable to this Agreement, the Voting and Support Agreement, the Mergers or any other transactions contemplated by this Agreement.
2.21Ownership of Parent Common Stock. During the three (3) years prior to the date of this Agreement, none of the Company or any Company Subsidiary has “owned” (as such term is defined in Section 203(c) of the DGCL), directly or indirectly, any shares of Parent Common Stock or other securities convertible into, exchangeable into or exercisable for shares of Parent Common Stock (other than pursuant to any Company Plan). There are no voting trusts or other agreements or understandings to
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which the Company or any Company Subsidiary is a party with respect to the disposition or voting of the capital stock or other equity interest of Parent or any Parent Subsidiary.
2.22Opinion of Financial Advisor. The Company Board has received the opinion of Allen & Company LLC (the “Company Financial Advisor”), financial advisor to the Company, to the effect that, as of the date of such opinion and based on and subject to the matters, assumptions, qualifications and limitations set forth in such opinion, the Exchange Ratio provided for in this Agreement is fair, from a financial point of view, to the holders of Company Common Stock (other than, as applicable, Parent, the Acquisition Subs and their respective Affiliates). The Company will make available to Parent a copy of such opinion as soon as practicable following the execution of this Agreement for informational purposes only (it being understood that such opinion is for the benefit of the Company Board and may not be relied upon by Parent, the Acquisition Subs or their respective Affiliates).
2.23Brokers. No broker, finder or investment banker (other than the Company Financial Advisor) is entitled to any brokerage, finder’s or other similar fee or commission in connection with the Mergers based upon arrangements made by or on behalf of the Company.
2.24Company Insurance Subsidiaries. Each Subsidiary of the Company that conducts the business of insurance (each, a “Company Insurance Subsidiary”) is (i) duly licensed or authorized as an insurance company in its jurisdiction of organization and (ii) duly licensed, authorized or otherwise eligible to transact the business of insurance in each other jurisdiction where it is required to be so licensed, authorized or otherwise eligible in order to conduct its business as currently conducted, except in each case, where the failure to be so qualified or licensed would not, individually or in the aggregate, reasonably be likely to be material to the Company and its Subsidiaries, taken as a whole. Part 2.24 of the Company Disclosure Schedule contains a true and complete list of the Company Insurance Subsidiaries, its jurisdiction of domicile and any jurisdiction in which it is commercially domiciled.
2.25Statutory Statements. The Company has made available to Parent and the Acquisition Subs copies of the following statutory statements, in each case together with the exhibits, schedules and notes thereto (collectively, the “Company Statutory Statements”) (i) the annual statement of each Company Insurance Subsidiary as of and for the annual periods ended December 31, 2019 and 2020; and (ii) the quarterly statements of each Company Insurance Subsidiary as of and for the quarterly period ended June 30, 2021, each as filed with the Domiciliary Department of Insurance. The Company Statutory Statements have been prepared in all material respects in accordance with SAP applied consistently throughout the periods presented, and present fairly, in all material respects, the statutory financial position and results of operations of each Company Insurance Subsidiary as of their respective dates and for the respective periods covered thereby. As of its filing date, and, if amended, as of the date of the last amendment prior to the date hereof, each such filing materially complied with applicable law in all material respects. No Governmental Entity has asserted any deficiency related to any such filing that has not been resolved to the reasonable satisfaction of such Governmental Entity.
2.26Reinsurance. Except as individually or in the aggregate, is not and would not be reasonably expected to be, material to the Company and the Company Insurance Subsidiaries, taken as a whole, (A) since January 1, 2019, neither the Company nor any Company Insurance Subsidiary has received any written notice from any applicable reinsurer that any amount of reinsurance ceded by the Company or such Company Insurance Subsidiary, as applicable, to such counterparty will be uncollectible or otherwise defaulted upon, (B) to the knowledge of the Company, no party to a Reinsurance Agreement is insolvent or the subject of a rehabilitation, liquidation, conservatorship, receivership, bankruptcy or similar proceeding, (C) to the knowledge of the Company, the financial condition of each party to a Reinsurance Agreement is not impaired to the extent that a default thereunder is reasonably anticipated, (D) there are no, and since January 1, 2019 there have been no, disputes under any Reinsurance Agreement other than disputes in the ordinary course for which adequate loss reserves have been established and (E) the Company and each Company Insurance Subsidiary that is party to a Reinsurance Agreement, as applicable, is entitled under any applicable insurance laws and SAP to take full reinsurance credit in its Statutory Statements for all amounts reflected therein that are recoverable by it pursuant to any Reinsurance Agreement and all such amounts recoverable have been properly recorded in its books and records of account (if so accounted therefor) and are properly reflected in its Statutory Statements, and no Governmental Entity has objected in writing to such characterization and accounting. None of the Reinsurance Agreements is finite reinsurance, financial reinsurance or such other form of reinsurance that does not meet the risk transfer requirements under applicable laws.
2.27Insurance Business.
(a)Except as, individually or in the aggregate, is not and would not be reasonably expected to be, material to the Company and the Company Insurance Subsidiaries, taken as a whole, since January 1, 2019, the business of each Company Insurance Subsidiary has been conducted in compliance with applicable insurance laws. In addition, (i) there is no pending or, to the Company’s
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knowledge, threatened in writing assertion by any state insurance regulatory authority that any Company Insurance Subsidiary has violated, nor, to the Company’s knowledge, is there any investigation pending or threatened in writing by any state insurance regulatory authority related to possible material violations by any Company Insurance Subsidiary of any applicable insurance laws, (ii) each Company Insurance Subsidiary has been duly authorized by the relevant state insurance regulatory authorities to issue the Insurance Contracts in the jurisdictions in which it operates and (iii) since January 1, 2019, each Company Insurance Subsidiary has, to the extent applicable, timely filed all material reports, forms, rates, notices and materials required to be filed by it with any state insurance regulatory authority. None of the Company Insurance Subsidiaries is subject to any order or decree of any insurance regulatory authority, and no insurance regulatory authority has revoked, suspended or limited, or, to the Company’s knowledge, threatened in writing to revoke, suspend or limit, any license or other permit issued pursuant to applicable insurance laws to any Company Insurance Subsidiary.
(b)None of the Company Insurance Subsidiaries is commercially domiciled under the laws of any jurisdiction and treated as domiciled in a jurisdiction other than that of its jurisdiction of incorporation.
(c)Neither the Company nor any of the Company Insurance Subsidiaries is subject to any requirement imposed by a Governmental Entity to maintain specified capital or surplus amounts or levels or is subject to any restriction on the payment of dividends or other distributions on its shares of capital stock, except for any such requirements or restrictions imposed by applicable insurance laws of general application.
(d)Part 2.27(d) of the Company Disclosure Schedule sets forth a true and correct list of all permitted accounting practices utilized by each Company Insurance Subsidiary in the preparation of the Statutory Statements.
2.28Insurance Producers. Except as, individually or in the aggregate, is not and would not be reasonably expected to be, material to the Company and the Company Insurance Subsidiaries, taken as a whole, since January 1, 2019, each employee who is an Insurance Producer and, to the knowledge of the Company, each other Insurance Producer, (a) at the time such Insurance Producer solicited or sold any Insurance Contract, was duly and appropriately appointed by a Company Insurance Subsidiary, in compliance with applicable law, to act as an Insurance Producer for such Insurance Contract, and was duly and appropriately licensed as an Insurance Producer (for the type of business sold or produced by such Insurance Producer on behalf of the Company Insurance Subsidiary), in each jurisdiction in which such Insurance Producer was required to be so licensed, and, to the knowledge of the Company, no such Insurance Producer violated any term or provision of applicable law relating to the solicitation or sale of any Insurance Contract in any material respect, (b) to the knowledge of the Company, has not breached the terms of any agency or broker contract with the Company Insurance Subsidiary or violated in any material respect any policy of the Company Insurance Subsidiary in the solicitation or sale of business for the Company Insurance Subsidiary and (c) to the knowledge of the Company, has not been enjoined, indicted, convicted or made the subject of any consent decree or judgment on account of any violation in any material respect of applicable law in connection with such Insurance Producer’s actions in his, her or its capacity as an Insurance Producer for the Company Insurance Subsidiary nor, to the knowledge of the Company, has any Insurance Producer been subject to any enforcement or disciplinary proceeding alleging any such violation. The Company has not received any written notice from any Governmental Entity with respect to any Insurance Producer regarding any of the matters described in clauses (a) through (c). There are no outstanding (i) material disputes between the Company or any Company Insurance Subsidiary and an Insurance Producer concerning material amounts of commissions or other incentive compensation, (ii) to the knowledge of the Company, material errors and omissions claims against any Insurance Producer in regard to any Insurance Contract related to or arising from the Insurance Producer’s relationship with the Company or the Company Insurance Subsidiary or (iii) material amounts owed by any Insurance Producer to any Company Insurance Subsidiary. The manner in which the Company Insurance Subsidiary compensates Insurance Producers involved in the solicitation, negotiation, sale or servicing of Insurance Contracts is in compliance in all material respects with applicable law and the terms of any applicable agreement with such Insurance Producers in all material respects.
2.29Information Supplied. The information supplied or to be supplied by the Company for inclusion in the Form S-4 Registration Statement (including the Proxy Statement/Prospectus) will not, at the time the Form S-4 Registration Statement (and any amendment or supplement thereto) is declared effective, on the date that the Proxy Statement/Prospectus is first mailed to the stockholders of the Company, or on the date of the Company Stockholder Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that, no representation or warranty is made by the Company with respect to statements made therein based on information supplied by Parent for inclusion therein.
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SECTION 3. |
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE ACQUISITION SUBS |
Parent and the Acquisition Subs hereby jointly and severally represent and warrant to the Company that, except as set forth or incorporated by reference in the Parent SEC Documents filed on or after January 1, 2020 and publicly available at least five (5) Business Days prior to the date of this Agreement (provided that in no event shall any risk factor disclosure under the heading “Risk Factors” or disclosure set forth in any “forward looking statements” disclaimer or other general statements to the extent they are non-specific, cautionary, predictive or forward looking in nature that are included in any part of any Parent SEC Document be deemed to be an exception to, or, as applicable, disclosure for purposes of, any representations and warranties of Parent or the Acquisition Subs contained in this Agreement) or, subject to Section 7.12, in the disclosure schedule delivered to the Company prior to the execution of this Agreement (the “Parent Disclosure Schedule”):
3.1Due Organization and Good Standing; Subsidiaries.
(a)Parent and the Acquisition Subs are corporations duly organized, validly existing and in good standing under the laws of their respective states of incorporation. Parent and the Acquisition Subs have the requisite corporate power and authority to own, lease and operate their respective assets and to carry on their respective businesses as it is being conducted as of the date of this Agreement, except as, individually or in the aggregate, has not constituted or resulted in a Parent Material Adverse Effect. Parent and the Acquisition Subs are duly qualified and have all necessary Governmental Authorizations to do business, and are in good standing, in each other jurisdiction where the nature of their business makes such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not constituted or resulted in a Parent Material Adverse Effect.
(b)Neither Parent nor the Acquisition Subs nor any Parent Subsidiary owns any equity interest or joint venture, partnership or similar interest in any other Entity, other than the Entities identified in Exhibit 21.1 of Parent’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (filed with the SEC on March 8, 2021) and any other wholly owned Parent Subsidiary. Each Parent Subsidiary is duly organized, validly existing and (where such concept is recognized under the laws of the jurisdiction in which it is organized) in good standing under the laws of the jurisdiction of its organization and has the requisite corporate or other organizational power and authority and (other than any Parent Subsidiary that conducts the business of insurance) Governmental Authorizations to own, lease and operate its assets and to carry on its business as it is being conducted as of the date of this Agreement, except where the failure to be so organized, existing and in good standing or to have such power and authority, individually or in the aggregate, has not constituted or resulted in a Parent Material Adverse Effect. All of the outstanding shares of capital stock of each Parent Subsidiary are duly authorized, validly issued, fully paid and nonassessable and are owned directly or indirectly by Parent free and clear of all Liens, except for restrictions on transfer under applicable securities laws.
3.2Organizational Documents. Prior to the date of this Agreement, Parent has made available to the Company copies of the Organizational Documents of Parent and the Acquisition Subs, including all amendments thereto as in effect on the date hereof. The Organizational Documents of Parent, the Acquisition Subs and each Parent Subsidiary are in full force and effect and neither (a) Parent or the Acquisition Subs nor (b) except as, individually or in the aggregate, has not constituted or resulted in a Parent Material Adverse Effect, any Parent Subsidiary is in violation of any of the provisions of such Organizational Documents.
3.3Capitalization.
(a)The authorized capital stock of Parent consists of (i) 200,000,000 shares of Parent Common Stock, of which 61,627,462 shares were issued and outstanding as of November 5, 2021 (the “Parent Capitalization Date”); and (ii) 10,000,000 shares of preferred stock, par value $0.00001 per share, none of which were outstanding as of the Parent Capitalization Date. All of the outstanding shares of Parent Common Stock have been, and all shares of Parent Common Stock reserved for issuance pursuant to the Parent Equity Plan will be when issued, duly authorized and validly issued, and are, or will be when issued, fully paid and non-assessable. All shares of Parent Common Stock to be issued in connection with the First Merger will be duly authorized, validly issued, fully paid and nonassessable, and all of the Parent Options, Parent RSUs, Parent Warrants and Additional Shares to be issued pursuant to Section 1.7 in connection with the First Merger will be duly authorized and validly issued, in each case when issued in accordance with the terms of this Agreement and subject to no preemptive or similar rights or other Liens, except for restrictions on transfer under applicable securities laws. All shares of Parent Common Stock to be issued upon the exercise of, or otherwise pursuant to the terms of, any Parent Option or Parent RSU, with respect to shares of Parent Common Stock to be issued pursuant to Section 1.7 in respect of any Assumed Company Option or Assumed Company RSU Award, respectively, in connection with the First Merger, will be, when issued in accordance with the terms of this Agreement (and the terms of such Parent Option or Parent RSU, as the case may be), duly authorized and validly issued, and are, or will be when issued, fully paid and non-assessable and subject to no preemptive or similar rights or other Liens, except for restrictions on transfer under applicable securities laws.
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(b)Except as set forth in Parent’s certificate of incorporation or bylaws (as amended) or the Parent Equity Agreements (i) none of the outstanding shares of Parent Common Stock is entitled or subject to any preemptive right, right of repurchase, right of participation or any similar right; (ii) none of the outstanding shares of Parent Common Stock is subject to any right of first refusal in favor of Parent; (iii) there are no bonds, debentures, notes or other indebtedness of Parent issued and outstanding having the right to vote (or convertible or exercisable or exchangeable for securities having the right to vote) on any matters on which stockholders of Parent may vote; and (iv) there is no Contract to which Parent is a party relating to the voting or registration of, or restricting any Person from purchasing, selling, pledging or otherwise disposing of (or from granting any option or similar right with respect to), any shares of Parent Common Stock. Except as set forth in the Parent Equity Agreements, Parent is not under any obligation, nor is it bound by any Contract pursuant to which it will become obligated, to repurchase, redeem or otherwise acquire any outstanding shares of Parent Common Stock or other securities.
(c)As of the Parent Capitalization Date (i) 6,005,287 shares of Parent Common Stock were subject to issuance pursuant to outstanding Parent Options; (ii) 154,391 shares of Parent Common Stock were subject to issuance pursuant to outstanding Parent RSUs and (iii) no other shares of capital stock or other voting securities of Parent were issued, reserved for issuance or outstanding. Prior to the date of this Agreement, Parent has made available to the Company true, correct and complete copies of (A) the Parent Equity Plan; and (B) the forms of all stock option agreements evidencing Parent Options outstanding as of the date of this Agreement and the forms of all restricted stock unit agreements evidencing Parent RSUs outstanding as of the date of this Agreement. The per share exercise price of each such Parent Option was at least equal to the fair market value of one (1) share of Parent Common Stock on the date of grant of such Parent Option.
(d)Except as set forth in Section 3.3(c), as of the Parent Capitalization Date, there was no (i) outstanding subscription, option, call, warrant or other right (whether or not currently exercisable) to acquire any shares of the capital stock or other equity interests, restricted stock unit, stock-based performance unit, shares of phantom stock, stock appreciation right, profit participation right or any other right that is linked to, or the value of which is based on or derived from, the value of any shares of capital stock or other equity interest of Parent; (ii) outstanding security, instrument, bond, debenture or note that is or may become convertible into or exchangeable for any shares of the capital stock or other equity securities of Parent; or (iii) stockholder rights plan (or similar plan commonly referred to as a “poison pill”) or Contract under which Parent is or may become obligated to sell or otherwise issue any shares of its capital stock or other equity interest or any other securities.
(e)From the Parent Capitalization Date through the date of this Agreement, neither Parent nor any of its Subsidiaries has issued any shares of Parent Common Stock or other equity interests of Parent or any Parent Subsidiary, other than pursuant to Parent Options or Parent RSUs, in each case, that were outstanding as of the Parent Capitalization Date.
3.4Authority; Binding Nature of Agreement.
(a)Parent has the requisite corporate power and authority to enter into and to perform its obligations under this Agreement and to consummate the Mergers. On or prior to the date hereof, the Parent Board has unanimously (i) duly and validly authorized and approved the execution, delivery and performance of this Agreement and the consummation of the Mergers by Parent; (ii) determined that the Mergers are fair to and in the best interests of Parent and its stockholders; (iii) approved and declared advisable this Agreement and the transactions contemplated by this Agreement, including the Mergers; and (iv) subject to the terms and conditions hereof, approved the issuance of shares of Parent Common Stock in the First Merger as contemplated by this Agreement (the “Parent Share Issuance”). Assuming the accuracy of the Company’s representations and warranties set forth in Section 2.21, the execution and delivery of this Agreement by Parent and the consummation by Parent of the Mergers and other transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Parent, and no other corporate proceedings on the part of Parent are necessary to authorize this Agreement, in each case other than the adoption of this Agreement by Parent as the sole stockholders of the Acquisition Subs and the filing of the Certificates of Merger as required by the DGCL. This Agreement has been duly executed and delivered on behalf of Parent and, assuming the due authorization, execution and delivery of this Agreement on behalf of the Company, constitutes the valid and binding obligation of Parent, enforceable against Parent in accordance with its terms, subject to the Bankruptcy and Equity Exception.
(b)Acquisition Sub I is a newly formed, wholly owned Subsidiary of Parent and has the requisite corporate power and authority to enter into and to perform its obligations under this Agreement. The board of directors of Acquisition Sub I has (i) determined that the transactions contemplated by this Agreement are fair to, and in the best interests of, Acquisition Sub I and its stockholder; (ii) declared that this Agreement is advisable and recommended that its sole stockholder adopt this Agreement; and (iii) authorized and approved the execution, delivery and performance of this Agreement by Acquisition Sub I. The execution and delivery of this Agreement by Acquisition Sub I and the consummation by Acquisition Sub I of the transactions contemplated by this
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Agreement have been duly authorized by all necessary corporate action on the part of Acquisition Sub I, and no other corporate proceedings on the part of Acquisition Sub I are necessary to authorize this Agreement other than, with respect to the Mergers (A) the adoption of this Agreement by Parent as the sole stockholder of Acquisition Sub I (which shall occur immediately following the execution of this Agreement); and (B) the filing of the Certificates of Merger as required by the DGCL. Parent, as the sole stockholder of Acquisition Sub I, will vote to adopt this Agreement immediately after the execution and delivery of this Agreement. This Agreement has been duly executed and delivered by Acquisition Sub I and, assuming the due authorization, execution and delivery of this Agreement on behalf of the Company, constitutes the valid and binding obligation of Acquisition Sub I, enforceable against Acquisition Sub I in accordance with its terms, subject to the Bankruptcy and Equity Exception.
(c)Acquisition Sub II is a newly formed, wholly owned Subsidiary of Parent and has the requisite limited liability company power and authority to enter into and to perform its obligations under this Agreement. The sole member of Acquisition Sub II has (i) determined that the transactions contemplated by this Agreement are fair to, and in the best interests of, Acquisition Sub II and its sole member; (ii) declared that this Agreement is advisable; and (iii) authorized and approved the execution, delivery and performance of this Agreement by Acquisition Sub II. The execution and delivery of this Agreement by Acquisition Sub II and the consummation by Acquisition Sub II of the transactions contemplated by this Agreement have been duly authorized by all necessary limited liability company action on the part of Acquisition Sub II, and no other limited liability company proceedings on the part of Acquisition Sub II are necessary to authorize this Agreement other than, with respect to the Mergers (A) the adoption of this Agreement by Parent as the sole member of Acquisition Sub II (which shall occur immediately following the execution of this Agreement); and (B) the filing of the Second Certificate of Merger as required by the DGCL and the DLLCA. This Agreement has been duly executed and delivered by Acquisition Sub II and, assuming the due authorization, execution and delivery of this Agreement on behalf of the Company, constitutes the valid and binding obligation of Acquisition Sub II, enforceable against Acquisition Sub I in accordance with its terms, subject to the Bankruptcy and Equity Exception.
3.5Non-Contravention; Consents.
(a)The execution and delivery of this Agreement by Parent and, assuming the accuracy of the Company’s representations and warranties set forth in Section 2.21, the consummation by Parent of the Mergers will not (i) cause a violation of any of the provisions of the Organizational Documents of Parent or any Parent Subsidiary; (ii) assuming the consents and filings referred to in Section 3.5(b) are made and obtained, conflict with or violate in any material respect any applicable Legal Requirements; or (iii) subject to Section 4.5, result in any material loss, limitation or impairment of any right of Parent or any Parent Subsidiary to own or use any assets, result in any material violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, first offer, first refusal, modification or acceleration of any material obligation or to the loss of a material benefit under any Contract binding upon Parent or any Parent Subsidiary or by which any of their respective properties, rights or assets are bound or subject, or result in the creation of any Liens of any kind (other than Parent Permitted Encumbrances) upon any of the properties, rights or assets of Parent or any Parent Subsidiary.
(b)Except as may be required by the Securities Act, the Exchange Act, the DGCL, the HSR Act or other applicable Antitrust Laws, applicable state securities takeover and “blue sky” laws or the rules and regulations of the NYSE, and neither Parent nor the Acquisition Subs, nor any Parent Subsidiary, is required to make any filing, registration, or declaration with, give any notice to, or obtain any consent, Order, license, permit, clearance, waiver or approval from, any Governmental Entity for the execution and delivery of this Agreement by Parent or the consummation by Parent of the Mergers, the performance by Parent of its covenants and obligations hereunder or the consummation by Parent of the Mergers, in each case, except as, individually or in the aggregate, would not constitute or result in a Parent Material Adverse Effect.
3.6Reports; Financial Statements; Internal Controls.
(a)All reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated by reference therein) required to be filed or furnished by Parent with the SEC under the Exchange Act or Securities Act since January 1, 2019 (the “Parent SEC Documents”) have been filed or furnished with the SEC on a timely basis. As of the time it was filed with the SEC (and, in the case of registration statements and proxy statements, on the dates of effectiveness and the dates of mailing, respectively) (or, with respect to clause (i) below, if amended or superseded, then on the date of such amended or superseding filing) (i) each of the Parent SEC Documents complied in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the Sarbanes-Oxley Act (as the case may be) and the applicable regulations promulgated thereunder and the listing requirements and corporate governance rules and regulations of the NYSE, each as in effect on the date such Parent SEC Document was filed (and, in the case of registration statements and proxy statements, on the dates of effectiveness and the dates of mailing, respectively, or, if amended prior to the date of this Agreement, the date of the filing of such amendment, with respect to the
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disclosures that are amended); and (ii) none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Since January 1, 2019, no executive officer of Parent has failed in any respect to make the certifications required of him or her under Section 302 or 906 of the Sarbanes-Oxley Act with respect to the Company SEC Documents. Neither the Parent nor any of its executive officers has received notice from any Governmental Entity challenging or questioning the accuracy, completeness, form or manner of filing of such certifications.
(b)The financial statements (including any related notes) contained or incorporated by reference in the Parent SEC Documents (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with GAAP applied on a consistent basis throughout the periods covered (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q or any successor form under the Exchange Act, and except that unaudited financial statements may not contain footnotes and are subject to normal year-end adjustments); (iii) fairly present, in all material respects, the financial position of Parent and Parent’s consolidated Subsidiaries as of the respective dates thereof and the results of operations and consolidated cash flows of Parent and Parent’s consolidated Subsidiaries for the periods covered thereby subject, with respect to unaudited interim statements, to normal year-end adjustments and (iv) have been prepared from the books and records of Parent and Parent’s consolidated Subsidiaries in all material respects. No financial statements of any Person other than Parent and Parent’s consolidated Subsidiaries are required by GAAP to be included in the consolidated financial statements of Parent. The books and records of Parent and the Parent Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements. As of the date hereof, Ernst & Young LLP has not resigned (or informed Parent that it intends to resign) or been dismissed as independent public accountants of Parent.
(c)Parent maintains, and at all times since December 31, 2019 has maintained, a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) which is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Parent and the Parent Subsidiaries; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and that receipts and expenditures are being made in accordance with authorizations of management and directors of Parent; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of Parent and the Parent Subsidiaries that could have a material effect on the financial statements. To the knowledge of Parent, Parent has not engaged in any material transactions that have not been properly recorded in the accounting records underlying its consolidated financial statements and there are no significant deficiencies or material weaknesses in the design or operation of Parents’ internal control over financial reporting. Parent has maintained the integrity of its financial reporting through proper access and change management procedures, along with customary reconciliations, reperformance and recalculations of key formulas, and detailed reviews performed by competent and qualified individuals. Management of Parent has disclosed to Parent’s auditors and the audit committee of the Parent Board (x) any significant deficiencies or material weaknesses in the design and operation of internal controls over financial reporting and (y) any fraud, whether or not material, that involves management or any other employees who have a significant role in Parent’s internal control over financial reporting, and each such deficiency, weakness and fraud so disclosed to auditors, if any, has been disclosed to Parent prior to the date hereof.
(d)Since January 1, 2019, (i) none of Parent or any Parent Subsidiary nor, to the knowledge of Parent, any director or officer of Parent or any Parent Subsidiary has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or, to the Parent’s knowledge, oral, regarding accounting, internal accounting controls or auditing practices, procedures, methodologies or methods of Parent or any Parent Subsidiary or any material complaint, allegation, assertion or claim from employees of Parent or any Parent Subsidiary regarding questionable accounting or auditing matters with respect to Parent or any Parent Subsidiary, and (ii) to the knowledge of Parent, no attorney representing Parent or any Parent Subsidiary, whether or not employed by Parent or any Parent Subsidiary, has reported evidence of a violation of securities laws, breach of fiduciary duty or similar violation by Parent, any Parent Subsidiary or any of their respective officers, directors, employees or agents to the Parent Board or any committee thereof, or to the General Counsel or Chief Executive Officer of Parent.
(e)Parent maintains disclosure controls as required by Rule 13a-15 or 15d-15 under the Exchange Act. As of the date hereof, Parent is in compliance in all material respects with all current listing requirements of the NYSE.
(f)Neither Parent nor any Parent Subsidiary is a party to, or has a commitment to effect, enter into or create, any joint venture, or “off-balance sheet arrangement” (as defined in Item 303(a) of Regulation S-K under the Exchange Act).
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(g)As of the date of this Agreement, there are no outstanding or unresolved comments in comment letters received from the SEC with respect to the Parent SEC Documents, and none of the Parent SEC Documents is, to the knowledge of Parent, the subject of ongoing SEC review or investigation.
(h)Neither Parent nor any Parent Subsidiary has any liabilities of any nature or type, whether accrued, absolute, determined, contingent or otherwise and whether due or to become due, except for (i) liabilities disclosed in the financial statements (including any related notes) contained in the Most Recent Parent Balance Sheet or in the balance sheets included in the Parent SEC Documents filed prior to the date of this Agreement; (ii) liabilities incurred in the ordinary course of business since the date of the Most Recent Parent Balance Sheet; (iii) liabilities that, individually or in the aggregate, have not constituted or resulted in a Parent Material Adverse Effect; and (iv) liabilities and obligations incurred in connection with the transactions contemplated by this Agreement.
3.7Absence of Certain Changes.
(a)Since the date of the Most Recent Parent Balance Sheet, there has not been any fact, event, change, effect, circumstance, occurrence or development that, individually or in the aggregate, has had a Parent Material Adverse Effect.
(b)Except in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, from the date of the Most Recent Parent Balance Sheet to the date of this Agreement, the businesses of Parent and the Parent Subsidiaries have been conducted in all material respects in the ordinary course of business (other than with respect to any Pandemic Measures), and neither Parent nor any Parent Subsidiary has undertaken any action that if proposed to be taken after the date of this Agreement would require the Company’s consent pursuant to Section 4.1(b)(i).
3.8Compliance with Legal Requirements. Parent is, and since January 1, 2019 has been, in compliance with all Legal Requirements applicable to it and its businesses, except where the failure to comply with such Legal Requirements would not, individually or in the aggregate, constitute or result in a Parent Material Adverse Effect. Neither Parent nor any Parent Subsidiary has, during the three (3)-year period prior to the date of this Agreement (i) to the knowledge of Parent, received any written notice or verbal notice from any Governmental Entity regarding any material violation by Parent of any Legal Requirement; or (ii) provided any notice to any Governmental Entity regarding any material violation by Parent or any Parent Subsidiary of any Legal Requirement.
3.9Legal Proceedings; Investigations; Orders.
(a)Other than ordinary course claims and related Legal Proceedings or ordinary course claims and related Legal Proceedings in connection with Contracts of insurance issued by any Parent Subsidiary that conducts the business of insurance, there is no Legal Proceeding pending (or, to the knowledge of Parent, threatened) against Parent, the Acquisition Subs or any Parent Subsidiary or affecting any of their respective properties or assets that (i) would adversely affect Parent’s or the Acquisition Subs’ ability to perform any of its obligations under, or consummate any of the transactions contemplated by, this Agreement; or (ii) individually or in the aggregate, has had a Parent Material Adverse Effect.
(b)There are no subpoenas, civil investigative demands or other written requests for information issued by a Governmental Entity to Parent or any Parent Subsidiary relating to potential or actual violations of any Legal Requirement that are pending or, to the knowledge of Parent, threatened, or, to the knowledge of Parent, any governmental investigations of Parent or any Parent Subsidiary, or any of their respective properties, relating to violations of any Legal Requirement that, individually or in the aggregate, has had a Parent Material Adverse Effect.
(c)There is no Order under which Parent, the Acquisition Subs or any Parent Subsidiary is subject to ongoing obligations that, individually or in the aggregate, has had a Parent Material Adverse Effect.
3.10Takeover Statutes. Assuming the accuracy of the Company’s representation in Section 2.21, the Parent Board has taken all action necessary to render Section 203 of the DGCL, all other applicable state anti-takeover statutes and any similar provisions of the Parent’s Organizational Documents inapplicable to the Mergers and the Parent Share Issuance.
3.11Ownership of Company Common Stock. During the three (3) years prior to the date of this Agreement, neither Parent nor any Parent Subsidiary has “owned” (as such term is defined in Section 203(c) of the DGCL), directly or indirectly, any shares of Company Common Stock or other securities convertible into, exchangeable into or exercisable for shares of Company Common Stock (other than pursuant to any employee benefit plan of Parent). There are no voting trusts or other agreements or
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understandings to which Parent or any Parent Subsidiary is a party with respect to the voting of the capital stock or other equity interest of the Company or any Company Subsidiary.
3.12Tax Matters.
(a)Except as would not, individually or in the aggregate, have a Parent Material Adverse Effect:
(i)Parent and the Parent Subsidiaries have timely filed (taking into account any extension of time within which to file) all Tax Returns that are required to be filed by or with respect to any of them and all such Tax Returns are true, correct and complete.
(ii)Parent and the Parent Subsidiaries have timely paid in full to the appropriate Governmental Entity all Taxes required to be paid by any of them (whether or not shown on any Tax Return), have established adequate accruals and reserves, in accordance with GAAP, on the financial statements included in the Parent SEC Documents for all Taxes payable by Parent and the Parent Subsidiaries for all taxable periods and portions thereof through the date of such financial statements.
(iii)Each of Parent and the Parent Subsidiaries has (i) timely paid, deducted, withheld and collected all amounts required to be paid, deducted, withheld or collected by any of them with respect to any payment owing to, or received from, their employees, creditors, independent contractors, customers and other third parties (and have timely paid over any amounts so withheld, deducted or collected to the appropriate Governmental Entity) and (ii) otherwise complied with all applicable Legal Requirements relating to the withholding, collection and remittance of Taxes (including information reporting requirements).
(iv)No claim has been made in writing by any taxing authority in a jurisdiction where Parent or any Parent Subsidiary has not filed a Tax Return of a particular type that Parent or any Parent Subsidiary is or may be subject to Tax by, or required to file Tax Returns in, such jurisdiction with respect to Taxes that are the subject to such Tax Return.
(v)Neither Parent nor any Parent Subsidiary will be required to include an item of income (or exclude an item of deduction) in any taxable period (or portion thereof) beginning after the Closing Date as a result of (i) a change in, or use of improper, method of accounting occurring prior to the Closing Date, (ii) a prepaid amount received or paid (or deferred revenue accrued) outside of the ordinary course of business prior to the Closing Date, or (iii) as a result of having entered into a “gain recognition agreement” within the meaning of Treasury Regulation Section 1.367(a)-8. Neither Parent nor any Parent Subsidiary has made an election pursuant to Section 965(h) of the Code.
(vi)Neither Parent nor any Parent Subsidiary is the subject of any currently ongoing Tax audit or other proceeding with respect to Taxes nor has any audit or other proceeding with respect to Taxes been proposed against any of them in writing, and any deficiencies asserted or assessments made as a result of any audit or other proceeding with respect to Taxes have been paid in full, are being contested in good faith, or adequate accruals or reserves for such deficiencies or assessments have been established in accordance with GAAP on the financial statements included in the Parent SEC Documents.
(vii)There are no Liens in respect of or on account of Taxes upon any of the property or assets of Parent or any Parent Subsidiary, except for Taxes not yet due and payable.
(viii)Neither Parent nor any Parent Subsidiary (i) is or has been a member of any affiliated, combined, consolidated, unitary or similar group for purposes of filing Tax Returns or paying Taxes, except for any such group of which Parent is the common parent or (ii) has any liability for Taxes of any Person (other than Parent or any Parent Subsidiary) under Treasury Regulations Section 1.1502-6 (or any similar state, local or non-U.S. Legal Requirement) or as a transferee or successor.
(ix)Neither Parent nor any Parent Subsidiary is a party to or bound by, or has any obligation under, any Tax indemnity, sharing, allocation, or reimbursement agreement or arrangement, other than (i) customary tax provisions in ordinary course commercial agreements, the principal purpose of which is not related to Taxes; and (ii) any agreement or arrangement solely between or among Parent and/or the Parent Subsidiaries.
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(x)Neither Parent nor any Parent Subsidiary is bound with respect to the current or any future taxable period by any closing agreement (within the meaning of Section 7121(a) of the Code or any similar or analogous state, local or non-U.S. Legal Requirement) or other ruling or written agreement with a taxing authority, in each case, with respect to Taxes.
(xi)Neither Parent nor any Parent Subsidiary (i) has filed any extension of time within which to file any Tax Returns that have not been filed, except in the ordinary course of business, (ii) has entered into any agreement or other arrangement waiving or extending the statute of limitations or the period of assessment or collection of any Taxes, (iii) has granted any power of attorney that is in force with respect to any matters relating to any Taxes, (iv) has applied for a ruling from a taxing authority relating to any Taxes that has not been granted or has proposed to enter into an agreement with a taxing authority that is pending, (v) has been issued any private letter rulings, technical advice memoranda or similar agreement or rulings by any taxing authority.
(xii)Neither Parent nor any Parent Subsidiary has participated in any “listed transaction” within the meaning of Treasury Regulations Section 1.6011-4(b)(2) (or any similar state, local or non-U.S. Legal Requirement).
(b)Neither Parent nor any Parent Subsidiary has constituted a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code or otherwise as part of a plan (or series of related transactions), within the meaning of Section 355(e) of the Code, that includes the Mergers, in the two years prior to the date of this Agreement.
(c)Neither Parent nor any Parent Subsidiary has knowledge of any facts, agreements, plans or other circumstances or has taken or agreed to take any action that would reasonably be expected to prevent or impede the Mergers, taken together, from qualifying for the Intended Tax Treatment.
3.13Brokers. No broker, finder or investment banker (other than LionTree Advisors LLC) is entitled to any brokerage, finder’s or other similar fee or commission in connection with the Mergers based upon arrangements made by or on behalf of Parent.
3.14Information Supplied. The information supplied or to be supplied by Parent for inclusion in the Form S-4 Registration Statement (including the Proxy Statement/Prospectus) will not, at the time the Form S-4 Registration Statement (and any amendment or supplement thereto) is declared effective, on the date that the Proxy Statement/Prospectus is first mailed to the stockholders of the Company, or on the date of the Company Stockholder Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that, no representation or warranty is made by Parent with respect to statements made therein based on information supplied by the Company for inclusion therein.
3.15Acquisition Subs. Parent is the sole stockholder or sole member, as applicable, of each of the Acquisition Subs. Since its date of incorporation or formation, as applicable, none of the Acquisition Subs has not carried on any business, incurred any liabilities or obligations or conducted any operation other than the execution of this Agreement, the performance of its obligations hereunder and matters ancillary thereto.
SECTION 4. |
COVENANTS |
4.1Interim Operations.
(a)The Company agrees that, during the period from the date of this Agreement through the earlier of the Closing or the termination of this Agreement, except (1) to the extent Parent shall otherwise give its prior consent in writing, (2) as set forth in Part 4.1(a) of the Company Disclosure Schedule, (3) as may be required by applicable Legal Requirements or (4) as expressly permitted or required by this Agreement, the Company shall, and shall cause the Company Subsidiaries to, use reasonable best efforts to conduct its business in the ordinary course and use reasonable best efforts to maintain and preserve intact its business organization, keep available the services of current officers, key employees and key consultants and maintain satisfactory relationships with customers, suppliers and distributors, Governmental Entities and other Persons with whom the Company or any Company Subsidiary has material business relations. Without limiting the foregoing, during the period from the date of this Agreement through the earlier of the Closing or the termination of this Agreement, except (1) to the extent Parent shall otherwise give its prior consent in writing, (2) as set
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forth in Part 4.1(a) of the Company Disclosure Schedule, (3) as may be required by applicable Legal Requirements or (4) as expressly permitted or required by this Agreement, the Company shall not (and shall not permit any Company Subsidiary to):
(i)amend the Organizational Documents of the Company;
(ii)split, combine, subdivide, change, exchange, amend the terms of or reclassify any shares of the Company’s capital stock or other equity interests of the Company or any Company Subsidiary;
(iii)declare, set aside, make or pay any dividend or other distribution (whether payable in cash, stock or property) with respect to any shares of the Company’s capital stock or the capital stock or other equity interest of any Company Subsidiary, other than dividends or distributions only to the extent paid by any wholly owned Company Subsidiary to the Company or another wholly owned Subsidiary of the Company;
(iv)acquire (by merger, consolidation, operation of law, acquisition of stock, other equity interests or assets, formation of a joint venture or otherwise) (A) any other Person, (B) any equity interest in any other Person, (C) any business owned by a third party, or (D) assets in a single transaction or series of related transactions for an aggregate purchase price in excess of $250,000, except, (1) acquisitions by the Company from any wholly owned Subsidiary or among any wholly owned Subsidiaries of the Company, (2) the purchase of equipment, supplies and inventory in the ordinary course of business or (3) inbound licenses of Intellectual Property in the ordinary course of business; provided that the issuance of any Insurance Contract by any Company Insurance Subsidiary will not be considered the acquisition of a business for purposes of this Section 4.1;
(v)issue, sell, grant or otherwise permit to become outstanding any additional shares of, or securities convertible or exchangeable for, or options, warrants or rights to acquire, any shares of its capital stock or other equity interests, other than (A) shares of Company Common Stock issuable upon exercise of Company Options or the vesting or settlement of Company RSUs, in each case outstanding as of the date of this Agreement and in accordance with the terms of the applicable award; (B) pursuant to the Company ESPP in the ordinary course of business and in accordance with the terms thereof and of this Agreement (including Section 4.8 hereof); (C) in connection with the exercise of Company Warrants; and (D) the issuance of the Additional Shares pursuant to Section 2.17 of the INSU Merger Agreement;
(vi)sell, assign, transfer, lease or license to any third party, or encumber, or otherwise dispose of (by merger, consolidation, operation of law, division or otherwise), any Company IP or material assets of the Company, other than (A) sales of inventory, goods or services in the ordinary course of business or of obsolete equipment or assets in the ordinary course of business; (B) pursuant to written Contracts or commitments existing as of the date of this Agreement and set forth in Part 4.1(a)(vi) of the Company Disclosure Schedule; (C) as security for any borrowings permitted by Section 4.1(a)(viii); or (D) licenses granted to customers or other third parties in the ordinary course of business, including any licenses granted in the operation of the enterprise business solutions line of the Company (the “EBS Business”);
(vii)directly or indirectly repurchase, redeem or otherwise acquire any shares of the Company’s or any Company Subsidiary’s capital stock or equity interests, or any other securities or obligations convertible (currently or after the passage of time or the occurrence of certain events) into or exchangeable for any shares of the Company’s or any Company Subsidiary’s capital stock or equity interests, except (A) shares of Company Common Stock repurchased from employees or consultants or former employees or consultants of the Company pursuant to the exercise of repurchase rights binding on the Company and existing prior to the date of this Agreement; (B) shares of Company Common Stock accepted as payment for the exercise price of options to purchase Company Common Stock pursuant to the Company Equity Plans or for withholding Taxes incurred in connection with the exercise, vesting or settlement of Company Options and Company RSUs, as applicable, in accordance with the terms of the applicable award and (C) in connection with the exercise of Company Warrants;
(viii)(A) incur, redeem, repurchase, prepay, defease, or cancel any indebtedness for borrowed money, guarantee any such indebtedness, issue or sell any debt securities or rights to acquire any debt securities (directly, contingently or otherwise) or make any loans or advances or capital contributions to any other Person, other than in the ordinary course of business or (B) incur any Lien on any of its material property or assets, except for Company Permitted Encumbrances;
(ix)(A) adopt, terminate or amend in any material respect any Company Plan, (B) increase, or accelerate the vesting or payment of, the compensation or benefits of any director, individual independent contractor or current or former employee of
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the Company or any Company Subsidiary with an annual compensation of $200,000 or above, other than as contemplated by Part 4.1(a)(ix) of the Company Disclosure Schedule, (C) grant any rights to severance, retention, change in control, transaction or termination pay to any current or former director, independent contractor or current or former employee of the Company or any Company Subsidiary with an annual compensation of $200,000 or above, (D) hire or promote any employee with an annual compensation of $200,000 or above, or (E) terminate the employment of any employee of the Company or any Company Subsidiary with an annual compensation of $200,000 or above (other than for cause); except, in each case, for (1) amendments to Company Plans determined by the Company in good faith to be required to comply with applicable Legal Requirements, (2) as otherwise expressly contemplated by this Agreement, (3) with respect to the annual renewal process for any Company Plan that is not reasonably expected to result in a material cost increase to the Company or any Company Subsidiary, (4) in connection with any employee hire (i) to replace departing employees with an annual compensation of less than $200,000, (ii) to fill open positions as set forth on Part 4.1(a)(ix)(4)(ii) of the Company Disclosure Schedule, (iii) who has already accepted an offer of employment and is set forth on Part 4.1(a)(ix)(4)(iii) of the Company Disclosure Schedule or (iv) otherwise in the ordinary course of business; or (5) for increases in compensation or benefits made in the ordinary course of business for any employee with an annual compensation of less than $200,000;
(x)(i)(A) amend or terminate (except for terminations pursuant to the expiration of the existing term of any Material Contract and amendments in the ordinary course of business and except with respect to Reinsurance Agreements) any Material Contract or (B) waive, release or assign any material rights under any Material Contracts (other than any Reinsurance Agreement), (ii) enter into or renew any Contract or agreement that, if in effect on the date of this Agreement, would constitute a Material Contract (except for renewals of any existing Material Contract in the ordinary course of business and Contracts entered into or renewed in connection with the EBS Business and except for Reinsurance Agreements), or (iii) enter into any Reinsurance Agreement that does not meet the criteria set forth on Part 4.1(a)(x)(iii) of the Company Disclosure Schedule;
(xi)change any of its methods of financial accounting or accounting practices in any material respect other than as required by changes in GAAP or SAP or as required by applicable Legal Requirements;
(xii)make, change or revoke any material Tax election, change or adopt any Tax accounting period or material method of Tax accounting, amend any material Company Return if such amendment would reasonably be expected to result in a material Tax liability, file any material Company Return prepared in a manner materially inconsistent with past practice, settle or compromise any material liability for Taxes or any Tax audit, claim, or other proceeding relating to a material amount of Taxes, enter into any “closing agreement” within the meaning of Section 7121 of the Code (or any similar state, local or non-U.S. Legal Requirement) if such agreement would reasonably be expected to result in a material Tax liability or have a material impact on Taxes, request any Tax ruling from any Governmental Entity, surrender any right to claim a material refund of Taxes, or, other than in the ordinary course of business, agree to an extension or waiver of the statute of limitations with respect to a material amount of Taxes;
(xiii)sell, transfer, assign, license, or otherwise dispose of (by merger, consolidation, operation of law, division or otherwise), or mortgage, encumber or exchange any material Intellectual Property owned, or purported to be owned, by the Company or any Subsidiary of the Company, including, for the avoidance of doubt, any sale, transfer, assignment, license, or other disposition of, or mortgage, encumbrance or exchange of any such material Intellectual Property to or with any Affiliate of the Company (other than non-exclusive licenses granted in the ordinary course of business) or modify, amend, cancel, terminate, waive, release or assign any Company IP License or any rights, claims, obligations or benefits thereunder or enter into any Contract that would have been a Company IP License had it been entered into prior to the First Effective Time, in each case, with respect to any nonmaterial Company IP License, except, in each case, in the ordinary course of business and for licenses granted in the connection with the EBS Business;
(xiv)(i) make any capital expenditure that is not contemplated by the capital expenditure budget set forth in Part 4.1(a)(xiv)(i) of the Company Disclosure Schedule or (ii) incur any cash expenditures or obligations or liabilities except cash expenditures, obligations or liabilities incurred (A) in the ordinary course of business or (B) in connection with the transactions contemplated by this Agreement;
(xv)enter into any agreement, understanding or arrangement with respect to the voting of any capital stock or other equity interests of the Company (including any voting trust), other than in connection with the granting of revocable proxies in connection with any meeting of the Company’s stockholders;
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(xvi)adopt a plan of (A) complete or partial liquidation of the Company or any Subsidiary of the Company or (B) dissolution, merger, consolidation, division, restructuring, recapitalization or other reorganization;
(xvii)commence, settle or compromise any litigation, claim, suit, action or proceeding, except for (x) ordinary course claims and related Legal Proceedings under or with respect to any Insurance Contract and (y) other settlements or compromises that (A) involve solely monetary remedies with a value not in excess of $75,000, with respect to any individual litigation, claim, suit, action or matter, or $250,000 in the aggregate to be paid by the Company and its Subsidiaries, (B) do not impose any restriction on the Company’s business or the business of the Company Subsidiaries, (C) do not relate to any litigation, claim, suit, action or proceeding by the Company’s stockholders in connection with this Agreement or the Mergers and (D) do not include an admission of liability or fault on the part of the Company or any Company Subsidiary;
(xviii)materially reduce the amount of insurance coverage under the material commercial insurance policies of the Company and the Company Subsidiaries or fail to use reasonable best efforts to renew or maintain any such material existing insurance policies;
(xix)(A) amend any material Company Permits in a manner that adversely impacts the Company’s ability to conduct its business in any material respect or (B) terminate or allow to lapse any material Company Permits;
(xx)(A) fail to pay any issuance, renewal, maintenance and other payments that become due with respect to any material Company Registered IP or otherwise abandon, cancel, or permit to lapse any material Company Registered IP, other than in its reasonable business judgment or in the ordinary course of business, or (B) authorize the disclosure to any third party of any material Trade Secret included in the Company IP in a way that results in loss of trade secret protection, other than in the ordinary course of business;
(xxi)except in the ordinary course of business and for Contracts entered into in connection with the EBS Business, enter into any individual Contract under which the Company or any Company Subsidiary (A) grants or agrees to grant any right to material Company IP, other than non-exclusive licenses, or (B) agrees to pay any royalties in excess of $150,000 with respect to any Intellectual Property;
(xxii)except as expressly required by applicable Legal Requirements or the Company’s Organizational Documents, convene (A) any special meeting of the Company’s stockholders other than the Company Stockholder Meeting or (B) any other meeting of the Company’s stockholders to consider a proposal that would reasonably be expected to impair, prevent or delay the consummation of the transactions contemplated hereby;
(xxiii)enter into any new line of business;
(xxiv)(i) alter or amend in any existing financial, underwriting, claims, claims handling, risk retention, reserving, investment or actuarial practice, guideline or policy or any material assumption underlying an actuarial practice or policy, except as may be required by GAAP, SAP, any Governmental Entity or applicable law or (ii) enter into any Contract or commitment with any insurance regulatory authority, in the case of each of clauses (i) and (ii) other than in the ordinary course of business; or
(xxv)authorize, approve or enter into any agreement or make any commitment to take any of the actions described in clauses “(i)” through “(xxiv)” of this sentence.
(b)Parent agrees that, during the period from the date of this Agreement through the earlier of the Closing or the termination of this Agreement, except (1) to the extent the Company shall otherwise give its prior consent in writing, (2) as set forth in Part 4.1(b) the Parent Disclosure Schedule, (3) as may be required by applicable Legal Requirements or (4) as expressly permitted or required by this Agreement, Parent shall, and shall cause the Parent Subsidiaries to, conduct its business in the ordinary course in all material respects and use reasonable best efforts to maintain and preserve intact its business organization. Without limiting the foregoing, during the period from the date of this Agreement through the earlier of the Closing or the termination of this Agreement, except (1) to the extent the Company shall otherwise give its prior consent in writing, (2) as set forth in Part 4.1(b) of the Parent Disclosure Schedule, (3) as may be required by applicable Legal Requirements or (4) as expressly permitted or required by this Agreement, Parent shall not (and shall not permit any Parent Subsidiary to), in each case by merger, consolidation, division, operation of law, or otherwise:
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(i)amend Parent’s or the Acquisition Subs’ Organizational Documents or amend the Organizational Documents of any Parent Subsidiary in any manner that would be adverse in any material respect to the holders of Company Common Stock (after giving effect to the Mergers) relative to other holders of Parent Common Stock;
(ii)split, combine, subdivide, amend the terms of or reclassify any shares of the Parent’s capital stock;
(iii)directly or indirectly repurchase, redeem or otherwise acquire any shares of Parent Common Stock, except (A) shares of Parent Common Stock repurchased from employees or consultants or former employees or consultants of Parent pursuant to the exercise of repurchase rights binding on Parent and existing prior to the date of this Agreement; or (B) shares of Parent Common Stock accepted as payment for the exercise price of Parent Options or for withholding Taxes incurred in connection with the exercise, vesting or settlement of equity awards, as applicable, in accordance with the terms of the applicable award;
(iv)adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization, other than transactions between Parent and any direct or indirect wholly owned Parent Subsidiary or between direct or indirect wholly owned Parent Subsidiaries;
(v)declare, set aside, make or pay any dividend or other distribution (whether payable in cash, stock or property) with respect to any shares of Parent’s capital stock or the capital stock or other equity interest of any Parent Subsidiary, other than dividends or distributions only to the extent paid by any wholly owned Parent Subsidiary to Parent or another wholly owned Subsidiary of Parent; or
(vi)authorize, approve or enter into any agreement or make any commitment to take any of the actions described in clauses “(i)” through “(v)” of this sentence.
(c)Between the date hereof and the Closing Date, the Company agrees to work in good faith to implement the actions, principles and goals set forth on Part 4.1(c) of the Company Disclosure Schedule. The parties acknowledge and agree that, (i) notwithstanding anything to the contrary in this Agreement (including the first sentence of this Section 4.1(c)), the Company shall not under any circumstance be required to take any action that would, or would reasonably be expected to, violate any applicable Legal Requirement, including any applicable Antitrust Law and (ii) any breach by the Company of this Section 4.1(c), or any failure by the Company to take any action set forth on Part 4.1(c) of the Company Disclosure Schedule or to implement all or any portion of the principles or to achieve all or any of the goals set forth on Part 4.1(c) of the Company Disclosure Schedule, will not be taken into account for any purpose under this Agreement, including for purposes of determining whether any condition to the obligation of any party under this Agreement has been satisfied under Section 5, whether any party may terminate this Agreement, or whether the Termination Fee may be payable, under Section 6, whether the Company may exercise any of its rights under this Agreement or whether any party may be liable to another party hereunder under any circumstance.
(d)Notwithstanding anything to the contrary in this Agreement (including Section 4.1(a), Section 4.1(b) and Section 4.1(c)), the Company and Parent and any of their respective Subsidiaries may, in response to COVID-19 and in consultation with the other party, take reasonable measures (including as a response to any Pandemic Measure) deemed advisable or necessary to prevent imminent financial loss or damage to the businesses of such party and their respective Subsidiaries, and any such action shall not be deemed itself a breach of this Agreement, including Section 4.1(a) and Section 4.1(b). Nothing contained in this Agreement is intended to give either the Company or Parent, directly or indirectly, the right to control or direct the other party’s, or the other party’s respective Subsidiaries’, businesses or operations prior to the Closing.
4.2Company No Solicitation.
(a)The Company will not and the Company will cause each of its Subsidiaries not to and will not authorize or permit and shall not otherwise direct its and their respective Representatives to, except as expressly permitted by this Section 4.2 or Section 4.4, directly or indirectly:
(i)solicit, initiate or knowingly encourage, induce, assist or knowingly facilitate any inquiries regarding, or the submission or announcement by any Person (other than Parent or its Subsidiaries) of, any proposal or offer that constitutes, or would reasonably be expected to lead to, any Company Acquisition Proposal;
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(ii)furnish any non-public information regarding the Company or any Subsidiary of the Company (other than to Parent and its Subsidiaries), or afford access to the Company’s or its Subsidiaries’ Representatives, books, records or property, in each case, in connection with, or for the purpose of soliciting, initiating, knowingly encouraging or knowingly facilitating, or in response to, any inquiry, proposal or offer that constitutes, or would reasonably be expected to lead to a Company Acquisition Proposal;
(iii)engage in, enter into, continue or otherwise participate in any discussions or negotiations with any Person (other than Parent or its Representatives) with respect to any Company Acquisition Proposal or any inquiry, proposal or offer that would reasonably be expected to lead to any Company Acquisition Proposal;
(iv)approve, adopt, recommend, agree to or enter into, or propose to approve, adopt, recommend, agree to or enter into, any letter of intent, memorandum of understanding or similar document, agreement, commitment, or agreement in principle with respect to any Company Acquisition Proposal; or
(v)resolve or agree to do any of the foregoing;
provided, however, that, notwithstanding anything to the contrary contained in this Agreement, prior to obtaining the Required Company Stockholder Vote, the Company and its Representatives may (I) contact the Person or any of its Representatives who has made such Company Acquisition Proposal solely to clarify the terms of such Company Acquisition Proposal so that the Company Board may reasonably inform itself about such Company Acquisition Proposal and (II) engage or otherwise participate in discussions or negotiations with, and provide information to, any Person (or its Representatives) that has made a bona fide written Company Acquisition Proposal after the date hereof that did not result from any breach of this Section 4.2(a) or Section 4.2(c) by the Company, any of its Subsidiaries or any of its or their respective Representatives if (A) prior to taking any such action, the Company Board determines in good faith, after consultation with the Company’s outside legal counsel and its financial advisor, that such Company Acquisition Proposal either constitutes a Company Superior Proposal or would reasonably be expected to lead to a Company Superior Proposal and that failure to engage in such discussions or negotiations, or provide such information, would reasonably be expected to be inconsistent with the Company Board’s fiduciary duties under applicable Legal Requirements; and (B) prior to providing any information regarding the Company or any Subsidiary of the Company to such third party in response to such Company Acquisition Proposal, the Company receives from such third party (or there is then in effect with such party) an executed confidentiality agreement that contains nondisclosure provisions that are at least as restrictive of such third party as those contained in the Non-Disclosure Agreement are to Parent and that does not prohibit compliance by the Company with this Section 4.2 (it being understood that such confidentiality agreement need not contain any standstill provisions). Prior to or substantially concurrently with providing any non-public information to such third party, the Company shall make such non-public information available to Parent (to the extent such non-public information has not been previously made available by the Company to Parent). The Company shall promptly (and in any event within twenty-four (24) hours) inform Parent if the Company furnishes non-public information and/or enters into discussions or negotiations as provided for in this Section 4.2(a) and will keep Parent reasonably informed in writing, on a current basis (and, in any event, within twenty-four (24) hours), of the status and all material terms of any Company Acquisition Proposal (including any material changes to the terms thereof) and the status of any discussions and negotiations with respect thereto.
(b)If the Company receives a Company Acquisition Proposal (or notice from any Person that it intends to make a Company Acquisition Proposal) or any inquiry or request for information with respect to a Company Acquisition Proposal or that is reasonably likely to lead to a Company Acquisition Proposal, then the Company shall promptly (and in no event later than twenty-four (24) hours after its receipt of such Company Acquisition Proposal or request) notify Parent in writing of such Company Acquisition Proposal or request (which notification shall include the identity of the Person making or submitting such request or Company Acquisition Proposal and an unredacted copy of any such written request or proposal (or, if not in writing, the material terms and conditions thereof)), together with copies of any proposed transaction agreements, and the Company shall thereafter keep Parent reasonably informed in writing, on a current basis (and, in any event, within twenty-four (24) hours), of the status of such Company Acquisition Proposal or request, including informing Parent of any material change to the terms of such Company Acquisition Proposal, and the status of any negotiations, including any change in its intentions as previously notified.
(c)Promptly following the execution and delivery of this Agreement, the Company shall, and shall cause each of its Subsidiaries and its and their respective Representatives to, immediately cease and cause to be terminated any existing solicitation of, or discussions or negotiations with, any Person (other than Parent and its Representatives) relating to any Company Acquisition Proposal made prior to the date hereof and any access any such Persons may have to any physical or electronic data room relating to any potential Company Acquisition Proposal. The Company shall not, and shall cause its Affiliates not to, release any third party from, or waive, amend or modify any provision of, or grant permission under, or fail to enforce, any standstill provision in any
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agreement to which the Company or any of its Affiliates is a party (unless, and only to the extent, the Company Board determines in good faith, after consultation with the Company’s outside legal counsel and its financial advisor, that the failure to do so would reasonably be expected to be inconsistent with the Company Board’s fiduciary duties under applicable Legal Requirements, in which case it may enable such Persons to submit and pursue a Company Acquisition Proposal).
(d)Any violation of the restrictions contained in this Section 4.2 by any of the Company’s Subsidiaries or the Representatives of the Company at the direction of the Company shall be deemed to be a breach of this Section 4.2 by the Company.
4.3Registration Statement; Proxy Statement/Prospectus.
(a)As promptly as reasonably practicable after the date of this Agreement, Parent and the Company shall jointly prepare and cause to be filed with the SEC the Proxy Statement/Prospectus, in preliminary form, and Parent shall prepare and cause to be filed with the SEC the Form S-4 Registration Statement, in which the Proxy Statement/Prospectus, in preliminary form, will be included as a prospectus. Each of the parties shall (i) use reasonable best efforts to cause the Form S-4 Registration Statement and the Proxy Statement/Prospectus to comply in all material respects with all applicable rules, regulations and requirements of the Exchange Act or Securities Act; (ii) promptly notify the other upon receipt of, and cooperate with each other and use reasonable best efforts to respond to, any comments or requests of the SEC or its staff, including for any amendment or supplement to the Form S-4 Registration Statement or the Proxy Statement/Prospectus; (iii) promptly provide the other party with copies of all written correspondence and a summary of all oral communications between it or its Representatives, on the one hand, and the SEC or its staff, on the other hand, relating to the Form S-4 Registration Statement or the Proxy Statement/Prospectus; (iv) use reasonable best efforts to have the Form S-4 Registration Statement declared effective under the Securities Act as promptly as practicable after it is filed with the SEC; (v) use reasonable best efforts to keep the Form S-4 Registration Statement effective through the Closing in order to permit the consummation of the Mergers; and (vi) cooperate with the other party and provide the other party with a reasonable opportunity to review and comment in advance on the Form S-4 Registration Statement and the Proxy Statement/Prospectus (including any amendments or supplements to the Form S-4 Registration Statement or the Proxy Statement/Prospectus) and any substantive correspondence (including all responses to SEC comments), prior to filing with the SEC or mailing, and shall provide to the other a copy of all such filings or communications made with the SEC, except to the extent such disclosure or communication relates to a Company Acquisition Proposal. The Company will, prior to filing the preliminary Proxy Statement/Prospectus, use its reasonable best efforts to obtain all necessary consents of the Company Financial Advisor to permit the Company to include in the Proxy Statement/Prospectus the opinion of the Company Financial Advisor that, as of the date of such opinion and based on and subject to the matters, assumptions, qualifications and limitations set forth in such opinion, the Exchange Ratio provided for in this Agreement is fair, from a financial point of view, to the holders of Company Common Stock (other than, as applicable, Parent, the Acquisition Subs and their respective Affiliates).
(b)Parent shall advise the Company, promptly after receipt of notice thereof, of the time when the Form S-4 Registration Statement becomes effective or any supplement or amendment has been filed, the issuance of any stop order relating thereto, or the suspension of the shares of Parent Common Stock for offering or sale in any jurisdiction, or any request by the SEC or its staff for any amendment of or supplement to the Form S-4 Registration Statement or the Proxy Statement/Prospectus or comments thereon and responses thereto or requests by the SEC for additional information, and Parent shall use its reasonable best efforts to as promptly as practicable have any stop order relating to the Form S-4 Registration Statement or any such suspension of the shares of Parent Common Stock lifted, reversed or otherwise terminated. The Company shall cause the Proxy Statement/Prospectus to be mailed to the Company’s stockholders as promptly as practicable after the Form S-4 Registration Statement is declared effective under the Securities Act. Each of the parties shall use reasonable best efforts promptly to furnish the other parties all information concerning such party, its Subsidiaries, directors, officers and (to the extent reasonably available to such party) stockholders that may be required by applicable Legal Requirements or reasonably requested by the other party or its Representatives in connection with any action contemplated by this Section 4.3. If, at any time prior to obtaining the Required Company Stockholder Vote, any party becomes aware of any information that should be disclosed in an amendment or supplement to the Form S-4 Registration Statement or the Proxy Statement/Prospectus in order to make any statement therein, in the light of the circumstances under which it is made, not false or misleading with respect to a material fact, or in order to avoid the omission of a material fact necessary to make the statements in the Form S-4 Registration Statement or the Proxy Statement/Prospectus not misleading, then such party (A) shall promptly inform the other party thereof; (B) shall provide the other party (and its counsel) with a reasonable opportunity to review and comment on any amendment or supplement to the Form S-4 Registration Statement or the Proxy Statement/Prospectus prior to it being filed with the SEC; (C) shall provide the other party with a copy of such amendment or supplement promptly after it is filed with the SEC; and (D) if mailing is required by law or otherwise appropriate, shall cooperate in mailing such amendment or supplement to the stockholders of the Company.
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4.4Meeting of the Company’s Stockholders; Company Change in Recommendation.
(a)The Company (i) shall take all action necessary under all applicable Legal Requirements and the Company’s Organizational Documents to, as promptly as reasonably practicable after the Form S-4 Registration Statement is declared effective (and, subject to the below, in any event within sixty (60) days thereafter), duly call, give notice of and hold a meeting of the holders of shares of Company Common Stock to vote on a proposal to adopt this Agreement, as well as a customary proposal regarding adjournment of such meeting (the “Company Stockholder Meeting”); and (ii) shall submit such proposals to, and, except in the case where the Company Board has made a Company Change in Recommendation in compliance with Section 4.4(c), (x) use its reasonable best efforts to solicit proxies in favor of such proposals from, such holders at the Company Stockholder Meeting, and (y) the Company shall not submit any other proposals to its stockholders in connection with the Company Stockholder Meeting without the prior written consent of Parent (not to be unreasonably withheld, conditioned or delayed). The Company, in consultation with Parent, shall set a record date for determining the Persons entitled to notice of, and to vote at, the Company Stockholder Meeting and shall not change such record date without the prior written consent of Parent. The Company shall use reasonable best efforts to ensure that all proxies solicited in connection with the Company Stockholder Meeting are solicited in compliance with all applicable Legal Requirements. Notwithstanding anything to the contrary contained in this Agreement, (A) the Company shall not postpone or adjourn the Company Stockholder Meeting without the prior written consent of Parent (not to be unreasonably withheld, conditioned or delayed), other than (1) to the extent reasonably necessary to ensure that any supplement or amendment to the Proxy Statement/Prospectus that the Company Board has determined in good faith after consultation with Parent and outside counsel is required by applicable Legal Requirements is disclosed to the Company’s stockholders and for such supplement or amendment to be promptly disseminated to the Company’s stockholders within a reasonable amount of time (as determined by the Company Board in good faith after consultation with outside counsel) prior to the Company Stockholder Meeting; (2) if required by applicable Legal Requirement or a request from the SEC or its staff; or (3) if as of the time for which the Company Stockholder Meeting is scheduled there are insufficient shares of Company Common Stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business to be conducted at the Company Stockholder Meeting; and (B) the Company may, and if Parent so requests (which Parent may do up to three (3) times, for up to five (5) Business Days each) shall, postpone or adjourn the Company Stockholder Meeting in order to solicit additional proxies in favor of the adoption of this Agreement if, on the date for which the Company Stockholder Meeting is scheduled, there would be insufficient votes to obtain the Required Company Stockholder Vote, whether or not a quorum is present, in which case, except in the case where the Company Board has made a Company Change in Recommendation in compliance with Section 4.4(c), the Company shall use its reasonable best efforts during any such postponement or adjournment to solicit and obtain such proxies in favor of the adoption of this Agreement as soon as reasonably practicable; provided that without the prior written consent of Parent (not to be unreasonably withheld, conditioned or delayed), (x) no single such adjournment or postponement pursuant to clauses (A) or (B) shall be for more than five (5) Business Days, except as may be required by applicable Legal Requirements, (y) all such adjournments and postponements together shall not cause the date of the Company Stockholder Meeting to be more than twenty (20) Business Days after the date for which the Company Stockholder Meeting was originally scheduled or, in the case of the foregoing clauses (A)(3) and (B), less than five (5) Business Days prior to the End Date and (z) in no event shall the Company change the record date for determining the stockholders entitled to notice of and to vote at the Company Stockholder Meeting. The Company shall use reasonable best efforts, on a daily basis during the ten (10) Business Days prior to the date of the Company Stockholder Meeting, to keep Parent reasonably informed as to the aggregate number of shares of Company Common Stock entitled to vote at the Company Stockholder Meeting for which proxies have been received by the Company with respect to the Required Company Stockholder Vote and the number of such proxies authorizing the holder thereof to vote in favor of the Required Company Stockholder Vote.
(b)Subject to Section 4.4(c) and Section 4.4(d), the Proxy Statement/Prospectus shall include the Company Board Recommendation and neither the Company Board nor any committee thereof shall, except as otherwise expressly permitted by this Agreement, including by Section 4.4(c) and Section 4.4(d) (i) withhold, withdraw, modify, amend or qualify (or publicly propose to withdraw, modify, amend or qualify), in a manner adverse to Parent or the Acquisition Subs, the Company Board Recommendation, or fail to include the Company Board Recommendation in the Proxy Statement/Prospectus; (ii) approve, recommend or declare advisable (or publicly propose to do so) any Company Acquisition Proposal; (iii) fail to publicly announce, within ten (10) Business Days after a tender offer or exchange offer relating to the equity securities of the Company shall have been commenced by any third party other than Parent and its Affiliates (and in no event later than one (1) Business Day prior to the date of the Company Stockholder Meeting, as it may be postponed or adjourned pursuant to Section 4.4(a)), a statement disclosing that the Company Board recommends rejection of such tender or exchange offer (for the avoidance of doubt, the taking of no position or a neutral position by the Company Board in respect of the acceptance of any such tender offer or exchange offer as of the end of such period shall constitute a failure to publicly announce that the Company Board recommends rejection of such tender or exchange offer); or (iv) if requested in writing by Parent, fail to issue, within five (5) Business Days after a Company Acquisition Proposal is publicly announced (and in no event later than one (1) Business Day prior to the date of the Company Stockholder Meeting, as it may be postponed or adjourned pursuant to Section 4.4(a)), a press release reaffirming the Company Board Recommendation; provided that Parent may make any such request
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once with respect to each particular Company Acquisition Proposal or once with respect to each amendment (to the financial or any other material terms) made thereto (any action described in clauses (i) through (iv) being referred to as a “Company Change in Recommendation”); (v) cause or permit the Company to enter into any Contract, letter of intent, memorandum of understanding, agreement in principle or other arrangement or understanding (other than a confidentiality agreement entered into in compliance with Section 4.2(a)) contemplating or relating to a Company Acquisition Transaction; (vi) take any action to make the provisions of any anti-takeover or similar statute or regulation inapplicable to any Company Acquisition Proposal or counterparty thereto; or (vii) publicly propose to do any of the foregoing.
(c)Notwithstanding anything to the contrary contained in this Agreement, at any time prior to obtaining the Required Company Stockholder Vote, the Company Board may make a Company Change in Recommendation related to a Company Acquisition Proposal if (x) the Company receives from a third party a bona fide written Company Acquisition Proposal after the date of this Agreement that has not been withdrawn and did not result from a breach of Section 4.2 and (y) prior to making such Company Change in Recommendation:
(i)the Company Board determines in good faith, after consultation with the Company’s outside legal counsel and its financial advisor, that such Company Acquisition Proposal constitutes a Company Superior Proposal and that failure to take such action would reasonably be expected to be inconsistent with the Company Board’s fiduciary duties under applicable Legal Requirements;
(ii)the Company delivers to Parent a written notice (the “Company Superior Proposal Notice”) no less than four (4) Business Days in advance stating that the Company Board intends to make a Company Change in Recommendation, which notice shall include the identity of the Person making such Company Acquisition Proposal and a copy of such proposal and a draft of the definitive agreement to be entered into in connection therewith (or, if not in writing, the material terms and conditions thereof); and
(iii)(A) during the four (4) Business Day period commencing on the date of Parent’s receipt of such Company Superior Proposal Notice, if requested by Parent, the Company engages in good faith negotiations with Parent regarding a possible amendment of this Agreement so that the Company Acquisition Proposal that is the subject of the Company Superior Proposal Notice ceases to be a Company Superior Proposal; and (B) after the expiration of the negotiation period described in clause “(A)” above, the Company Board determines in good faith, after consultation with its outside legal counsel and its financial advisor, and after taking into account any amendments to this Agreement that Parent and the Acquisition Subs have committed in writing to make as a result of the negotiations contemplated by clause “(A)” above, that such Company Acquisition Proposal continues to constitute a Company Superior Proposal; provided that if there is any change and/or amendment, whether communicated orally or in writing, to the financial or other material terms of such Company Acquisition Proposal, the Company shall, in each case, be required to deliver to Parent an additional notice consistent with that described in clause “(ii)” above and a new negotiation period under clause “(A)” above shall commence, during which time the Company shall be required to comply with the requirements of Section 4.4(c)(iii) anew with respect to such additional notice.
(d)Notwithstanding anything to the contrary contained in this Agreement, at any time prior to obtaining the Required Company Stockholder Vote, the Company Board may make a Company Change in Recommendation that is not related to a Company Acquisition Proposal if and only in response to any state of fact, event, change, effect, circumstance, occurrence or development, or combination thereof, arising following the date of this Agreement and that was neither known to nor or reasonably foreseeable to the Company Board prior to the execution and delivery of this Agreement and such fact, event, change, effect, circumstance, occurrence or development, or combination thereof, is not specifically related to (a) the receipt, existence of or terms of a Company Acquisition Proposal or a Company Superior Proposal or any inquiry or communications relating thereto, any matter relating thereto or consequences thereof or (b) in each case in and of itself, any changes in the market price or trading volume of Company Common Stock or the fact that the Company meets, fails to meet or exceeds any internal or published projections, forecasts or estimates of its revenue, earnings or other financial performance or results of operations for any period (it being understood, however, that any underlying cause of any of the foregoing may be taken into account unless excluded pursuant to clauses (a) or (b)) (any such state of fact, event, change, effect, circumstance, occurrence, development, condition, circumstance, or combination thereof, being referred to as a “Company Intervening Event”); and, prior to making such Company Change in Recommendation, (1) the Company Board determines in good faith, after consultation with its outside legal counsel and its financial advisor, that, in light of such Company Intervening Event, a failure to effect a Company Change in Recommendation would reasonably be expected to be inconsistent with the Company Board’s fiduciary duties under applicable Legal Requirements; (2) no less than four (4) Business Days prior to the making of such Company Change in Recommendation, Parent receives a written notice from the Company confirming that the
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Company Board intends to effect such Company Change in Recommendation, specifying the reasons therefor in reasonable detail; (3) during such four (4) Business Day period, if requested by Parent, the Company engages in good faith negotiations with Parent to amend this Agreement in such a manner that obviates the need for the Company Board to effect a Company Change in Recommendation; and (4) following the end of such four (4) Business Day period, the Company Board determines in good faith, after consultation with its outside legal counsel and financial advisor and after taking into account any amendments to this Agreement that Parent and the Acquisition Subs have committed in writing to make as a result of the negotiations contemplated by clause (3) above, that, in light of such Company Intervening Event, a failure to effect a Company Change in Recommendation would reasonably be expected to be inconsistent with the Company Board’s fiduciary duties under applicable Legal Requirements, even if such changes committed to in writing were to be given effect.
(e)Notwithstanding any Company Change in Recommendation, unless this Agreement has been earlier terminated in accordance with Section 6.1, this Agreement shall be submitted to the holders of shares of Company Common Stock at the Company Stockholder Meeting for the purpose of voting on the adoption of this Agreement and nothing contained in this Agreement shall be deemed to relieve the Company of such obligation.
(f)Nothing contained in this Agreement shall prohibit the Company, the Company Board or their Representatives from (i) taking and disclosing to the stockholders of the Company a position contemplated by Rule 14e-2(a) or Rule 14d-9 promulgated under the Exchange Act or issuing a “stop, look and listen” statement to the stockholders of the Company pursuant to Rule 14d-9(f) promulgated under the Exchange Act pending disclosure of its position thereunder or making any disclosure to its stockholders if the Company Board determines in good faith, after consultation with its outside legal counsel and its financial advisor, that the failure to make such disclosure would reasonably be expected to be inconsistent with the Company Board’s fiduciary duties under applicable Legal Requirements or (ii) directing any Person (or the Representative of that Person) who makes a Company Acquisition Proposal to the provisions of this Section 4.4; provided, however, that in the case of either clause (i) or clause (ii), no such communication, statement or disclosure that would constitute a Company Change in Recommendation shall be permitted, made or taken except in accordance with Section 4.4(c).
(g)Any violation of the restrictions contained in this Section 4.4 by any of the Company’s Subsidiaries or the Representatives of the Company at the direction of the Company shall be deemed to be a breach of this Section 4.4 by the Company.
4.5Filings; Other Action.
(a)Subject to the terms and conditions of this Agreement, each of the parties hereto shall cooperate with the other and use (and shall cause their respective Affiliates to use), and Parent shall cause each Person who is deemed by a Governmental Entity to “control” Parent or will be deemed by a Governmental Entity to “control” any of the Company Insurance Subsidiaries following the Closing (each such Person, a “Control Person”) to cooperate with the parties hereto and to use and cause their respective Affiliates to use, their respective reasonable best efforts to fulfill all conditions applicable to such party pursuant to this Agreement and to consummate and make effective, as promptly as practicable, the transactions contemplated hereby, including using reasonable best efforts to (i) prepare and file promptly and fully all documentation to effect all necessary and advisable filings, notifications, notices, petitions, statements, registrations, submissions of information, applications and other documents (including any required filings under applicable Antitrust Laws and Legal Requirements relating to the acquisition of control of insurance companies) that are or may become necessary, proper or advisable in connection with the consummation of the transactions contemplated by this Agreement; (ii) obtain as promptly as reasonably practicable (and in any event no later than the End Date) all approvals, consents, clearances, expirations or terminations of waiting periods, registrations, permits, authorizations and other confirmations from any Governmental Entity that are or may become necessary, proper or advisable to consummate the transactions contemplated by this Agreement; and (iii) obtain all necessary consents, approvals or waivers from third parties. Except as set forth in Part 4.5(a) of the Parent Disclosure Schedule, neither Parent nor any of its applicable Affiliates shall, and Parent shall cause each of the Control Persons not to, at any time prior to the Closing, file any application with or request for approval or non-disapproval by any Governmental Entity with respect to any inter-Affiliate transaction between the Company or any of its Affiliates, on the one hand, and any of the post-Closing Affiliates of any of them (including Parent and any of its Affiliates or Control Persons), on the other hand, in each case that would require approval or non-disapproval under applicable Legal Requirements. Parent acknowledges and agrees that any breach by any Affiliate of Parent or any Control Person, of the provisions of this Section 4.5(a) (assuming, solely for this purpose, that such Affiliate or Control Person was bound to the same covenants in this Section 4.5(a) as Parent) shall constitute a breach of this Section 4.5(a) by Parent.
(b)Each party shall use their respective reasonable best efforts to file, as promptly as reasonably practicable after the date of this Agreement, and Parent shall cause the Control Persons to file, all notices, reports and other documents required to be filed by such Person with any Governmental Entity with respect to the Mergers and the other transactions contemplated by this Agreement,
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and to submit as promptly as reasonably practicable any additional information requested by any such Governmental Entity. Without limiting the generality of the foregoing, (i) each of Parent and the Company shall, in consultation and cooperation with the other within twenty (20) Business Days after the date of this Agreement (or such other date as may be mutually agreed to by Parent and the Company), prepare and file the notifications required under the HSR Act; and (ii) as promptly as reasonably practicable after the date of this Agreement, but in no event later than as required by applicable Legal Requirements, prepare and file, or pre-file with regard to any Governmental Entity that requires such pre-filing prior to any formal filing of, all other notifications required under any other Antitrust Laws or other Legal Requirements. In addition and without limiting the generality of the foregoing, Parent shall file, and shall cause each Control Person to file, within twenty (20) Business Days after the date of this Agreement, a “Form A” Approval of Acquisition of Control with the Delaware Department of Insurance with respect to the acquisition of control of the Company Insurance Subsidiaries. Each party shall promptly notify the other party and provide copies to the other party of any substantive written notice or other written communication from any Governmental Authority in connection with any current or pending Governmental Authorizations (other than those that are administrative or ministerial in nature). Parent and the Company shall, and Parent shall cause the Control Persons to, use their respective reasonable best efforts to respond as promptly as reasonably practicable to any inquiries or requests for additional information or documentary material received from any state attorney general, antitrust authority or other Governmental Entity pursuant or related to the transactions contemplated by this Agreement.
(c)Subject to the provisions of the Non-Disclosure Agreement, Parent and the Company each shall, and Parent shall cause the Control Persons to, promptly supply the other with any information that may be required in order to effectuate any filings (including applications) pursuant to (and to otherwise comply with its obligations set forth in) Section 4.5(a) and Section 4.5(b). Each of Parent and the Company, as it deems advisable and necessary, may reasonably designate competitively sensitive material provided to the other as “outside counsel only” or with similar restrictions. Each of Parent and the Company may also reasonably redact the material as necessary to (i) comply with other contractual arrangements or applicable Legal Requirements or (ii) prevent the loss of protection under the attorney-client privilege or the attorney work product doctrine. Such materials and the information contained therein shall be given only to the outside legal counsel of the recipient and, with the prior written consent of the disclosing party, to economic or other experts retained by the outside counsel of the recipient, or otherwise as the restriction indicates, and be subject to any additional confidentiality or joint defense agreement between the parties. Except where prohibited by applicable Legal Requirements or any Governmental Entity, and subject to the provisions of the Non-Disclosure Agreement, each of Parent and the Company shall (i) consult with the other in good faith prior to taking a position with respect to any filing required or advisable pursuant to Section 4.5(a) and Section 4.5(b); (ii) permit the other to review and discuss in advance, and consider in good faith the views of the other in connection with, any analyses, appearances, presentations, memoranda, letters, responses to requests, briefs, white papers, arguments, opinions and proposals before making or submitting any of the foregoing to any Governmental Entity by or on behalf of any party in connection with any such filing or any Legal Proceeding in connection with this Agreement or the transactions contemplated hereby; (iii) coordinate with the other in preparing and exchanging such information; (iv) promptly provide the other party’s counsel with copies of all filings, notices, analyses, presentations, memoranda, letters, responses to requests, briefs, white papers, opinions, proposals and other submissions (and a summary of any oral presentations) made or submitted by such party with or to any Governmental Entity in connection with any filing required by Section 4.5(a) and Section 4.5(b) in connection with this Agreement or the transactions contemplated hereby; and (v) consult with the other party in advance of any meeting, video conference or teleconference with any Governmental Entity or, in connection with any proceeding by a private party, with any other Person, and, to the extent not prohibited by the Governmental Entity or other Person, give the other party the opportunity to attend and participate in such meetings, video conferences and teleconferences. Parent shall be responsible for the payment of all filing fees pursuant to Antitrust Laws or insurance regulatory Legal Requirements and in connection with the transactions contemplated hereby.
(d)Notwithstanding anything to the contrary contained in this Agreement, without the prior written consent of Parent (not to be unreasonably withheld, conditioned or delayed), neither the Company nor any of its Subsidiaries or Affiliates will offer, propose, negotiate, agree or consent to any accommodation, concession, commitment, condition or remedy (financial or otherwise) to or with any Governmental Entity or any third party in connection with seeking or obtaining approvals or consents for the transactions contemplated by this Agreement. Without the prior written consent of the other party, neither Parent or any of its Affiliates or Control Person, on the one hand, nor the Company, on the other hand, shall enter into any agreement relating to the transactions contemplated by this Agreement with any Governmental Entity or take any other action that would reasonably be expected to materially delay the Closing or the expiration or termination of any waiting period under the HSR Act or any other applicable Legal Requirement.
(e)If any administrative or judicial action or proceeding, including any proceeding by a private party, is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Antitrust Law or other Legal Requirement, each of Parent and the Company shall, and Parent shall cause each Control Person to, use reasonable best efforts to contest and resist any such action or proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement. Subject to the proviso below, Parent shall, and shall cause its Affiliates and the
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Control Persons to, take or refrain from taking, and agree or commit to take or refrain from taking, any and all actions, or suffer to exist any limitation, action, restriction, condition or requirement, as applicable, in each case that are necessary to avoid each and every impediment under any applicable Legal Requirements that may be asserted by, or judgment, decree and Order that may be entered by or with, any Governmental Entity with respect to this Agreement or other transactions contemplated hereby this Agreement so as to enable the Closing to occur as promptly as practicable, including any of the foregoing as is necessary, proper or advisable to (i) obtain all approvals, consents, clearances, expirations from any Governmental Entities necessary, proper or advisable to consummate the transactions contemplated by this Agreement, (ii) resolve any objections that may be asserted by any Governmental Entity with respect to the transactions contemplated by this Agreement and (iii) prevent the entry of, and have vacated, lifted, reversed or overturned, any judgment, decree or Order of any Governmental Entity that would prevent, prohibit, restrict or delay the consummation of the transactions contemplated by this Agreement; provided that, notwithstanding anything to the contrary contained in this Agreement, in no event shall Parent or any of its Affiliates or the Control Persons be required to take any action, including entering into any consent decree, hold separate order or other arrangement, that (when taken together with all other such actions) would have, or would reasonably be expected to have, a material adverse effect on (A) the business, financial condition or results of operations of (x) the Company and its Subsidiaries, taken as a whole, or (y) Parent and its Subsidiaries, taken as a whole, or (B) the aggregate economic benefits that Parent reasonably expects to receive from the transactions contemplated by this Agreement (each of (A) and (B), a “Burdensome Condition”).
(f)Each of Parent and the Company agrees that, prior to the earlier of the First Effective Time and the termination of this Agreement pursuant to Section 6.1, it shall not, and shall ensure that none of its Subsidiaries or Affiliates shall, consummate, enter into any agreement providing for, or authorize, announce, commit to or approve, any investment, acquisition, divestiture, business combination or other transaction that would reasonably be expected to materially delay, materially impede or prevent the consummation of the transactions contemplated by this Agreement.
4.6Access.
(a)Upon reasonable prior notice, the Company shall afford Parent and its Representatives reasonable access, during normal business hours throughout the period prior to the First Effective Time, to the Company’s and its Subsidiaries personnel, properties, Contracts, filings with Governmental Entities and books and records and, during such period, the Company shall furnish promptly to Parent all reasonably available information concerning its business as Parent may reasonably request in each case for the purposes of integration planning and the consummation of the transactions contemplated by this Agreement; provided, however, that the Company shall not be required to permit any inspection or provide other access, or to disclose any information, that in the reasonable judgment of the Company would (i) unreasonably interfere with the business or operations of the Company and its Subsidiaries, (ii) violate any obligation of the Company with respect to confidentiality or privacy; (iii) jeopardize protections afforded the Company under the attorney-client privilege, the attorney work product doctrine or similar legal privilege or protection; (iv) violate any Legal Requirement; or (v) result in the disclosure of any trade secrets of any third parties, competitively sensitive information, information concerning the valuation of the Company or any of its Subsidiaries or Personal Data that would expose the Company to the risk of liability; provided that in each case the Company shall inform Parent of the nature of the information being withheld, and shall use its reasonable best efforts to make alternative arrangements that would allow Parent (or its applicable Representative) access to such information. All information obtained by or provided to Parent and its Representatives pursuant to this Agreement shall be treated as “Confidential Information” of the Company for purposes of the Non-Disclosure Agreement.
(b)To the extent that any of the information or material furnished pursuant to this Agreement may include material subject to the attorney-client privilege, work product doctrine or any other applicable privilege, the parties understand and agree that they have a commonality of interest with respect to such matters and it is their desire, intention and mutual understanding that the sharing of such material is not intended to, and shall not, waive or diminish in any way the confidentiality of such material or its continued protection under the attorney-client privilege, work product doctrine or any other applicable privilege. All such information that is entitled to protection under the attorney-client privilege, work product doctrine or any other applicable privilege shall remain entitled to such protection under these privileges, this Agreement, and under the joint defense doctrine.
(c)No exchange of information or investigation by Parent or its Representatives shall affect or be deemed to affect, modify or waive the representations and warranties of the Company set forth in this Agreement. No exchange of information or investigation by the Company or its Representatives shall affect or be deemed to affect, modify or waive the representations and warranties of Parent set forth in this Agreement.
4.7Publicity. Parent and the Company shall consult with one another prior to issuing, and shall provide each other with the opportunity to review and comment upon, any public announcement, statement or other disclosure with respect to this Agreement
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or the Mergers and shall not issue any such public announcement or statement prior to such consultation, except as may be required by applicable Legal Requirement or by the rules and regulations of Nasdaq or the NYSE (in which event Parent or the Company, as applicable, shall endeavor, on a basis reasonable under the circumstances, to provide a meaningful opportunity to the other party to review and comment upon such public announcement or statement in advance, and shall give due consideration to all reasonable additions, deletions or changes suggested thereto by Parent or the Company, as applicable); provided that (i) Parent may make public announcements, statements or other disclosures concerning this Agreement or the Mergers that consist of information previously disclosed in previous public announcements, statements or other disclosures made by Parent in compliance with this Section 4.7, (ii) this Section 4.7 shall not apply to any press release or other public announcement or disclosure in connection with any Company Change in Recommendation effected by the Company Board to the extent permitted by and in compliance with Section 4.4, and (iii) Parent may make any public statements to the press, analysts, investors or those participating in investor calls or industry conferences. The Company and Parent agree to issue the previously agreed upon form of joint press release announcing the execution and delivery of this Agreement promptly following the execution of this Agreement.
4.8Company ESPP. The Company shall take the necessary actions with respect to the Company ESPP so that (i) any offering period in effect as of the last day of the current offering period shall be shortened by setting a new “Exercise Date” (within the meaning of the Company ESPP) in respect of such offering period that is no later than the last day of the current offering period (the “Offering Period End Date”) and on the Offering Period End Date, cause the exercise of each outstanding purchase right under the Company ESPP, except in no event shall the Company permit any new participants to enroll in, or any current participants to increase payroll deduction or other contribution elections under, the Company ESPP on or following the date hereof; and (ii) as of the Offering Period End Date, the Company ESPP shall be suspended, and no offering periods or purchase periods shall be thereafter commenced and no payroll deductions or other contributions shall be thereafter made or effected with respect to the Company ESPP.
4.9Certain Tax Matters.
(a)For U.S. federal income Tax purposes, (i) the parties hereto intend that the Mergers, taken together, should qualify as a “reorganization” within the meaning of Section 368(a) of the Code (the “Intended Tax Treatment”) and (ii) this Agreement is intended to be, and is hereby adopted as, a “plan of reorganization” for purposes of Treasury Regulations Section 1.368-2(g) and 1.368-3(a), to which the Parent, the Acquisition Subs and the Company are parties under Section 368(b) of the Code.
(b)Both prior to and following each of the First Effective Time and Second Effective Time, (x) Parent shall not make (or permit Acquisition Sub II to make) any election to classify Acquisition Sub II as a corporation for U.S. federal income Tax purposes, and (y) Parent, the Acquisition Subs and the Company shall use their respective commercially reasonable efforts, and shall cause their respective Subsidiaries to use their commercially reasonable efforts, to take or cause to be taken any action necessary for the Mergers, taken together, to qualify for the Intended Tax Treatment, including (i) reasonably refraining from any action that such party knows, or is reasonably expected to know, is reasonably likely to prevent the Mergers, taken together, to qualify for the Intended Tax Treatment and (ii) not taking any tax reporting position inconsistent with the Intended Tax Treatment for U.S. federal (and applicable state and local) income Tax purposes, unless otherwise required pursuant to (i) a change in applicable Tax Law, or (ii) a “determination” within the meaning of Section 1313(a) of the Code (or corresponding or similar provision of state or local Tax Law).
(c)Each of Parent and the Company shall reasonably cooperate with one another and their respective counsel and use its commercially reasonable efforts to obtain (i) the Parent Tax Opinion, and (ii) the Company Tax Opinion, in each case, including by executing and delivering customary tax representation letters (not to be inconsistent with this Agreement and dated as of the date of such opinion) as Parent Tax Counsel and Company Tax Counsel may reasonably request in form and substance reasonably satisfactory to Parent Tax Counsel and Company Tax Counsel. Each of the Parties hereto further acknowledges and hereby agrees that it is not a condition to the Closing that (x) the Mergers, taken together, qualify for the Intended Tax Treatment or (y) the Parent Tax Opinion or Company Tax Opinion be delivered to Parent and the Company, respectively.
4.10Indemnification; Directors’ and Officers’ Insurance.
(a)For a period of no less than six (6) years after the First Effective Time, the Surviving Company shall indemnify and hold harmless, and provide advancement of expenses to, all current or former directors and officers of the Company or any of its Subsidiaries, and any Person who becomes a director or officer of the Company or any of its Subsidiaries prior to the First Effective Time (together with their respective heirs and representatives, the “Indemnified Parties”) to the fullest extent permitted by applicable Legal Requirements in respect of acts or omissions occurring or alleged to have occurred at or prior to the First Effective Time, whether asserted or claimed prior to, at or after the First Effective Time, by reason of the fact of such Persons serving as an officer or director of the Company or any of the Subsidiaries of the Company. The parties hereto agree that for six (6) years after the First
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Effective Time all rights to elimination or limitation of liability, indemnification, exculpation or advancement of expenses for acts or omissions occurring or alleged to have occurred at or prior to the First Effective Time, whether asserted or claimed prior to, at or after the First Effective Time, now existing in favor of the Indemnified Parties as provided in the Organizational Documents of the Company or any of its Subsidiaries or in any written agreement between the Company or any of its Subsidiaries and such Person that is publicly filed or otherwise in effect as of the date of this Agreement shall survive the Mergers and shall continue in full force and effect. For six (6) years after the First Effective Time, the Surviving Company shall cause to be maintained in effect the provisions in (i) the Organizational Documents of the Company and each of the Subsidiaries of the Company; and (ii) any other agreements of the Company or any of the Subsidiaries of the Company with any Indemnified Party, in each case, regarding exculpation, elimination or limitation of liability, indemnification of officers and directors or other fiduciaries and advancement of expenses that are in existence on the date of this Agreement, and no such provision shall be amended, modified or repealed in any manner that would materially and adversely affect the rights or protections thereunder of any such Indemnified Party in respect of acts or omissions occurring or alleged to have occurred at or prior to the First Effective Time without the consent of such Indemnified Party.
(b)For a period of no less than six (6) years following the First Effective Time, the Surviving Company shall cause to be maintained in effect the existing policy of the Company’s directors’ and officers’ liability insurance (or a comparable replacement policy) (the “D&O Policy”) covering claims arising from facts or events that occurred at or prior to the First Effective Time (including for acts or omissions occurring in connection with this Agreement and the consummation of the transactions contemplated by this Agreement) and covering each of the Company’s current directors and officers, in any case on terms with respect to coverage and amounts that are no less favorable than those terms in effect on the date of this Agreement; provided, however, that in no event shall the Surviving Company be required to expend in any one (1) year an amount in excess of 300% of the current annual premium paid by the Company (which annual premium is set forth in Part 4.10(b) of the Company Disclosure Schedule) for such insurance (such 300% amount, the “Maximum Annual Premium”); and provided further, however, that if the annual premium of such insurance coverage exceeds the Maximum Annual Premium, the Surviving Company shall be obligated to obtain a policy with the greatest comparable coverage available for a cost not exceeding the Maximum Annual Premium. Notwithstanding anything to the contrary in this Agreement, the Company may, or if the Company is unable to, Parent may on its behalf, prior to the First Effective Time, purchase a six (6)-year “tail” prepaid policy on the D&O Policy with an annual cost not in excess of the Maximum Annual Premium, and in the event that Parent or the Company shall purchase such a “tail” policy, Parent and the Surviving Company shall maintain such “tail” policy in full force and effect and continue to honor their respective obligations thereunder, in lieu of all other applicable obligations of the Surviving Company under the first sentence of this Section 4.10(b) for so long as such “tail” policy shall be maintained in full force and effect.
(c)Each of the Indemnified Parties or other Persons who are beneficiaries under the D&O Policy or the “tail” policy referred to in Section 4.10(b) (and, after the death of any of the foregoing Persons, such Person’s heirs and representatives) are intended to be third party beneficiaries of this Section 4.10, with full rights of enforcement as if a party thereto. The rights of the Indemnified Parties (and other Persons who are beneficiaries under the D&O Policy or the “tail” policy referred to in Section 4.10(b) (and their heirs and representatives)) under this Section 4.10 shall be in addition to, and not in substitution for, any other rights that such Persons may have under the Organizational Documents of the Company or any of its Subsidiaries, any and all indemnification agreements of or entered into by the Company or any of its Subsidiaries, or applicable Legal Requirements (whether at law or in equity).
(d)In the event that Parent, the Surviving Company or any of their respective Subsidiaries (or any of their respective successors or assigns) shall consolidate or merge with any other Person and shall not be the continuing or surviving corporation or entity in such consolidation or merger, then in each case, to the extent necessary to protect the rights of the Indemnified Parties and other Persons who are beneficiaries under the D&O Policy or the “tail” policy referred to in Section 4.10(b) (and their respective heirs and representatives), proper provision shall be made so that the continuing or surviving corporation or entity (or its successors or assigns, if applicable) shall assume the obligations set forth in this Section 4.10.
4.11Employee Matters.
(a)From the Closing Date until the twelve (12)-month anniversary of the Closing Date (or, if sooner, until the date of termination of employment of the relevant Continuing Employee), Parent shall or cause the Company to, provide each employee employed by the Company as of immediately prior to the Closing Date who remains so employed as of immediately following the Closing Date (each a “Continuing Employee”), with (i) a base salary that is substantially comparable in the aggregate to that provided to such Continuing Employee immediately prior to the Closing Date, (ii) target cash incentive compensation opportunities that are substantially comparable to those provided to similarly situated employees of Parent and its Affiliates, and (iii) employee benefits that are the same, in the aggregate, as those provided to similarly situated employees of Parent and its Affiliates.
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(b)Parent shall treat, and shall use reasonable best efforts to cause each benefit plan sponsored, maintained, or contributed to by Parent or any of its Subsidiaries after the Closing (including, follow the Closing, the Surviving Company) and in which any Continuing Employee participates (each, a “Parent Benefit Plan”) to recognize, for purposes of determining eligibility to participate and vesting, all past service with the Company or any of its Subsidiaries earned prior to the Closing Date as service with Parent and its Affiliates; provided that such service shall not be recognized to the extent that such recognition would result in a duplication of compensation, benefits or coverage.
(c)Parent shall use reasonable best efforts to cause each Parent Benefit Plan, that is a group health plan, within the meaning of Section 3(1) of ERISA: (i) to waive any and all eligibility waiting periods, evidence of insurability requirements, and pre-existing condition limitations and exclusions with respect to each Continuing Employee to the extent waived, satisfied, or not included under the analogous Company Plan, and (ii) with respect to the year in which the Closing occurs, to recognize for each Continuing Employee for purposes of applying annual deductible, co-insurance, and out-of-pocket maximums under each Parent Benefit Plan that provides group health benefits any deductible, co-insurance, and out-of-pocket expenses paid by the Continuing Employee and credited under the analogous Company Plan during the portion of the plan year prior to the Closing Date.
(d)Except as set forth in this Section 4.11, no provision of this Agreement, including this Section 4.11, is intended, or shall be interpreted, to provide or create any third party beneficiary rights, claims or benefits or any other rights of any kind or nature whatsoever in any Continuing Employee, consultant, contractor, or any other Person performing similar functions, including any rights of employment or service for any specified period and/or any employee benefits, in favor of any union, association, Continuing Employee, consultant, or contractor or any other Person performing similar functions. In addition, no provision of this Agreement, including this Section 4.11, is intended, or shall be interpreted, to establish or amend any term or condition of any Company Plan, any Parent Benefit Plan, or any other employee benefit or compensation plan, program, or policy of any of the Company, Parent, or any of their respective Affiliates or to alter or limit the ability of any of the Company, Parent, or their respective Affiliates to amend, modify, or terminate any Company Plan or Parent Benefit Plan or any other benefit plan, program, agreement, or arrangement at any time assumed, maintained, sponsored or contributed to by any of them.
4.12Stockholder Litigation. The Company shall provide Parent with prompt written notice of, and copies of all pleadings and material correspondence relating to, any Legal Proceeding against the Company or any of its directors or officers by any holder of shares of Company Common Stock arising out of or relating to this Agreement or the transactions contemplated by this Agreement. The Company shall give Parent the opportunity to participate, at Parent’s sole cost and expense, in the defense, settlement, or compromise of any such Legal Proceeding, and no such settlement or compromise shall be agreed to without the prior written consent of Parent (not to be unreasonably withheld, conditioned or delayed).
4.13Stock Exchange Listing and Delisting. Parent shall use its reasonable best efforts to cause the shares of Parent Common Stock to be issued in the First Merger, including the shares of Parent Common Stock to be issued upon the exercise of converted Company Options and upon vesting and settlement of converted Company RSUs, to be approved for listing (subject to notice of issuance) on the NYSE at or prior to the First Effective Time. Prior to the Closing, the Company shall cooperate with Parent to cause the shares of Company Common Stock to be delisted from Nasdaq and deregistered under the Exchange Act as soon as practicable following the First Effective Time.
4.14Section 16 Matters. Prior to the First Effective Time, the Parent Board and the Company Board, respectively, shall take all actions that may be required or appropriate to cause any dispositions of shares of Company Common Stock (including derivative securities with respect to shares of Company Common Stock) or acquisitions of Parent Common Stock (including derivative securities with respect to Parent Common Stock) in connection with the transactions contemplated by Section 1 by each individual who is, or as a result of the transactions contemplated by this Agreement will be, subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to the Company or is, or will as a result of the transactions contemplated by this Agreement become, subject to such reporting requirements with respect to Parent, to be exempt under Rule 16b-3 promulgated under the Exchange Act.
4.15Director Resignations. The Company shall cause to be delivered to Parent prior to the Closing resignations, in form and substance reasonably satisfactory to Parent, executed by each director of the Company in office as of immediately prior to the First Effective Time, in each case, conditioned and effective upon the First Effective Time.
4.16Takeover Statutes. If any antitakeover or similar statute or regulation is or may become applicable to the transactions contemplated by this Agreement, each of the parties hereto and its respective Board of Directors shall (a) grant any approvals and take all any actions necessary so that the transactions contemplated by this Agreement may be consummated as
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promptly as practicable on the terms contemplated hereby and (b) otherwise act to eliminate or minimize the effects of any such statute or regulation on the transactions contemplated by this Agreement.
4.17Termination of Certain Agreements. On and as of the Closing, the Company shall take all actions necessary to cause the Contracts listed in Part 4.17 of the Company Disclosure Schedule to be terminated without any further force and effect and without any cost or other liability or obligation to the Company or its Subsidiaries, and there shall be no further obligations of any of the relevant parties thereunder following the Closing.
SECTION 5. |
CONDITIONS TO EACH PARTY’S OBLIGATION TO EFFECT THE MERGER |
5.1Conditions Precedent to Each Party’s Obligations. The obligations of each party to effect the Mergers and otherwise cause the transactions contemplated by this Agreement to be consummated are subject to the satisfaction or waiver, as of the Closing, of each of the following conditions:
(a)Effectiveness of Registration Statement. The Form S-4 Registration Statement shall have become effective in accordance with the provisions of the Securities Act, no stop order shall have been issued by the SEC and shall remain in effect with respect to the Form S-4 Registration Statement, and no proceedings for that purpose shall have been commenced or be threatened in writing by the SEC that has not been withdrawn.
(b)Company Stockholder Approval. The Required Company Stockholder Vote shall have been obtained.
(c)Governmental Approvals. (i) Any waiting period (or any agreed upon (in accordance with Section 4.5(d)) extension of any waiting period or commitment not to consummate the Mergers for any period of time) applicable to the consummation of the Mergers under the HSR Act shall have expired or been terminated, and there shall be no agreement (agreed upon in accordance with Section 4.5(d)) pending or in effect between Parent and any Governmental Entity not to close; and (ii) any Governmental Authorization identified in Part 5.1(c)(ii) of the Company Disclosure Schedule shall have been made or obtained and shall remain in full force and effect.
(d)Listing. The shares of Parent Common Stock to be issued pursuant to the First Merger, including the shares of Parent Common Stock to be issued upon the exercise of converted Company Options and upon vesting of converted Company RSUs, shall have been approved for listing (subject to notice of issuance) on the NYSE.
(e)No Restraints. No Legal Requirement or Order preventing, enjoining or making illegal the consummation of the Mergers shall have been entered, issued or adopted by any court of competent jurisdiction or other Governmental Entity of competent jurisdiction and remain in effect (any such Legal Requirement or Order issued by a court of competent jurisdiction or other Governmental Entity of competent jurisdiction, a “Relevant Legal Restraint”).
5.2Additional Conditions Precedent to Parent’s Obligations. The obligation of Parent to cause the Mergers to be effected and otherwise cause the transactions contemplated by this Agreement to be consummated are subject to the satisfaction or waiver by Parent, as of the Closing, of each of the following conditions:
(a)Accuracy of Representations. (i) The representations and warranties of the Company contained in Section 2.3(a), Section 2.3(c) (first sentence only), Section 2.3(d) and Section 2.3(e) shall be true and accurate, other than de minimis inaccuracies, at and as of the Closing Date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty shall be true and accurate, other than de minimis inaccuracies, as of such particular date or period of time); (ii) the representations and warranties of the Company contained in Section 2.1(a), Section 2.3(c) (second sentence only), Section 2.4, Section 2.5, Section 2.6(a)(i), Section 2.20, Section 2.22, Section 2.23 and Section 2.24 (last sentence only) shall be true and accurate in all material respects at and as of the Closing Date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty shall be true and accurate in all material respects as of such particular date or period of time); provided, however, that, in the case of this clause (ii), for purposes of determining the accuracy of such representations and warranties, all materiality, “Company Material Adverse Effect” and similar qualifications set forth in such representations and warranties shall be disregarded; (iii) the representations and warranties of the Company contained in Section 2.24 (first sentence only) shall be true and accurate at and as of the Closing Date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty shall be true and accurate as of such particular date or period of time); and (iv) the representations and warranties of the
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Company set forth in this Agreement (other than those representations and warranties referred to in the foregoing clauses (i), (ii) and (iii)) shall be true and accurate in all respects at and as of the Closing Date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty shall be so true and accurate as of such particular date or period of time), except as, individually or in the aggregate has not constituted or resulted in, a Company Material Adverse Effect; provided, however, that, in the case of this clause (iv), for purposes of determining the accuracy of such representations and warranties, all materiality, “Company Material Adverse Effect” and similar qualifications set forth in such representations and warranties shall be disregarded; provided that the reference to Company Material Adverse Effect in Section 2.8(a) shall be given effect.
(b)Performance of Covenants. The covenants in this Agreement that the Company is required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects.
(c)No Company Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Effects that, individually or in the aggregate, have constituted or resulted in, a Company Material Adverse Effect.
(d)Certificate. Parent shall have received a certificate, dated as of the Closing Date and executed by the Chief Executive Officer or Chief Financial Officer of the Company, confirming that the conditions set forth in Section 5.2(a), Section 5.2(b) and Section 5.2(c) have been duly satisfied.
5.3Additional Conditions Precedent to the Company’s Obligations. The obligation of the Company to effect the Mergers and otherwise consummate the transactions contemplated by this Agreement is subject to the satisfaction or waiver by the Company, as of the Closing, of each of the following conditions:
(a)Accuracy of Representations. (i) The representations and warranties of Parent contained in Section 3.3(a), Section 3.3(c) (first sentence only), Section 3.3(d) and Section 3.3(e) shall be true and accurate, other than de minimis inaccuracies, at and as of the Closing Date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty shall be true and accurate, other than de minimis inaccuracies, as of such particular date or period of time); (ii) the representations and warranties of Parent and the Acquisition Subs contained in Section 3.1(a), Section 3.3(c) (second sentence only), Section 3.4, Section 3.5(a)(i), Section 3.10 and Section 3.13 shall be true and accurate in all material respects at and as of the Closing Date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty shall be true and accurate in all material respects as of such particular date or period of time); provided, however, that, in the case of this clause (ii), for purposes of determining the accuracy of such representations and warranties, all materiality, “Parent Material Adverse Effect” and similar qualifications set forth in such representations and warranties shall be disregarded; and (iii) the representations and warranties of Parent and the Acquisition Subs set forth in this Agreement (other than those representations and warranties referred to in the foregoing clauses (i) and (ii)) shall be true and accurate in all respects at and as of the Closing Date as if made at and as of such time (except to the extent that any such representation and warranty expressly speaks as of a particular date or period of time, in which case such representation and warranty shall be so true and accurate as of such particular date or period of time), except as, individually or in the aggregate, has not constituted or resulted in, a Parent Material Adverse Effect; provided, however, that, in the case of this clause (iii), for purposes of determining the accuracy of such representations and warranties, all materiality, “Parent Material Adverse Effect” and similar qualifications set forth in such representations and warranties shall be disregarded; provided that the reference to Parent Material Adverse Effect in Section 3.7(a) shall be given effect.
(b)Performance of Covenants. The covenants in this Agreement that Parent is required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects.
(c)No Parent Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Effects that, individually or in the aggregate, have constituted or resulted in a Parent Material Adverse Effect.
(d)Certificate. The Company shall have received a certificate, dated as of the Closing Date and executed by the Chief Executive Officer or Chief Financial Officer of Parent, confirming that the conditions set forth in Section 5.3(a), Section 5.3(b) and Section 5.3(c) have been duly satisfied.
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5.4Frustration of Closing Conditions. None of Parent, the Acquisition Subs or the Company may rely on the failure of any condition set forth in this Section 5 to be satisfied as a condition precedent to any right or obligation of such party hereunder if such failure was caused by such party’s breach of this Agreement.
SECTION 6. |
TERMINATION |
6.1Termination. This Agreement may be terminated and the Mergers may be abandoned:
(a)by mutual written consent of Parent and the Company at any time prior to the First Effective Time;
(b)by Parent or the Company if the Mergers shall not have been consummated by the close of business on August 8, 2022 (as such date may be extended pursuant to the provisos below or pursuant to this Section 6.1(b), the “End Date”); provided, that if any of the conditions to the Closing set forth in Section 5.1(c) or Section 5.1(e) has not been satisfied or waived on or prior to the close of business on the End Date but all other conditions to Closing set forth in Sections 5.1, 5.2 and 5.3 have been satisfied (other than those conditions that by their nature are to be satisfied at the Closing, so long as such conditions are capable of being satisfied if the Closing were to occur on the End Date) or waived, the End Date will be automatically extended, without any action on the part of any party hereto, to November 8, 2022 and, if so extended, such date shall be the “End Date”; and provided, further, that if the satisfaction of the last to be satisfied or waived of the conditions set forth in Section 5 (other than those conditions that by their nature are to be satisfied at the Closing) occurs less than two (2) Business Days prior to the End Date, the End Date shall be deemed extended to the extent necessary to permit the Closing to occur; and provided, further, that a party shall not be permitted to terminate this Agreement pursuant to this Section 6.1(b) if the material breach by such party (or any Affiliate of such party or Control Person of such party) of any of such party’s obligation under this Agreement shall have been the primary cause of, or primarily resulted in, the failure of the First Effective Time to have occurred on or before the End Date;
(c)by Parent or the Company at any time prior to the First Effective Time if a Relevant Legal Restraint permanently preventing, enjoining or making illegal the consummation of the Mergers shall have become final and non-appealable; provided, that the party seeking to terminate the Agreement shall have used reasonable best efforts to prevent the entry of and to remove such Relevant Legal Restraint in accordance with Section 4.5; provided, further, that a party shall not be permitted to terminate this Agreement pursuant to this Section 6.1(c) if the material breach by such party (or any Affiliate of such party) of any of such party’s obligation under this Agreement shall have materially contributed to such Relevant Legal Restraint;
(d)by Parent at any time prior to obtaining the Required Company Stockholder Vote if (i) the Company Board shall have failed to include the Company Board Recommendation in the Proxy Statement/Prospectus or shall have made a Company Change in Recommendation or (ii) the Company shall have breached in any material respects Section 4.2 or Section 4.4;
(e)by either Parent or the Company if (i) the Company Stockholder Meeting (including any adjournments and postponements thereof) shall have been held and completed and (ii) the Required Company Stockholder Vote shall not have been obtained;
(f)by Parent if (i) any of the Company’s representations and warranties contained in this Agreement shall be inaccurate such that the condition set forth in Section 5.2(a) would not be satisfied; or (ii) any of the Company’s covenants contained in this Agreement shall have been breached such that the condition set forth in Section 5.2(b) would not be satisfied; provided, however, that for purposes of clauses (i) and (ii) above, if an inaccuracy in any of the Company’s representations and warranties or a breach of a covenant of the Company is curable by the Company by the End Date and the Company is continuing to exercise its reasonable best efforts to cure such inaccuracy or breach, then Parent may not terminate this Agreement under this Section 6.1(f) on account of such inaccuracy or breach unless such inaccuracy or breach shall remain uncured for a period of thirty (30) days commencing on the date that the Company receives written notice of such inaccuracy or breach from Parent; provided, further, that Parent shall not have the right to terminate this Agreement pursuant to this Section 6.1(f) if Parent is then in breach of any of its representations, warranties or agreements contained in this Agreement, which breach would give rise to the failure of a condition set forth in Section 5.3(a) or Section 5.3(b); or
(g)by the Company if (i) any of Parent’s representations and warranties contained in this Agreement shall be inaccurate such that the condition set forth in Section 5.3(a) would not be satisfied; or (ii) any of Parent’s covenants contained in this Agreement shall have been breached such that the condition set forth in Section 5.3(b) would not be satisfied; provided, however, that for purposes of clauses (i) and (ii) above, if an inaccuracy in any of Parent’s representations and warranties or a breach of a covenant of Parent is curable by Parent by the End Date and Parent is continuing to exercise its reasonable best efforts to cure such inaccuracy or
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breach, then the Company may not terminate this Agreement under this Section 6.1(g) on account of such inaccuracy or breach unless such inaccuracy or breach shall remain uncured for a period of thirty (30) days commencing on the date that Parent receives written notice of such inaccuracy or breach from the Company; provided, further, that the Company shall not have the right to terminate this Agreement pursuant to this Section 6.1(g) if the Company is then in breach of any of its representations, warranties or agreements contained in this Agreement, which breach would give rise to the failure of a condition set forth in Section 5.2(a) or Section 5.2(b).
The party seeking to terminate this Agreement pursuant to this Section 6.1 shall give written notice of such termination to the other parties in accordance with Section 7.8, specifying the provision of this Agreement pursuant to which such termination is effected.
6.2Effect of Termination. In the event of the termination of this Agreement as provided in Section 6.1, this Agreement shall be of no further force or effect with no liability to any Person on the part of any party to this Agreement (or any of its Representatives or Affiliates); provided, however, that (a) the last sentence of Section 4.6(a), Section 4.10, this Section 6.2, Section 6.3 and Section 7 shall survive the termination of this Agreement and shall remain in full force and effect; and (b) subject to Section 6.3(c), the termination of this Agreement shall not relieve any party from any liability for any fraud or any Willful Breach of this Agreement, in which case the aggrieved party shall be entitled to all rights and remedies available at law or in equity, including liability for damages determined taking into account all relevant factors, including the loss of benefit of the transactions contemplated by this Agreement to the party, any lost stockholder premium, the time value of money, and any benefit to the breaching party or its stockholders arising from such fraud or Willful Breach. The Non-Disclosure Agreement shall not be affected by a termination of this Agreement.
6.3Termination Fees.
(a)If this Agreement is terminated by Parent pursuant to Section 6.1(d), or by either Parent or the Company pursuant to Section 6.1(b) or Section 6.1(e) at a time when Parent would have been entitled to terminate this Agreement pursuant to Section 6.1(d), then, within two (2) Business Days after the termination of this Agreement, the Company shall cause to be paid to Parent the Termination Fee.
(b)If this Agreement is terminated (i)(A) by Parent or the Company pursuant to Section 6.1(b) or Section 6.1(e) or (B) by Parent pursuant to Section 6.1(f) as a result of a breach of the Company’s covenants set forth in Section 4.2 or Section 4.4 and (ii)(A) at or prior to the date of such termination, any Person shall have publicly announced an intention to make a Company Acquisition Proposal, or a Company Acquisition Proposal shall have been publicly disclosed, publicly announced, or otherwise publicly commenced, submitted or made at least five (5) Business Days prior to the Company Stockholder Meeting (or at least five (5) Business Days prior to the date of termination, in the case of an applicable termination other than pursuant to Section 6.1(e)); and (B) on or prior to the date that is twelve (12) months following the termination of this Agreement, either (1) a Company Acquisition Transaction is consummated or (2) a definitive agreement relating to a Company Acquisition Transaction is entered into by the Company (it being understood that, for purposes of this clause “(B),” each reference to “twenty percent (20%)” in the definition of “Company Acquisition Transaction” in Exhibit A shall be deemed to be a reference to “fifty percent (50%)”), then, within two (2) Business Days after the earlier of the consummation of such Company Acquisition Transaction or entering into a definitive agreement relating to a Company Acquisition Transaction, the Company shall cause to be paid to Parent the Termination Fee.
(c)Any Termination Fee due and payable by the Company under this Section 6.3 shall be paid by wire transfer of cash in same-day funds to an account designated in writing by Parent. For the avoidance of doubt, the Termination Fee shall be payable by the Company only once and not in duplication even though the Termination Fee may be payable by the Company under one or more provisions hereof. If the Company fails to pay the Termination Fee when due and payable by the Company, then the Company shall pay to Parent interest on such overdue amount (for the period commencing as of the date such overdue amount was originally required to be paid and ending on the date such overdue amount is actually paid to Parent) at a rate per annum equal to the “prime rate” (as published in The Wall Street Journal) in effect on the date such amount was originally required to be paid, and the Company shall pay the reasonable and documented out-of-pocket costs and expenses (including reasonable and documented legal fees and out-of-pocket expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken by Parent to collect payment. The parties agree that if the Termination Fee becomes payable by, and is paid by, the Company, then such Termination Fee shall be Parent’s sole and exclusive remedy for damages against the Company and its Affiliates and its and their Representatives in connection with this Agreement, and in no event in which the Termination Fee becomes payable by, and is paid by, the Company, will Parent or any other Person seek to recover any other money damages or seek any other remedy from the Company or any other Person based on a claim in law or equity or otherwise in connection with this Agreement; provided, that nothing contained herein shall relieve any party from liability for any actual, common law fraud or Willful Breach.
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(d)Each of the parties acknowledges that the agreements contained in this Section 6.3 are an integral part of the transactions contemplated by this Agreement, and that without these agreements the parties would not enter into this Agreement.
SECTION 7. |
MISCELLANEOUS PROVISIONS |
7.1Amendment. This Agreement may be amended at any time prior to the First Effective Time (whether before or after receipt of the Required Company Stockholder Vote) by an instrument in writing signed on behalf of each of the parties hereto; provided, however, that after the Required Company Stockholder Vote has been received, no amendment shall be made which by applicable Legal Requirement or regulation of Nasdaq requires further approval of the stockholders of the Company without the further approval of such stockholders.
7.2Waiver.
(a)Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party or parties entitled to the benefits thereof only by a written instrument signed by the party granting such waiver. Any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
(b)No failure on the part of any party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy. No single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
7.3No Survival of Representations and Warranties. None of the representations and warranties contained in this Agreement, or contained in any certificate, schedule or document delivered pursuant to this Agreement or in connection with any of the transactions contemplated by this Agreement, shall survive the First Effective Time. This Section 7.3 shall not limit any covenant or agreement contained in this Agreement that by its terms is to be performed in whole or in part after the First Effective Time.
7.4Entire Agreement; Non-Reliance; Third-Party Beneficiaries.
(a)This Agreement, the Voting and Support Agreement, the Company Disclosure Schedule, the Parent Disclosure Schedule and the Non-Disclosure Agreement constitute the entire agreement and supersede all prior and contemporaneous agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof and thereof.
(b)Without limiting the generality of Section 7.4(a), except for the representations and warranties expressly contained in Section 2, Parent and the Acquisition Subs acknowledge and agree that the Company has not made and is not making any representations or warranties, express or implied, whatsoever regarding the subject matter of this Agreement, that none of Parent, the Acquisition Subs or any Parent Subsidiary or any of their respective Representatives is relying on, and none of the foregoing has relied on, in connection with each of Parent’s and the Acquisition Subs’ entry into this Agreement and agreement to consummate the transactions contemplated hereby or otherwise, any representations or warranties, express or implied, whatsoever regarding the Company, any of its Affiliates, any of their respective Representatives, any other subject matter of this Agreement or any other matter, express or implied, except for the representations and warranties expressly set forth in Section 2 of this Agreement.
(c)Without limiting the generality of Section 7.4(a), except for the representations and warranties expressly contained in Section 3, the Company acknowledges and agrees that Parent has not made and is not making any representations or warranties, express or implied, whatsoever regarding the subject matter of this Agreement, that none of the Company, its Subsidiaries or any of their respective Representatives is relying on, and none of the foregoing has relied on, in connection with the Company’s entry into this Agreement and agreement to consummate the transactions contemplated hereby or otherwise, any representations or warranties, express or implied, whatsoever regarding Parent, any of its Affiliates, any of their respective Representatives, any other subject matter of this Agreement or any other matter, express or implied, except for the representations and warranties expressly set forth in Section 3 of this Agreement.
(d)Notwithstanding anything to the contrary in this Agreement or any other agreement, document or instrument delivered or to be delivered in connection herewith, none of Parent, the Acquisitions Subs or the Company makes any representations or warranties with respect to, and nothing contained in this Agreement or in any other agreement, document or instrument to be delivered in connection herewith is intended or shall be construed to be a representation or warranty, express or implied, in respect of,
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the adequacy or sufficiency of reserves, or the effect of the adequacy or sufficiency of reserves on any line item, asset, liability or equity amount on any financial or other document.
(e)Parent, the Company and the Acquisition Subs agree that their respective representations and warranties set forth in this Agreement are solely for the benefit of the other parties hereto, in accordance with and subject to the terms of this Agreement, and this Agreement is not intended to, and does not, confer upon any Person other than Parent, the Company, and the Acquisition Subs and their respective successors, legal representatives and permitted assigns any rights or remedies, express or implied, hereunder, including the right to rely upon the representations and warranties set forth in this Agreement, except as set forth in Section 7.7. The representations and warranties in this Agreement are the product of negotiations among the parties. Any inaccuracies in such representations and warranties are subject to waiver by the parties in accordance with this Agreement without notice or liability to any other Person. In some instances, the representations and warranties in this Agreement may represent an allocation among the parties of risks associated with particular matters regardless of the knowledge of any of the parties. Consequently, Persons other than the parties may not rely upon the representations and warranties in this Agreement as characterizations of actual facts or circumstances as of the date of this Agreement or as of any other date.
(f)Notwithstanding the foregoing, nothing in this Section 7.4 shall restrain, limit, restrict or prohibit any claim based on fraud or Willful Breach.
7.5Applicable Law; Jurisdiction.
(a)This Agreement is made under, and shall be construed and enforced in accordance with, the laws of the State of Delaware applicable to agreements made and to be performed solely therein, without giving effect to principles of conflicts of law. Each of the parties hereto (i) consents to and submits to the exclusive personal jurisdiction of the Court of Chancery of the State of Delaware or, if that court does not have jurisdiction, a federal court sitting in Delaware in any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement; (ii) agrees that all claims in respect of such action or proceeding shall be heard and determined in any such court; (iii) shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court; and (iv) shall not bring any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement in any other court. Each of the parties hereto waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other Person with respect thereto.
(b)EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LEGAL REQUIREMENTS ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. Each of the parties hereto acknowledges that it and the other parties have been induced to enter into this Agreement and the transactions contemplated by this Agreement, as applicable, by, among other things, the mutual waivers and certifications in this Section 7.5.
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7.6Payment of Expenses. Whether or not the Mergers are consummated, except as expressly set forth in this Agreement, each party hereto shall pay its own expenses incident to preparing for, entering into and carrying out this Agreement and the transactions contemplated hereby.
7.7Assignability; Parties in Interest. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective successors and permitted assigns. This Agreement shall not be assignable by any party, in whole or in part, by operation of law or otherwise, without the express prior written consent of the other parties hereto. Except for (i) the right of the Company, on behalf of its stockholders, to pursue damages in the event of Parent’s, or the Acquisition Subs’ actual, common law fraud or Willful Breach of this Agreement, which shall be deemed in such event to be damages of the Company, (ii) the right of Parent, on behalf of its stockholders, to pursue damages in the event of Company’s actual, common law fraud or Willful Breach of this Agreement, which shall be deemed in such event to be damages of Parent, (iii) the provisions of Section 1 (which, from and after the First Effective Time, shall be for the benefit of (1) Persons who are holders of shares of Company Common Stock immediately prior to the First Effective Time and (2) as of the applicable date, holders of Company Options, Company RSUs and Company Warrants, and the Legacy Company Equityholders with respect to the terms of Section 1.7(h) relating to the Additional Shares) and (iv) the provisions of Section 4.10 (which, from and after the First Effective Time shall be for the benefit of the Indemnified Parties and the other Persons identified therein), nothing in this Agreement (including Section 4.8), express or implied, is intended to or shall confer upon any Person, other than the parties hereto, any right, benefit or remedy of any nature.
7.8Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly given and made as follows (a) if sent by registered or certified mail in the United States, return receipt requested, then such communication shall be deemed duly given and made upon receipt; (b) if sent by nationally recognized overnight air courier (such as DHL or Federal Express), then such communication shall be deemed duly given and made two (2) Business Days after being sent; (c) if sent by electronic mail, when transmitted (provided that the transmission of the email is promptly confirmed by telephone or response email); and (d) if otherwise actually personally delivered to a duly authorized representative of the recipient, then such communication shall be deemed duly given and made when delivered to such
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authorized representative, provided that such notices, requests, demands and other communications are delivered to the address set forth below, or to such other address as any party shall provide by like notice to the other parties to this Agreement:
if to Parent or the Acquisition Subs: |
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Lemonade, Inc. |
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5 Crosby Street, 3rd Floor |
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New York, NY 10013 |
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Attention: |
Tim Bixby; Dennis Monaghan |
Email: |
tim.bixby@lemonade.com; dennis.monaghan@lemonade.com;
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with a copy (which shall not constitute notice) to: |
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Latham & Watkins LLP |
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1271 Avenue of the Americas |
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New York, NY 10020 |
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Attention: |
Robert M. Katz |
Email: |
Robert.Katz@lw.com |
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with a copy (which shall not constitute notice) to: |
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Amar, Reiter, Jeanne, Shochatovitch & Co., Lawyers |
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Technology Park, The Tower main building (“HaMigdal”) |
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6th floor, 2 Agudat Sport Hapoel Rd. |
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Jerusalem 969580, Israel |
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Attention: |
Daniel Chinn |
Email: |
DanielC@ayr.co.il |
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if to the Company: |
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Metromile, Inc. |
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425 Market Street #700 |
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San Francisco, CA 94105 |
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Attention: |
Regi Vengalil; Junna Ro |
Email: |
rvengalil@metromile.com; jro@metromile.com |
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with a copy (which shall not constitute notice) to: |
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Kirkland & Ellis LLP |
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601 Lexington Avenue |
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New York, NY 10022 |
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Attention: |
Rajab S. Abbassi; Edward J. Lee |
Email: |
Rajab.Abbassi@kirkland.com; Edward.Lee@kirkland.com |
7.9Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties hereto agree that the court making such determination shall have the power to limit the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the parties hereto agree to replace such invalid or unenforceable
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term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term.
7.10Counterparts. This Agreement may be executed and delivered (including by facsimile or other form of electronic transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. The exchange of a fully executed Agreement (in counterparts or otherwise) by facsimile or other electronic delivery shall be sufficient to bind the parties to the terms and conditions of this Agreement.
7.11Specific Performance. Each of the parties hereto agrees that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, and that monetary damages, even if available, would not be an adequate remedy therefor. It is accordingly agreed that, in addition to any other remedy that a party hereto may have under law or in equity, in the event of any breach or threatened breach by Parent, the Acquisition Subs or the Company of any covenant or obligation of such party contained in this Agreement, the other parties shall be entitled to obtain (i) an Order of specific performance to enforce the observance and performance of such covenant; and (ii) an injunction restraining such breach or threatened breach. In the event that any action is brought in equity to enforce the provisions of this Agreement, no party hereto shall allege, and each party hereto hereby waives the defense or counterclaim, that there is an adequate remedy at law. Each party hereto further agrees that no other party hereto or any other Person shall be required to obtain, furnish or post any bond or similar instrument in connection with or as a condition to obtaining any remedy referred to in this Section 7.11, and each party hereto irrevocably waives any right it may have to require the obtaining, furnishing or posting of any such bond or similar instrument.
7.12Disclosure Schedules.
(a)The Company Disclosure Schedule has been arranged, for purposes of convenience only, in separate sections and subsections corresponding to the Sections and subsections of Section 2 and, as applicable, Section 4. Any information set forth in any subsection of Part 2 of the Company Disclosure Schedule shall be deemed to be disclosed and incorporated by reference in each of the other subsections of Part 2 of the Company Disclosure Schedule as though fully set forth in such other subsections to the extent it is reasonably apparent on its face that such disclosure also qualifies or applies to such other subsections. No reference to or disclosure of any item or other matter in the Company Disclosure Schedule shall be construed, in and of itself, as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed in the Company Disclosure Schedule. The information set forth in the Company Disclosure Schedule is disclosed solely for purposes of this Agreement, and no information set forth therein shall be deemed, in and of itself, to be an admission by any party hereto to any third party of any matter whatsoever, including any violation of Legal Requirement or breach of any Contract.
(b)The Parent Disclosure Schedule has been arranged, for purposes of convenience only, in separate sections and subsections corresponding to the Sections and subsections of Section 3 and, as applicable, Section 4. Any information set forth in any subsection of Part 3 of the Parent Disclosure Schedule shall be deemed to be disclosed and incorporated by reference in each of the other subsections of Part 3 of the Parent Disclosure Schedule as though fully set forth in such other subsections (whether or not specific cross-references are made) to the extent it is reasonably apparent on its face that such disclosure also qualifies or applies to such other subsections. No reference to or disclosure of any item or other matter in the Parent Disclosure Schedule shall be construed, in and of itself, as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed in the Parent Disclosure Schedule. The information set forth in the Parent Disclosure Schedule is disclosed solely for purposes of this Agreement, and no information set forth therein shall be deemed, in and of itself, to be an admission by any party hereto to any third party of any matter whatsoever, including any violation of Legal Requirement or breach of any Contract.
7.13Construction.
(a)For purposes of this Agreement, whenever the context requires the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include masculine and feminine genders. If a term is defined as one part of speech, it shall have a corresponding meaning when used as another part of speech.
(b)The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement.
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(c)As used in this Agreement, the words (i) “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation,” (ii) the words “hereof,” “hereby,” “herein,” “hereunder” and similar terms in this Agreement shall refer to this Agreement as a whole and not any particular section or article in which such words appear, and (iii) references to “ordinary course of business” or phrases of similar import shall mean ordinary course of business consistent with past practice.
(d)For purposes of this Agreement, (i) any reference to a Legal Requirement shall include any rules and regulations promulgated thereunder and all amendments and modifications thereto and (ii) any reference to a Contract shall include all amendments and modifications thereto.
(e)Except as otherwise indicated, all references in this Agreement to “Sections,” “Exhibits,” “Annexes” and “Schedules” are intended to refer to Sections of this Agreement and Exhibits, Annexes and Schedules to this Agreement.
(f)All references in this Agreement to “$” are intended to refer to United States dollars.
(g)The table of contents and headings to this Agreement are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions of this Agreement. The Exhibits, Schedules and Annexes attached to this Agreement constitute a part of this Agreement and are incorporated herein for all purposes.
[Remainder of page intentionally left blank]
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Parent and the Acquisition Subs have caused this Agreement to be executed as of the date first written above.
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LEMONADE, INC. |
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a Delaware corporation |
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By: |
/s/ Daniel Schreiber |
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Name: |
Daniel Schreiber |
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Title: |
Chief Executive Officer |
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By: |
/s/ Shai Wininger |
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Name: |
Shai Wininger |
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Title: |
Chief Executive Officer |
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CITRUS MERGER SUB A, INC. |
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a Delaware corporation |
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By: |
/s/ Daniel Schreiber |
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Name: |
Daniel Schreiber |
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Title: |
President |
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By: |
/s/ Shai Wininger |
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Name: |
Shai Wininger |
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Title: |
Secretary |
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CITRUS MERGER SUB B, LLC |
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a Delaware limited liability company |
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By: |
/s/ Daniel Schreiber |
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Name: |
Daniel Schreiber |
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Title: |
President |
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By: |
/s/ Shai Wininger |
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Name: |
Shai Wininger |
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Title: |
Secretary |
The Company has caused this Agreement to be executed as of the date first written above.
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METROMILE, INC. |
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a Delaware corporation |
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By: |
/s/ Dan Preston |
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Name: |
Dan Preston |
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Title: |
Chief Executive Officer |
[Signature Page to Agreement and Plan of Merger]
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
“Acquisition Sub I” shall have the meaning set forth in the Preamble.
“Acquisition Sub II” shall have the meaning set forth in the Preamble.
“Acquisition Subs” shall have the meaning set forth in the Preamble.
“Additional Shares” shall have the meaning set forth in Section 1.7(h)(i).
A Person shall be deemed to be an “Affiliate” of another Person if such Person directly or indirectly controls, is directly or indirectly controlled by or is directly or indirectly under common control with such other Person. For this purpose, “control” (including, with its correlative meanings, “controlled by” and “under common control with”) means the power, whether by contract, equity ownership or otherwise, to direct the policies or management of a Person.
“Anti-Corruption Laws” shall have the meaning set forth in Section 2.14.
“Antitrust Laws” shall mean the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended, and all other applicable Legal Requirements that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening of competition through merger or acquisition.
“Assumed Company Option” shall have the meaning set forth in Section 1.7(a).
“Assumed Company RSU Award” shall have the meaning set forth in Section 1.7(b).
“Bankruptcy and Equity Exception” shall have the meaning set forth in Section 2.5.
“Burdensome Condition” shall have the meaning set forth in Section 4.5(e).
“Business Data” shall mean all business information, Confidential Information and all Personal Data and data (whether of employees, contractors, consultants, customers, consumers, or other Persons and whether in electronic or any other form or medium) that is accessed, collected, used, processed, stored, shared, distributed, transferred, disclosed, destroyed or disposed of used by an IT System or on behalf of Company or Company Subsidiaries.
“Business Day” shall mean any day other than a Saturday, a Sunday or other day on which the SEC or banking institutions located in the City of New York are authorized or required by Legal Requirements to be closed.
“Cancelled Company Option” shall have the meaning set forth in Section 1.7(b).
“Cancelled Company RSU Award” shall have the meaning set forth in Section 1.7(d).
“Certificates of Merger” shall have the meaning set forth in Section 1.2.
“Closing” shall have the meaning set forth in Section 1.2.
“Closing Date” shall have the meaning set forth in Section 1.2.
“Code” shall mean the United States Internal Revenue Code of 1986, as amended.
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“Commonly Controlled Entity” shall mean any entity, trade or business that is a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the entity, trade or business that is a member of the same “controlled group” as the Company, pursuant to Section 4001(a)(14).
“Company” shall have the meaning set forth in the Preamble.
“Company Acquisition Proposal” shall mean any offer, indication of interest or proposal (other than an offer or proposal made or submitted by or on behalf of Parent or any of its Subsidiaries) contemplating or otherwise relating to any Company Acquisition Transaction.
“Company Acquisition Transaction” shall mean any transaction or series of related transactions (other than the Mergers) involving:
(a)any merger, consolidation, amalgamation, share exchange, business combination, joint venture, reorganization or other similar transaction involving the Company;
(b)any transaction (i) in which any Person or “group” (as defined in the Exchange Act and the rules thereunder) of Persons acquires beneficial or record ownership of securities (or instruments convertible into or exercisable or exchangeable for, such securities) representing twenty percent (20%) or more of the outstanding voting power of the Company; or (ii) in which the Company or any of its Subsidiaries issues securities (or instruments convertible into or exercisable or exchangeable for, such securities) representing twenty percent (20%) or more of the outstanding voting power of the Company (after giving effect to such transaction);
(c)any sale, exchange, transfer, acquisition or disposition of twenty percent (20%) or more of the consolidated assets (including equity securities of Subsidiaries of the Company) of the Company and its Subsidiaries, taken as a whole, or of any business or businesses (or the assets of any business or businesses, including equity securities of any Subsidiaries of the Company) that constitute or account for twenty percent (20%) or more of the consolidated net revenues or net income of the Company and its Subsidiaries, taken as a whole;
(d)any tender offer or exchange offer that if consummated would result in any Person or “group” (as defined in the Exchange Act and the rules thereunder) of Persons acquiring beneficial or record ownership of securities (or instruments convertible into or exercisable or exchangeable for such securities) representing twenty percent (20%) or more of the outstanding voting power of the Company; or
(e)any combination of the foregoing types of transaction if the sum of the percentage of the voting power of the Company or of the consolidated net revenues, net income or assets of the Company and its Subsidiaries, taken as a whole, involved is twenty percent (20%) or more.
“Company Board” shall mean the board of directors of the Company.
“Company Board Recommendation” shall have the meaning set forth in Section 2.4.
“Company Book-Entry Shares” shall have the meaning set forth in Section 1.8(b).
“Company Capitalization Date” shall have the meaning set forth in Section 2.3(a).
“Company Change in Recommendation” shall have the meaning set forth in Section 4.4(b).
“Company Common Stock” shall mean the common stock, par value $0.0001 per share, of the Company.
“Company Disclosure Schedule” shall have the meaning set forth in the introductory paragraph of Section 2.
“Company Equity Agreements” shall mean the Company Equity Plans (together with all grant agreements evidencing the Company Options and Company RSUs) and the Company ESPP.
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“Company Equity Plans” shall mean the Company’s 2011 Equity Incentive Plan, as amended, and the Company’s 2021 Equity Incentive Plan.
“Company ESPP” shall mean the Metromile, Inc. 2021 Employee Stock Purchase Plan.
“Company Financial Advisor” shall have the meaning set forth in Section 2.22.
“Company Insurance Subsidiary” shall have the meaning set forth in Section 2.24.
“Company Intervening Event” shall have the meaning set forth in Section 4.4(d).
“Company IP” shall mean all Intellectual Property owned, or purported to be owned by the Company or any Company Subsidiary.
“Company IP Licenses” shall have the meaning set forth in Section 2.9(k).
“Company Material Adverse Effect” shall mean any state of facts, circumstance, condition, event, change, development, occurrence, result, effect, action or omission (each, an “Effect”) that, individually or in the aggregate with any one or more other Effects, (i) has had, or would reasonably expected to have, a material adverse effect on the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole or (ii) prevents, materially impairs, materially impedes or materially delays the consummation of the Mergers and the other transactions contemplated hereby on a timely basis and in any event on or before the End Date; provided, however, that with respect to clause (i) only, no Effect to the extent resulting or arising from any of the following, shall, to such extent, be deemed to constitute, or be taken into account in determining the occurrence of, a Company Material Adverse Effect: (A) general economic, political, business, industry, financial or market conditions affecting the industry in which the Company and its Subsidiaries operate; (B) any outbreak, continuation or escalation of any military conflict, declared or undeclared war, armed hostilities, or acts of foreign or domestic terrorism (including cyber-terrorism) in countries in which, or in the proximate geographic region of which, the Company or its Subsidiaries operate; (C) any pandemic (including the SARS-CoV-2 virus and COVID-19 disease), Pandemic Measure, epidemic, plague, or other outbreak of illness or public health event, hurricane, flood, tornado, earthquake, wildfire or other natural disaster, catastrophe event or act of God; (D) any failure by the Company or any of its Subsidiaries to meet any internal or external projections or forecasts or any decline in the price of Company Common Stock (but excluding, in each case, the underlying causes of such failure or decline, as applicable, which may themselves constitute or be taken into account in determining whether there has been, or would be, a Company Material Adverse Effect to the extent not otherwise excluded in this definition); (E) the public announcement, pendency or consummation of the Mergers and the other transactions contemplated hereby; (F) changes in applicable Legal Requirements or the interpretation thereof; (G) changes in GAAP, SAP or any other applicable accounting standards or principles or the interpretation thereof; or (H) any action expressly required to be taken by the Company pursuant to the terms of this Agreement or at the express written direction or consent of Parent; provided, further, that any Effect relating to or arising out of or resulting from any change or event referred to in clause (A), (B), (C), (F) or (G) above may constitute, and be taken into account in determining the occurrence of, a Company Material Adverse Effect to the extent that such change or event has a disproportionate impact on the Company and its Subsidiaries as compared to other participants that operate in the industry in which the Company and its Subsidiaries operate.
“Company Options” shall mean options to purchase shares of Company Common Stock from the Company.
“Company Permits” shall have the meaning set forth in Section 2.12(b).
“Company Permitted Encumbrances” shall mean (a) Liens for Taxes or governmental assessments, charges or claims of payment not yet due and payable or which are being contested in good faith by appropriate proceedings; (b) vendors’, mechanics’, materialmen’s, carriers’, workers’, construction and other similar Liens arising or incurred in the ordinary course of business or with respect to liabilities that are not yet due and payable or, if due, are not delinquent or are being contested in good faith by appropriate proceedings; (c) encumbrances or imperfections of title relating to liabilities for which appropriate reserves have been established and are reflected in the Most Recent Company Balance Sheet or imposed or promulgated by applicable Legal Requirements, including zoning, entitlement, building codes, or other Legal Requirements with respect to land use; (d) Liens, pledges or encumbrances arising from or otherwise relating to transfer restrictions under the securities laws of any jurisdiction; (e) non-exclusive licenses of Intellectual Property granted in the ordinary course of business; (f) Liens, encumbrances or imperfections of title which do not and would not reasonably be expected to, individually or in the aggregate, materially impair the use of the subject property as used by the Company
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and its Subsidiaries and (g) Liens arising under any Company indentures or the Company’s existing credit facility (or any replacement or refinancing thereof in accordance with this Agreement).
“Company Placement Warrants” shall mean means the warrants exercisable for Company Common Stock and issued to certain holders in a private placement in connection with initial public offering of INSU Acquisition Corp. II (the “IPO”) and pursuant to the applicable subscription agreement between the Company and the applicable holders.
“Company Plan” shall mean each “employee benefit plan” (within the meaning of Section 3(3) of ERISA, whether or not subject to ERISA) and each other employment, bonus, deferred compensation, equity or equity-based, pension, severance, change in control, transaction, retention, employee loan, retirement, health and welfare, medical, dental, disability, fringe benefit, or other employee benefit plan, policy, agreement, program or arrangement, which the Company or any Company Subsidiary maintains for the benefit of its current or former employees, consultants or directors, but excluding any plan, program, policy, agreement or arrangement sponsored or maintained by any non-U.S. Governmental Entity that the Company or any of its Subsidiaries contributes to or is required to contribute to under applicable Legal Requirements.
“Company Privacy Policy” shall mean each external or internal, past or present privacy policy or privacy- or security-related representation, statement, notice, obligation or promise of the Company or any Company Subsidiaries including any policy, representation, statement, notice, obligation, or promise relating to: (a) the privacy or security of Personal Data of users of any website, mobile application or service operated by or on behalf of the Company or any Company Subsidiary (or the privacy or security of Personal Data of such users’ customers, employees or other third parties related to such users); or (b) the collection, use, storage, hosting, disclosure, transmission, transfer, disposal, retention, interception, or other processing of, or security of, any Personal Data.
“Company Products” shall mean any and all products and services that are or have been since January 1, 2017 produced, marketed, offered, sold, licensed, provided, distributed or supported by or on behalf of the Company or any Company Subsidiary, including but not limited to insurance services and devices provided to consumers (other than Insurance Contracts) and used by the Company and the Company Subsidiaries to provide such insurance services and Technology of the Company and Company IP licensed to third-party insurers.
“Company Public Warrants” shall mean the warrants exercisable for Company Common Stock issued in connection with the IPO and governed by that certain Warrant Agreement, dated September 2, 2020, by and among the Company and each of the signatories thereto.
“Company Registered IP” shall have the meaning set forth in Section 2.9(a).
“Company Returns” shall have the meaning set forth in Section 2.15(a)(i).
“Company RSUs” shall mean restricted stock units representing the right to vest in and be issued shares of Company Common Stock by the Company that are subject to vesting restrictions based on continuing service or based on performance.
“Company SEC Documents” shall have the meaning set forth in Section 2.7(a).
“Company Sites” shall have the meaning set forth in Section 2.9(m).
“Company Statutory Statements” shall have the meaning set forth in Section 2.25.
“Company Stock Certificates” shall have the meaning set forth in Section 1.8(b).
“Company Stockholder Meeting” shall have the meaning set forth in Section 4.4(a).
“Company Subsidiary” shall mean any direct or indirect -Subsidiary of the Company.
“Company Superior Proposal” shall mean any bona fide, unsolicited written Company Acquisition Proposal made after the date of this Agreement that (a) if consummated, would result in any Person (or such Person’s direct or indirect stockholders) or “group” (as defined in the Exchange Act and the rules thereunder) of Persons (other than Parent) directly or indirectly becoming the beneficial owner of (i) any business or businesses that constitute or account for fifty percent (50%) or more of the net revenues, net income or assets of the Company, or (ii) fifty percent (50%) or more of the outstanding total voting power of the equity securities of
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the Company; and (b) the Company Board determines in good faith, after consultation with the Company’s outside legal counsel and its financial advisor, is reasonably capable of being consummated on the terms proposed and which, taking into account all financial and legal aspects thereof, including the timing, likelihood of consummation, legal, confidentiality, regulatory, financing and other aspects of such Company Acquisition Proposal, would be more favorable to the holders of shares of Company Common Stock from a financial point of view (including taking into account payment by the Company of the Termination Fee) than the transactions contemplated by this Agreement (after giving effect to any revisions to the terms of the Agreement committed to in writing by Parent in response to such Company Acquisition Proposal pursuant to Section 4.4).
“Company Superior Proposal Notice” shall have the meaning set forth in Section 4.4(c).
“Company Tax Counsel” shall mean Kirkland & Ellis LLP or such other nationally recognized Tax counsel reasonably satisfactory to the Company and Parent.
“Company Tax Opinion” shall mean a written opinion from Company Tax Counsel, delivered to the Company in connection with the consummation of the Mergers or filed in connection with the Form S-4 Registration Statement or the Proxy Statement/Prospectus, based on the facts, representations, assumptions and exclusions set forth or described in such opinion, to the effect that the Mergers, taken together, should qualify for the Intended Tax Treatment. In rendering such opinion, Company Tax Counsel shall be entitled to rely upon customary assumptions, representations, warranties and covenants reasonably satisfactory to it, including representations and covenants set forth in the customary tax representation letters obtained from Parent and the Company pursuant to Section 4.9(c).
“Company Warrant Agreements” shall mean (i) that certain Warrant Agreement, dated September 2, 2020, by and among the Company and each of the signatories thereto and (ii) that certain subscription agreement by and between the Company and the applicable holders of the Company Placement Warrants.
“Company Warrants” shall mean outstanding warrants issued pursuant to the Company Warrant Agreements.
“Continuing Employee” shall have the meaning set forth in Section 4.11(a).
“Contract” shall mean any contract, subcontract, note, bond, mortgage, indenture, lease, license, sublicense, guaranty, security agreement, franchise or other legally binding instrument, commitment or obligation, whether oral or in writing, excluding any permits, in each case, purporting to be legally binding.
“Control Person” shall have the meaning set forth in Section 4.5(a).
“COVID” shall mean SARS-CoV-2 or COVID-19, and any evolutions or mutations thereof or related or associated epidemics, pandemic or disease outbreaks.
“D&O Policy” shall have the meaning set forth in Section 4.10(b).
“Data Security Incident” shall mean the actual or suspected unauthorized access, acquisition, exfiltration, manipulation, erasure, use or disclosure of any Business Data owned, used, stored, received, or controlled by or on behalf of the Company or Company Subsidiaries, including, but not limited to, any unauthorized access, use, disclosure, loss or destruction of Personal Data that would constitute a breach for which notification to individuals and/or Governmental Entities or data protection authorities is required under the Privacy and Security Laws or for which notification was made to any of the aforementioned on a voluntary basis.
“Data Service Provider” shall have the meaning set forth in Section 2.9(l).
“Delaware Secretary of State” shall have the meaning set forth in Section 1.2.
“DGCL” shall have the meaning set forth in the Recitals.
“Domiciliary Department of Insurance” shall mean the domiciliary state insurance regulatory authority of the applicable Company Insurance Subsidiary.
“DTC” shall mean The Depository Trust Company.
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“EBS Business” shall have the meaning set forth in Section 4.1(a)(vi).
“First Certificate of Merger” shall have the meaning set forth in Section 1.2.
“First Effective Time” shall have the meaning set forth in Section 1.2.
“First Merger” shall have the meaning set forth in the Recitals.
“End Date” shall have the meaning set forth in Section 6.1(b).
“Entity” shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any company limited by shares, limited liability company or joint stock company), firm, society or other enterprise, association, organization or entity (including any Governmental Entity).
“Environmental Law” shall have the meaning set forth in Section 2.18.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Exchange Agent” shall have the meaning set forth in Section 1.10(a).
“Exchange Fund” shall have the meaning set forth in Section 1.10(a).
“Exchange Ratio” shall mean for each share of Company Common Stock, 0.05263 shares of Parent Common Stock.
“Export Approvals” shall have the meaning set forth in Section 2.12(d).
“Export Control Laws” shall mean (a) all applicable trade, export control, import, and antiboycott laws and regulations imposed, administered, or enforced by the U.S. government, including the Arms Export Control Act (22 U.S.C. § 2778), the International Emergency Economic Powers Act (50 U.S.C. §§ 1701–1706), Section 999 of the Internal Revenue Code, Title 19 of the U.S. Code, the International Traffic in Arms Regulations (22 C.F.R. Parts 120-130), the Export Administration Regulations (15 C.F.R. Parts 730-774), the Export Control Reform Act of 2018 (50 U.S.C. §§ 4801-4852), the U.S. customs regulations at 19 C.F.R. Chapter 1, and the Foreign Trade Regulations (15 C.F.R. Part 30); and (b) all applicable trade, export control, import, and antiboycott laws and regulations imposed, administered or enforced by any other country, except to the extent inconsistent with U.S. law.
“Foreign Plan” shall have the meaning set forth in Section 2.16(a).
“Form S-4 Registration Statement” shall mean the registration statement on Form S-4 to be filed with the SEC by Parent in connection with the Parent Share Issuance, as such registration statement may be amended prior to the time it is declared effective by the SEC.
“GAAP” shall mean United States generally accepted accounting principles.
“Generally Available Software” means generally, commercially available off-the-shelf software and (i) is used in the general operation of the business but is not material to the Company or any of its Subsidiaries, and (ii) has not been modified or customized for the Company or any of its Subsidiaries.
“Government Official” means (a) any elected or appointed government official, officer, employee or Person acting in an official or public capacity on behalf of a Governmental Entity, (b) any official or employee of a quasi-public or non-governmental international organization, (c) any employee or other Person acting for or on behalf of any entity that is wholly or partially government owned or controlled by a Governmental Entity, (d) any Person exercising legislative, administrative, judicial, executive, or regulatory functions for or pertaining to a Governmental Entity (including any independent regulator), (e) any political party official, officer, employee, or other Person acting for or on behalf of a political party and (f) any candidate for public office.
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“Governmental Authorization” shall mean any franchise, grants, easement, variance, exception, consent, certificate, approval, clearance, permission, permit, license, registration, qualification or authorization granted by any Governmental Entity.
“Governmental Entity” shall mean any federal, state, local or foreign governmental authority, any transnational governmental organization or any court of competent jurisdiction, arbitral, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign.
“Harmful Code” shall have the meaning set forth in Section 2.9(k).
“HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.
“In-Bound Licenses” shall have the meaning set forth in Section 2.9(k).
“Initial Surviving Corporation” shall have the meaning set forth in Section 1.1.
“Indemnified Parties” shall have the meaning set forth in Section 4.10(a).
“INSU Merger Agreement” shall mean that certain Agreement and Plan of Merger and Reorganization, dated as of November 24, 2020 and as amended on January 12, 2021 and further amended on February 8, 2021, by and among the Company, INSU II Merger Sub Corp. and Metromile Operating Company (formerly known as MetroMile, Inc.).
“Insurance Contract” shall mean each insurance policy, certificate, binder, slip, agreement, undertaking, contract, treaty or similar instrument, and all riders, endorsements and amendments thereto issued or assumed by any Company Insurance Subsidiary.
“Insurance Producer” shall mean each insurance agent, marketer, wholesaler, distributor, general agency, producer, broker, reinsurance intermediary, program manager, managing general agent and managing general underwriting currently writing, selling, producing, underwriting or administering business for or on behalf of any Company Insurance Subsidiary, including such party’s and its Subsidiaries’ salaried employees.
“Intellectual Property” shall mean Technology and Intellectual Property Rights.
“Intellectual Property Rights” shall mean any and all past, present and future common law or statutory rights anywhere in the world arising under or associated with: (i) patents, patent applications, statutory invention registrations, registered designs, industrial designs and design patents, and similar or equivalent rights in inventions and designs, and all intellectual property rights therein provided by international treaties and conventions, including all divisions, continuations, continuations-in-part, reissues, renewals, re-examinations, provisionals and extensions thereof (“Patents”); (ii) trademarks, service marks, trade dress, trade names, company names, logos and other designations of origin, and the goodwill associated with any of the foregoing, together with any registrations and applications for registration thereof (“Marks”); (iii) URL and domain name registrations, uniform resource locators, and Internet Protocol addresses, social media handles and other names, identifiers and locators associated with Internet addresses, sites and services; (iv) copyrights and any other equivalent rights in works of authorship (including intellectual property rights in Software as a work of authorship), whether registered or unregistered, moral rights, and any other rights of authors, and any registrations and applications for registration thereof (“Copyrights”); (v) mask work rights (as defined in the Semiconductor Chip Protection Act, 17 U.S.C. § § 901-914) and any other intellectual property right in semiconductor topology or mask works, and any registration therefore (“Mask Work Rights”) (vi) trade secrets and industrial secret rights, proprietary know-how, and confidential and proprietary data and business or technical information, including any ideas, formulas, compositions, inventions (whether patentable or not and however documented), processes, techniques, specifications, business plans, proposals, designs, technical data, invention disclosures, customer data, financial information, pricing and cost information, bills of material or other similar information (“Trade Secrets”); (vii) rights in databases and data collections (including rights (if any) in design databases, knowledge databases, customer lists and customer databases) under the laws of the United States or any other jurisdiction, whether registered or unregistered, and any applications for registration therefore; (viii) all claims and causes of actions arising out of or related to any past, current or future infringement or misappropriation of any of the foregoing; and (ix) other similar or equivalent intellectual property rights anywhere in the world.
“Intended Tax Treatment” shall have the meaning set forth in Section 4.9(a).
“IRS” shall mean the United States Internal Revenue Service.
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“IT Systems” shall have the meaning set forth in Section 2.9(k).
“knowledge of Parent” shall mean the actual knowledge, after reasonable inquiry of direct reports, of the individuals listed in Part “Definitions” of the Parent Disclosure Schedule.
“knowledge of the Company” shall mean the actual knowledge, after reasonable inquiry of direct reports, of the individuals listed in Part “Definitions” of the Company Disclosure Schedule.
“Legacy Company Equityholders” shall have the meaning set forth in Section 1.7(h)(ii).
“Legal Proceeding” shall mean any legal or administrative proceeding (including before the United States Patent and Trademark Office or the Patent Trial and Appeal Board), lawsuit, arbitration, court action, or other proceeding before any Governmental Entity.
“Legal Requirement” shall mean any law, rule or regulation adopted or promulgated by any Governmental Entity, including but not limited to the Anti-Corruption Laws, Privacy and Security Laws, Sanctions Laws and Export Control Laws, each as defined herein.
“Letter of Transmittal” shall have the meaning set forth in Section 1.10(b).
“Lien” shall mean, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, encumbrance or limitation on transfer in respect of such property or asset. A Person shall be deemed to own subject to a Lien any property or asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such property or asset.
Any statement in the Agreement to the effect that any information, document or other material has been “made available” by the Company shall mean that such information, document or material was (a) uploaded to the virtual data room maintained by the Company in connection with the transactions contemplated by the Agreement prior to 11:59 p.m., New York time on November 7, 2021 or (b) publicly filed with the SEC prior to the date of this Agreement. Any statement in the Agreement to the effect that any information, document or other material has been “made available” by Parent shall mean that such information, document or material was, prior to 11:59 p.m., New York time on November 7, 2021, (i) uploaded to the virtual data room maintained by Parent in connection with the transactions contemplated by the Agreement or (ii) publicly filed with the SEC.
“Material Contract” shall have the meaning set forth in Section 2.11.
“Maximum Annual Premium” shall have the meaning set forth in Section 4.10(b).
“Mergers” shall have the meaning set forth in the Recitals.
“Merger Consideration” shall have the meaning set forth in Section 1.5(b).
“Most Recent Company 10-K/A” shall mean the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2020 (filed with the SEC on June 2, 2021).
“Most Recent Company Balance Sheet” shall mean the balance sheet of the Company as of June 30, 2021.
“Most Recent Parent Balance Sheet” shall mean the balance sheet of Parent as of June 30, 2021.
“Nasdaq” shall have the meaning set forth in Section 2.7(e).
“Non-Disclosure Agreement” shall mean that certain confidentiality agreement, dated as of August 20, 2021, by and between the Company and Parent.
“Non-DTC Book-Entry Share” shall have the meaning set forth in Section 1.10(c).
“NYSE” shall have the meaning set forth in Section 3.4(a).
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“OFAC” shall mean the U.S. Department of Treasury, Office of Foreign Assets Control.
“Offering Period End Date” shall have the meaning set forth in Section 4.8.
“Open Source” shall mean any Software that is distributed as “free software,” “open source software” or under a similar licensing or distribution model (an “Open Source License”), including the GNU General Public License (GPL), GNU Lesser General Public License (LGPL), Mozilla Public License (MPL), BSD licenses, the Artistic License, the Netscape Public License, the Sun Community Source License (SCSL) the Sun Industry Standards License (SISL) and the Apache License, or any other license described by the Open Source Initiative as set forth on www.opensource.org.
“Option Consideration” shall have the meaning set forth in Section 1.7(b).
“Order” shall mean any order, decision, judgment, writ, injunction, stipulation, award, or decree, issued by any Governmental Entity.
“Organizational Documents” shall mean, with respect to any Entity (a) if such Entity is a corporation, such Entity’s certificate or articles of incorporation, by-laws and similar organizational documents, as amended; (b) if such Entity is a limited liability company, such Entity’s certificate or articles of formation and operating agreement, as amended; and (c) if such Entity is a limited partnership, such Entity’s certificate or articles of formation and limited partnership agreement, as amended.
“Out-Bound Licenses” shall have the meaning set forth in Section 2.9(k).
“Pandemic Measures” means any quarantine, “shelter in place,” “stay at home,” workforce reduction, social distancing, shut down, closure, sequester or any other Legal Requirement, Order, directive, guideline or recommendation by any Governmental Entity, in each case, in connection with or in response to COVID-19 or any other pandemic or epidemic.
“Parent” shall have the meaning set forth in the Preamble.
“Parent Benefit Plan” shall have the meaning set forth in Section 4.11(b).
“Parent Board” shall mean the board of directors of Parent.
“Parent Capitalization Date” shall have the meaning set forth in Section 3.3(a).
“Parent Common Stock” shall mean the common stock, par value $0.00001 per share, of Parent.
“Parent Disclosure Schedule” shall have the meaning set forth in the introductory paragraph of Section 3.
“Parent Equity Agreements” shall mean the agreements pursuant to which outstanding awards are granted under the Parent Equity Plan.
“Parent Equity Plan” shall mean the 2020 Incentive Award Plan, as amended and restated from time to time.
“Parent IP” shall mean all Intellectual Property owned, or purported to be owned by Parent or any Parent Subsidiary.
“Parent Material Adverse Effect” shall mean any Effect that, individually or in the aggregate with any one or more other Effects, (i) has had, or would reasonably expected to have, a material adverse effect on the business, financial condition or results of operations of Parent and its Subsidiaries, taken as a whole or (ii) prevents, materially impairs, materially impedes or materially delays the consummation of the Mergers and the other transactions contemplated hereby on a timely basis and in any event on or before the End Date; provided, however, that with respect to clause (i) only, no Effect to the extent resulting or arising from any of the following, shall, to such extent, be deemed to constitute, or be taken into account in determining the occurrence of, a Parent Material Adverse Effect: (A) general economic, political, business, industry, financial or market conditions affecting the industry in which Patent and its Subsidiaries operate; (B) any outbreak, continuation or escalation of any military conflict, declared or undeclared war, armed hostilities, or acts of foreign or domestic terrorism (including cyber-terrorism) in countries in which, or in the proximate geographic region of which, Parent and its Subsidiaries operate; (C) any pandemic (including the SARS CoV-2 virus and COVID-19 disease), Pandemic Measure, epidemic, plague, or other outbreak of illness or public health event, hurricane, flood, tornado, earthquake,
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wildfire or other natural disaster, catastrophe event or act of God; (D) any failure by Parent or any of its Subsidiaries to meet any internal or external projections or forecasts or any decline in the price of Parent Common Stock (but excluding, in each case, the underlying causes of such failure or decline, as applicable, which may themselves constitute or be taken into account in determining whether there has been, or would be, a Parent Material Adverse Effect to the extent not otherwise excluded in this definition); (E) the public announcement, pendency or consummation of the Mergers and the other transactions contemplated hereby; (F) changes in applicable Legal Requirements or the interpretation thereof; (G) changes in GAAP or any other applicable accounting standards or the interpretation thereof; or (H) any action expressly required to be taken by Parent pursuant to the terms of this Agreement or at the express written direction or consent of the Company; provided, further, that any Effect relating to or arising out of or resulting from any change or event referred to in clause (A), (B), (C), (F) or (G) above may constitute, and be taken into account in determining the occurrence of, a Parent Material Adverse Effect to the extent that such change or event has a disproportionate impact on Parent and its Subsidiaries as compared to other participants that operate in the industry in which Parent and its Subsidiaries operate.
“Parent Options” shall mean options to purchase shares of Parent Common Stock from Parent.
“Parent Permitted Encumbrances” shall mean (a) Liens for Taxes or governmental assessments, charges or claims of payment not yet due and payable or which are being contested in good faith by appropriate proceedings; (b) vendors’, mechanics’, materialmen’s, carriers’, workers’, construction and other similar Liens arising or incurred in the ordinary course of business or with respect to liabilities that are not yet due and payable or, if due, are not delinquent or are being contested in good faith by appropriate proceedings; (c) Liens, encumbrances or imperfections of title relating to liabilities for which appropriate reserves have been established and are reflected in the Most Recent Parent Balance Sheet or imposed or promulgated by applicable Legal Requirements, including zoning, entitlement, building codes, or other Legal Requirements with respect to land use; (d) Liens, pledges or encumbrances arising from or otherwise relating to transfer restrictions under the securities laws of any jurisdiction; (e) non-exclusive licenses of Intellectual Property granted in the ordinary course of business; (f) Liens, encumbrances or imperfections of title which do not and would not reasonably be expected to, individually or in the aggregate, materially impair the use of the subject property as used by Parent and its Subsidiaries; and (g) Liens arising under any Parent indentures or existing credit facility of Parent.
“Parent RSUs” shall mean restricted stock units representing the right to vest in and be issued shares of Parent Common Stock by Parent that are subject to vesting restrictions based on continuing service or based on performance.
“Parent SEC Documents” shall have the meaning set forth in Section 3.6(a).
“Parent Share Issuance” shall have the meaning set forth in Section 3.4(a).
“Parent Stock Price” shall mean the average of the volume weighted average trading prices per share of Parent Common Stock on NYSE (as reported by Bloomberg L.P. or, if not reported therein, in another authoritative source mutually selected by the parties) on each of the twenty (20) consecutive Trading Days ending on (and including) the Trading Day that is three Trading Days prior to the date of the First Effective Time.
“Parent Subsidiary” shall mean any direct or indirect Subsidiary of Parent.
“Parent Tax Counsel” shall mean Latham & Watkins LLP or such other nationally recognized Tax counsel reasonably satisfactory to Parent and the Company.
“Parent Tax Opinion” shall mean a written opinion from Parent Tax Counsel, delivered to Parent in connection with the consummation of the Mergers or filed in connection with the Form S-4 Registration Statement or the Proxy Statement/Prospectus, based on the facts, representations, assumptions and exclusions set forth or described in such opinion, to the effect that the Mergers, taken together, should qualify for the Intended Tax Treatment. In rendering such opinion, Parent Tax Counsel shall be entitled to rely upon customary assumptions, representations, warranties and covenants reasonably satisfactory to it, including representations and covenants set forth in the customary tax representation letters obtained from Parent and the Company pursuant to Section 4.9(c).
“Parent Warrant” shall have the meaning set forth in Section 1.7(g).
“Per Company Share Price” means (a) the Parent Stock Price multiplied by (b) the Exchange Ratio.
“Person” shall mean any individual or Entity.
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“Personal Data” shall mean any information about an identifiable natural person that alone or in combination with other information identifies, or could be used to identify, a natural person, and includes a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person, and any information that is defined as “personal data,” “personally identifiable information,” “individually identifiable health information,” “protected health information” or “personal information” under any applicable data protection Legal Requirement or Privacy and Security Law.
“Privacy and Security Laws” shall mean each Legal Requirement applicable to Business Data, data security, the collection, access, sharing, processing, use, retention, destruction, or protection of Business Data, and/or direct marketing and advertising, profiling and tracking, e-mail, messaging and/or telemarketing, including, but not limited to, the General Data Protection Regulation (EU) 2016/679, the Data Protection Act 2018 (UK), the California Consumer Protection Act, the Gramm-Leach-Bliley Act, the New York Department of Financial Services Cybersecurity Regulation (23 NYCRR 500), and any international, federal, state or local laws regulating the aforementioned, including state insurance laws. The Privacy and Security Laws shall also include the Payment Card Industry Data Security Standards.
“Prohibited Person” shall mean any Person that is the target of Sanctions Laws, including (a) a Person that has been determined by a competent authority to be the subject of a prohibition on such conduct of any law, regulation, rule or executive order administered by OFAC; (b) the government, including any political subdivision, agency or instrumentality thereof, of any country against which the United States maintains comprehensive economic sanctions or embargoes (currently Iran, Syria, Cuba, North Korea, and the Crimea region of Ukraine); (c) any Person that acts on behalf of or is owned or controlled by a government of a country against which the United States maintains comprehensive economic sanctions or embargoes; (d) any Person organized or resident in a country or territory subject to comprehensive sanctions; (e) any Person that has been identified on the OFAC Specially Designated Nationals and Blocked Persons List (Appendix A to 31 C.F.R. Ch. V), as amended from time to time, or fifty percent (50%) or more of which is owned, directly or indirectly, by any such Person or Persons, or, where relevant under applicable Sanctions Laws, controlled by any such Person or Persons or acting for or on behalf of such Person or Persons; or (f) any Person that has been designated on any similar list or Order published by a Governmental Entity in the United States.
“Proxy Statement/Prospectus” shall mean the proxy statement/prospectus to be sent to the Company’s stockholders in connection with the Company Stockholder Meeting.
“Registered IP” shall mean all U.S., international or foreign (a) issued Patents and Patent applications, (b) registered Marks and applications to register Marks, (c) registered Copyrights and applications for Copyright registration, (d) registered Mask Work Rights and applications to register Mask Work Rights, (e) domain name registrations and (f) all other Intellectual Property Rights that are registered with, issued by or applied for by or with any Governmental Entity or other public or quasi-public legal authority (including domain name registrars).
“Reinsurance Agreement” shall mean any reinsurance agreement to which the Company or any Company Insurance Subsidiary is a party and has any existing material rights or material obligations.
“Relevant Legal Restraint” shall have the meaning set forth in Section 5.1(e).
“Representatives” shall mean, with respect to a Person, all of the officers, directors, employees, consultants, legal representatives, agents, advisors, auditors, investment bankers, Affiliates and other representatives of such Person.
“Required Company Stockholder Vote” shall have the meaning set forth in Section 2.5.
“RSU Consideration” shall have the meaning set forth in Section 1.7(d).
“Sanctions Laws” shall mean applicable economic or financial sanctions or trade embargoes imposed, administered, or enforced by relevant Governmental Entities, including those administered by OFAC or the U.S. Department of State, the European Union or its Member States, or Her Majesty’s Treasury of the United Kingdom.
“SAP” shall mean, as applicable, the statutory accounting practices prescribed or permitted by the Domiciliary Department of Insurance as in effect at the relevant time, consistently applied, excluding any permitted practices.
“SEC” shall mean the United States Securities and Exchange Commission.
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“Second Certificate of Merger” shall have the meaning set forth in Section 1.2.
“Second Effective Time” shall have the meaning set forth in Section 1.2.
“Second Merger” shall have the meaning set forth in the Recitals.
“Securities Act” shall mean the Securities Act of 1933, as amended.
“Software” shall mean any computer software, programs and databases in any applicable form, including object code, source code, firmware and embedded versions thereof tools, assemblers, applets, compilers, application programming interfaces, developers kits, utilities, graphical user interfaces, menus, images, icons, and forms, and all versions, updates, corrections, enhancements and modifications thereof, and all related documentation, developer notes, comments and annotations related thereto.
“Sponsor Share Cancellation and Vesting Agreement” shall have the meaning set forth in Section 1.5(b).
An Entity shall be deemed to be a “Subsidiary” of another Person if such Person directly or indirectly owns, beneficially or of record (a) an amount of voting securities or other interests in such Entity that is sufficient to enable such Person to elect at least a majority of the members of such Entity’s board of directors or comparable governing body; or (b) at least fifty percent (50%) of the outstanding voting equity interests issued by such Entity.
“Statutory Statements” shall have the meaning set forth in Section 2.25.
“Surviving Company” shall have the meaning set forth in Section 1.1.
“Tax Returns” shall mean any and all returns, reports, elections, claims for refund, estimated Tax filings, declarations, certificates or other documents filed or required to be filed with any Governmental Entity with respect to Taxes, including any schedules or attachments thereto, and any amendments thereof.
“Taxes” shall mean any and all U.S. federal, state, local and non-U.S. taxes, assessments, levies, duties, tariffs, imposts and other similar charges and fees imposed by any Governmental Entity, including, without limitation, any income, franchise, windfall or other profits, gross receipts, premiums, property, sales, use, net worth, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation, excise, withholding, ad valorem, stamp, transfer, value-added, and license, registration and documentation fees, severance, occupation, environmental, disability, real property, personal property, registration, alternative or add-on minimum, or estimated tax, and including any interest, penalty, additions to tax and any additional amounts imposed with respect thereto, whether disputed or not.
“Technology” shall mean tangible embodiments of Intellectual Property Rights, including know-how, trade secrets and other proprietary information contained with, protecting, covering or relating to mask sets, wafers, products, development tools, algorithms, APIs, databases, data collections, Internet web sites, web content and links, diagrams, inventions, methods and processes (whether or not patentable), assembly designs, assembly methods, network configurations and architectures, proprietary information, protocols, layout rules, schematics, packaging and other specifications, Software (in any form, including source code, executable code, firmware, hardware configuration data, Verilog files, RTL code, Gerber files and GDSII files), concepts, techniques, test methods, interfaces, verification tools, technical documentation (including instruction manuals, samples, studies and summaries), annotations, comments, files, records, designs, bills of material, build instructions, test automation, test reports, performance data, optical quality data, routines, formulae, layout designs, topographies, blocks, libraries, circuit designs, test vectors, IP cores, net lists, emulation and simulation tools and reports, lab notebooks, invention disclosures, discoveries, improvements, prototypes, samples, studies, process flow, process module data, yield data, reliability data, engineering data, test results and all other forms of technical information and technology that are used in, held for use in, or relating to the Company Products and the business of the Company and the Company Subsidiaries. Technology does not include Intellectual Property Rights, including any Intellectual Property Rights in any of the foregoing.
“Termination Fee” shall mean an amount in cash equal to $12,500,000.
“Third Party Intellectual Property” means any and all Intellectual Property owned or purported to be owned by a third party.
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“Top Producer” shall mean a top twenty (20) producer of the Company and the Company Subsidiaries, taken as a whole, based on volume of new policy inceptions placed by such producers during the period commencing on January 1, 2021 and ending on the date of this Agreement.
“Top Supplier” shall mean a top (10) ten supplier of the Company and the Company Subsidiaries, taken as a whole, based on expenditures during the twelve (12) months ended September 30, 2021.
“Trading Day” shall mean any day on which shares of Parent Common Stock are tradeable on the NYSE.
“Treasury Regulations” shall mean the regulations prescribed under the Code (including any temporary regulations, amended or successor provisions with respect to such regulations).
“Voting and Support Agreement” shall have the meaning set forth in the Recitals.
“Willful Breach” means a material breach of this Agreement resulting from a deliberate act or a deliberate failure to act, taken or not taken with the actual knowledge that such act or failure to act would, or would reasonably be expected to, result in or constitute a material breach of this Agreement.
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EXHIBIT C
FORM OF LIMITED LIABILITY COMPANY AGREEMENT OF
THE SURVIVING COMPANY
[(See attached.)]
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Annex B
OPINION OF ALLEN & COMPANY LLC
November 8, 2021
The Board of Directors
Metromile, Inc.
425 Market Street, #700
San Francisco, California 94105
The Board of Directors:
We understand that Metromile, Inc., a Delaware corporation (“Metromile”), Lemonade, Inc., a Delaware corporation (“Lemonade”), Citrus Merger Sub A, Inc., a Delaware corporation and direct wholly owned subsidiary of Lemonade (“Acquisition Sub I”), and Citrus Merger Sub B, LLC, a Delaware limited liability company and direct wholly owned subsidiary of Lemonade (“Acquisition Sub II” and, together with Acquisition Sub I, “Acquisition Subs”), propose to enter into an Agreement and Plan of Merger (the “Agreement”). As more fully described in the Agreement, as part of a single integrated transaction, (i) Acquisition Sub I will be merged with and into Metromile (the “First Merger”), with Metromile as the surviving corporation in the First Merger, and thereafter Metromile will be merged with and into Acquisition Sub II (the “Second Merger” and, together with the First Merger, the “Mergers”), with Acquisition Sub II as the surviving company in the Second Merger, and (ii) by virtue of the First Merger, each outstanding share of the common stock, par value $0.0001 per share, of Metromile (“Metromile Common Stock”) will be converted into the right to receive 0.05263 (the “Exchange Ratio”) of a share of the common stock, par value $0.00001 per share, of Lemonade (“Lemonade Common Stock”). The terms and conditions of the Mergers are more fully set forth in the Agreement.
Allen & Company LLC (“Allen & Company”) has acted as financial advisor to Metromile in connection with the proposed Mergers and has been asked to render an opinion to the Board of Directors of Metromile (the “Board”) as to the fairness, from a financial point of view, to holders of Metromile Common Stock, other than as specified below, of the Exchange Ratio provided for in the Agreement. For such services, Metromile has agreed to pay to Allen & Company cash fees, of which a portion is payable upon the delivery of this opinion (the “Opinion Fee”) and the principal portion is contingent upon consummation of the Mergers. No portion of the Opinion Fee is contingent upon either the conclusion expressed in this opinion or successful consummation of the Mergers. Metromile also has agreed to reimburse Allen & Company’s reasonable expenses and to indemnify Allen & Company and related parties against certain liabilities arising out of our engagement.
Allen & Company, as part of our investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, private placements and related financings, negotiated underwritings, secondary distributions of listed and unlisted securities, and valuations for corporate and other purposes. As the Board is aware, Allen & Company in the past has provided investment banking services to Metromile unrelated to the Mergers and to Lemonade and in the future may provide such services to Metromile, Lemonade and/or their respective affiliates, for which services Allen & Company has received and would expect to receive compensation, including, during the two-year period prior to the date hereof, having acted as (i) co-placement agent for the private placement undertaken in connection with Metromile’s business combination with INSU Acquisition Corp. II and (ii) co-bookrunning manager for the initial underwritten public offering and a follow-on underwritten public offering of Lemonade Common Stock. In the ordinary course, Allen & Company as a broker-dealer and certain of Allen & Company’s affiliates, directors and officers have invested or may invest, hold long or short positions and may trade, either on a discretionary or non-discretionary basis, for their own or beneficiaries’ accounts or for those of Allen & Company’s clients, in the debt and equity securities (or related derivative securities) of Metromile, Lemonade and/or their respective affiliates. The issuance of this opinion has been approved by Allen & Company’s opinion committee.
Our opinion as expressed herein reflects and gives effect to our general familiarity with Metromile and Lemonade and the industry in which Metromile and Lemonade operate as well as information that we received during the course of this assignment, including information provided by the managements of Metromile and Lemonade in the course of discussions relating to the Mergers as more fully described below. In arriving at our opinion, we neither conducted a physical inspection of the properties or facilities of Metromile, Lemonade or any other entity nor made or obtained any evaluations or appraisals of the insurance premiums, assets or liabilities (contingent, accrued, derivative, off-balance sheet or otherwise) of Metromile, Lemonade or any other entity, or conducted any analysis concerning the solvency or fair value of Metromile, Lemonade or any other entity. We have not investigated, and express no opinion or view regarding, any actual or potential litigation, proceedings or claims involving or impacting Metromile, Lemonade or
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any other entity and we have assumed, with your consent, that there will be no developments with respect to any such matters that would be meaningful in any respect to our analyses or opinion. We are not an actuary and our services do not include any determination or evaluation of, or any attempt to evaluate, actuarial assumptions or allowances for losses or loss adjustment expenses and any unearned premium amounts and, accordingly, we have made no analysis of, and express no opinion or view as to, the adequacy of reserves with respect thereto. In connection with our engagement, we were not requested to, and we did not, undertake on behalf of Metromile a formal third-party solicitation process for the acquisition of all or a portion of Metromile; however, at the direction of the Board, we contacted selected third parties regarding their potential interest in exploring strategic opportunities with Metromile.
In arriving at our opinion, we have, among other things:
(i) |
reviewed the financial terms of a draft, dated November 8, 2021, of the Agreement; |
(ii) |
reviewed certain publicly available historical and other business and financial information relating to Metromile and Lemonade, including public filings of Metromile and Lemonade, and historical market prices for Metromile Common Stock and Lemonade Common Stock; |
(iii) |
reviewed certain financial information relating to Metromile, including certain internal financial forecasts, estimates and other financial and operating data relating to Metromile, provided to or discussed with us by the management of Metromile; |
(iv) |
reviewed certain financial information relating to Lemonade, including certain internal financial forecasts, estimates and other financial and operating data relating to Lemonade, provided to or discussed with us by the management of Lemonade and as approved and extended per the management of Metromile; |
(v) |
held discussions with the respective managements of Metromile and Lemonade relating to the operations, financial condition and prospects of Metromile and Lemonade; |
(vi) |
reviewed and analyzed certain publicly available information, including certain stock market data and financial information, relating to selected companies with businesses that we deemed generally relevant in evaluating Metromile and Lemonade; |
(vii) |
reviewed and analyzed certain publicly available financial information relating to selected transactions that we deemed generally relevant in evaluating the Mergers; and |
(viii) |
conducted such other financial analyses and investigations as we deemed necessary or appropriate for purposes of the opinion expressed herein. |
In rendering our opinion, we have relied upon and assumed, with your consent and without independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information available to us from public sources, provided to or discussed with us by the managements and other representatives of Metromile and Lemonade or otherwise reviewed by us. With respect to the financial forecasts, estimates and other financial and operating data relating to Metromile and Lemonade (as approved and extended, in the case of Lemonade, per the management of Metromile and including, without limitation, as to tax attributes) that we have been directed to utilize for purposes of our analyses and opinion, we have been advised by the respective managements of Metromile and Lemonade and we have assumed, at your direction, that such financial forecasts, estimates and other financial and operating data have been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such managements, as the case may be, as to, and are a reasonable basis upon which to evaluate, the future financial and operating performance of Metromile and Lemonade and the other matters covered thereby. We express no opinion or view as to any financial forecasts, estimates or other financial or operating data or the assumptions on which they are based.
We have relied, at your direction, upon the assessments of the managements of Metromile and Lemonade as to, among other things, (i) the potential impact on Metromile and Lemonade of certain market, competitive, geopolitical, macroeconomic, cyclical, seasonal and other conditions, trends and developments in and prospects for, and governmental, regulatory and legislative policies and
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matters relating to or otherwise affecting, the insurance industry, including the sectors of such industry and geographic regions in which Metromile and Lemonade operate, (ii) the capital necessary to support the respective businesses and growth initiatives of Metromile and Lemonade and to satisfy statutory capital and surplus requirements, (iii) the respective products and digital platforms, software, technology and intellectual property of Metromile and Lemonade (including associated risks), (iv) Metromile’s and Lemonade’s internal controls over financial reporting and related procedures, (v) implications for Metromile and Lemonade and their respective operations of the global COVID-19 pandemic, (vi) existing and future agreements and arrangements involving, and the ability to attract, retain and/or replace, key employees, customers, reinsurers, third-party service providers, partners and other commercial relationships of Metromile and Lemonade, and (vii) the ability to integrate the operations of Metromile and Lemonade. With your consent, we have assumed that there will be no developments with respect to any such matters that would have an adverse effect on Lemonade, Metromile or the Mergers (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to our analyses or opinion.
Further, our opinion is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to us as of, the date hereof. It should be understood that subsequent developments may affect the conclusion expressed in this opinion and that we assume no responsibility for advising any person of any change in any matter affecting this opinion or for updating or revising our opinion based on circumstances or events occurring after the date hereof. As you are aware, the credit, financial and stock markets, the industry in which Metromile and Lemonade operate and the securities of Metromile and Lemonade have experienced and may continue to experience volatility and we express no opinion or view as to any potential effects of such volatility on Metromile, Lemonade or the Mergers (including the contemplated benefits thereof).
We have assumed, with your consent, that the Mergers will be consummated in accordance with their terms and in compliance with all applicable laws, documents and other requirements, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the necessary governmental, regulatory or third party approvals, consents, releases, waivers, decrees and agreements for the Mergers, no delay, limitation, restriction or condition, including any divestiture or other requirements or remedies, amendments or modifications, will be imposed or occur that would have an adverse effect on Metromile, Lemonade or the Mergers (including the contemplated benefits thereof) that would be meaningful in any respect to our analyses or opinion. We also have assumed, with your consent, that the Mergers, taken together, will qualify for U.S. federal income tax purposes as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended, and will otherwise qualify for the intended tax treatment contemplated by the Agreement. In addition, we have assumed, with your consent, that the final executed Agreement will not differ from the draft reviewed by us in any respect meaningful to our analyses or opinion.
Our opinion is limited to the fairness, from a financial point of view and as of the date hereof, of the Exchange Ratio (to the extent expressly specified herein), without regard to individual circumstances of specific holders of Metromile Common Stock (whether by virtue of control, voting, liquidity, contractual arrangements or otherwise) that may distinguish such holders or the securities of Metromile held by such holders, and our opinion does not in any way address proportionate allocation or relative fairness. Our opinion also does not address any other terms, aspects or implications of the Mergers, including, without limitation, the form or structure of the Mergers, any voting and support agreement or any other agreements, arrangements or understandings entered into in connection with, related to or contemplated by the Mergers or otherwise. We express no opinion or view as to the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation or other consideration payable to any officers, directors or employees of any party to the Mergers or any related entities, or any class of such persons or any other party, relative to the Exchange Ratio or otherwise. We are not expressing any opinion or view as to the actual value of Lemonade Common Stock when issued or the prices at which Lemonade Common Stock or any other securities of Lemonade, or any securities of Metromile, may trade or otherwise be transferable at any time, including following announcement or consummation of the Mergers. In addition, we express no opinion or view with respect to accounting, tax, regulatory, legal or similar matters, including, without limitation, as to tax or other consequences of the Mergers or otherwise or changes in, or the impact of, accounting standards, tax and other laws, regulations and governmental and legislative policies affecting Metromile, Lemonade or the Mergers (including the contemplated benefits thereof), and we have relied, at your direction, upon the assessments of representatives of Metromile as to such matters. This opinion does not constitute a recommendation as to the course of action that Metromile (or the Board or any committee thereof) should pursue in connection with the Mergers or otherwise address the merits of the underlying decision by Metromile to engage in the Mergers, including in comparison to other strategies or transactions that might be available to Metromile or which Metromile might engage in or consider.
B-3
It is understood that this opinion and our advisory services are intended for the benefit and use of the Board (in its capacity as such) in connection with its evaluation of the Exchange Ratio from a financial point of view. This opinion does not constitute advice or a recommendation to any securityholder or other person as to how to vote or act on any matter relating to the Mergers or otherwise.
Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Exchange Ratio provided for in the Agreement is fair, from a financial point of view, to holders of Metromile Common Stock (other than, to the extent applicable, Lemonade, Acquisition Subs and their respective affiliates).
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Very truly yours, |
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ALLEN & COMPANY LLC |
B-4
Annex C
VOTING AND SUPPORT AGREEMENT
THIS VOTING AND SUPPORT AGREEMENT (this “Agreement”) is made and entered into as of November 8, 2021, by and among Lemonade, Inc., a Delaware corporation (“Parent”); and [ · ], a [ · ] (“Stockholder”).
WHEREAS, contemporaneously with the execution of this Agreement, Parent, Citrus Merger Sub A, Inc., a Delaware corporation and a direct wholly owned subsidiary of Parent (“Acquisition Sub I”), Citrus Merger Sub B, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Parent (“Acquisition Sub II,” and together with Acquisition Sub I, the “Acquisition Subs”), and Metromile, Inc., a Delaware corporation (the “Company”), are entering into an Agreement and Plan of Merger, dated as of the date hereof (the “Merger Agreement”), providing, among other things, for an integrated transaction pursuant to which, first, Acquisition Sub I will be merged with and into the Company (the “First Merger”) in accordance with the Merger Agreement and the General Corporation Law of the State of Delaware (the “DGCL”), and second, the Company, as the surviving corporation in the First Merger, will be merged with and into Acquisition Sub II (the “Second Merger,” and together with the First Merger, the “Mergers”) in accordance with the Merger Agreement, the DGCL and the Delaware Limited Liability Company Act, with Acquisition Sub II as the surviving limited liability company; and
WHEREAS, as a condition of and inducement to Parent’s willingness to enter into the Merger Agreement, Parent and the Acquisition Subs have required that Stockholder enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement and in the Merger Agreement, and intending to be legally bound hereby, the parties hereto agree as follows:
1. |
Certain Definitions. For the purposes of this Agreement, capitalized terms used but not otherwise defined in this Agreement shall have the meanings ascribed to them in the Merger Agreement, and other capitalized terms used herein shall have the respective meanings ascribed to them in this Section 1. |
“Additional Owned Shares” shall mean all shares of Company Common Stock and any other equity securities of the Company which are beneficially owned by Stockholder or, solely with respect to any Stockholder that is not an individual, any of its controlled Affiliates, and are acquired after the date hereof and prior to the Expiration Date.
“Affiliate” shall have the meaning set forth in the Merger Agreement; provided, however, that the Company shall not be deemed to be an Affiliate of Stockholder.
“beneficial ownership” (and related terms such as “beneficially owned” or “beneficial owner”) shall have the meaning set forth in Rule 13d-3 under the Exchange Act, and a Person’s beneficial ownership of securities shall be calculated in accordance with the provisions of such rule (in each case, irrespective of whether or not such rule is actually applicable in such circumstance).
“Company Stockholders Meeting” shall have the meaning set forth in Section 2.
“Covered Shares” shall mean the Owned Shares and Additional Owned Shares.
“knowledge of Stockholder” shall mean, for any Stockholder that is an individual, the actual knowledge, after reasonable inquiry, of such Stockholder and, for any Stockholder that is not an individual, the actual knowledge, after reasonable inquiry, of any officer of Stockholder.
“Liens” shall have the meaning set forth in Section 5(a).
“Owned Shares” shall mean all shares of Company Common Stock and any other equity securities of the Company which are beneficially owned by Stockholder or, solely with respect to any Stockholder that is not an individual, any of its controlled Affiliates, as of the date hereof, as set forth on Schedule I.
C-1
“Representatives” shall mean, with respect to a Person, all of the officers, directors, employees, consultants, legal representatives, agents, advisors, auditors, investment bankers, and other representatives of such Person and, solely with respect to any Stockholder that is not an individual, any of its controlled Affiliates.
“Term” shall have the meaning set forth in Section 6.
“Transfer” shall mean, with respect to a security, the transfer, pledge, hypothecation, encumbrance, assignment or other disposition (whether by sale, merger, consolidation, liquidation, dissolution, dividend, distribution or otherwise) of such security or the beneficial ownership thereof, the offer to make such a transfer or other disposition, and each option, agreement, arrangement or understanding, whether or not in writing, to effect any of the foregoing. As a verb, “Transfer” shall have a correlative meaning.
2. |
Agreement to Vote. Prior to the Expiration Date, at any meeting of the stockholders of the Company, however called, or at any adjournment or postponement thereof, or in any other circumstance in which the vote, consent or other approval of the stockholders of the Company is sought (each, a “Company Stockholders Meeting”), Stockholder irrevocably and unconditionally agrees that [it][he/she] shall, and shall cause any other holder of record of Stockholder’s Covered Shares to, (a) appear at each such meeting or otherwise cause all Covered Shares to be counted as present thereat for purposes of calculating a quorum and (b) vote (or cause to be voted), or execute and deliver a written consent (or cause a written consent to be executed and delivered) covering, all Covered Shares: |
(i) |
in favor of the adoption of the Merger Agreement and the approval of the Mergers and the other transactions contemplated by the Merger Agreement, and the execution and delivery by the Company of the Merger Agreement and the approval of the terms thereof and each of the other actions contemplated by the Merger Agreement and this Agreement; |
(ii) |
in favor of any adjournment or postponement recommended by the Company with respect to any Company Stockholders Meeting to the extent permitted or required pursuant to Section 4.4 of the Merger Agreement; |
(iii) |
against any Company Acquisition Proposal; |
(iv) |
against any merger agreement or merger (other than the Merger Agreement and the Mergers), consolidation, combination, sale of substantial assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by the Company; and |
(v) |
against any proposal, action or agreement that would reasonably be expected to (A) materially impede, frustrate, interfere with, delay, postpone, prevent or otherwise impair the Mergers or the other transactions contemplated by the Merger Agreement, (B) result in a breach in any respect of any covenant, representation, warranty or any other obligation or agreement of the Company under the Merger Agreement, (C) result in a breach in any respect of any covenant, representation, warranty or any other obligation or agreement of Stockholder under this Agreement, (D) result in any of the conditions set forth in Section 5 of the Merger Agreement not being fulfilled or (E) except as expressly contemplated by the Merger Agreement, change in any manner the dividend policy or capitalization of, including the voting rights of any class of capital stock of, the Company. Stockholder shall not commit or agree to take any action inconsistent with the foregoing. |
3. |
No Disposition or Solicitation. |
(a) |
No Disposition or Adverse Act. Stockholder hereby covenants and agrees that, except as contemplated by this Agreement and the Merger Agreement, prior to the Expiration Date, Stockholder shall not (i) offer to Transfer, Transfer or consent to any Transfer of any or all of the Covered Shares or any interest therein without the prior written consent of Parent, (ii) enter into any contract, option or other agreement or understanding with respect to any Transfer of any or all Covered Shares or any interest therein, (iii) grant any proxy, power-of-attorney or other authorization or consent in or with respect to any or all of the Covered Shares (other than a proxy card or broker instructions directing that the Covered Shares be voted in accordance with Section 2), (iv) deposit any or all of the Covered Shares into a voting trust or enter into a voting agreement or arrangement with respect to any or all of the Covered Shares or (v) take any other action that would make any representation or warranty of Stockholder contained herein untrue or incorrect or in any way restrict, limit or interfere with the performance of Stockholder’s obligations hereunder or the transactions contemplated hereby or by the Merger Agreement. Notwithstanding the |
C-2
foregoing, a Stockholder may Transfer Covered Shares (i) pursuant to a Rule 10b5-1 trading plan established by the Stockholder and in effect as of the date hereof, (ii) to effect a “cashless exercise” to pay the exercise price of Company Options or to satisfy such Stockholder’s Tax withholding obligations in connection with such exercise, as permitted pursuant to the terms of any of the Company Equity Agreements, (iii) to effect a “net settlement” of Company RSUs to satisfy such Stockholder’s Tax withholding obligations upon the settlement of a Company RSU, as permitted pursuant to the terms of any of the Company Equity Agreements, (iv), in the case of a Stockholder that is not an individual, to an Affiliate of such Stockholder and (v), in the case of a Stockholder that is an individual, (A) to any member of such Stockholder’s immediate family, (B) to a trust for the sole benefit of such Stockholder or any member of such Stockholder’s immediate family (i.e., spouse, lineal descendant or antecedent, brother or sister, adopted child or grandchild or the spouse of any child, adopted child, grandchild or adopted grandchild), (C) upon the death of such Stockholder, and (D) by will, divorce decree, intestacy or other similar law; provided that any such Transfer referenced in clauses (iv) — (v) shall be permitted only if the applicable transferee agrees in a signed writing reasonably acceptable to Parent (such acceptance not to be unreasonably withheld, conditioned or delayed) to be bound by the terms of this Agreement (a “Permitted Transfer”). Any attempted Transfer of Covered Shares or any interest therein in violation of this Section 3(a) shall be null and void ab initio.
(b) |
Non-Solicitation. Prior to the Expiration Date, Stockholder hereby agrees that Stockholder shall not, and shall use [its][his/her] reasonable best efforts to cause [its][his/her] Representatives not to, directly or indirectly: |
(i) |
solicit, initiate, knowingly encourage or knowingly facilitate any inquiries regarding, or the submission or announcement by any Person (other than Parent or its Subsidiaries) of, any proposal or offer that constitutes, or would reasonably be expected to lead to, any Company Acquisition Proposal; |
(ii) |
furnish any non-public information regarding the Company or any Subsidiary of the Company (other than to Parent and its Subsidiaries), in connection with, or for the purpose of soliciting, initiating, knowingly encouraging or knowingly facilitating, or in response to, any inquiry, proposal or offer that constitutes or would reasonably be expected to lead to a Company Acquisition Proposal; |
(iii) |
engage in, enter into, continue or otherwise participate in any discussions or negotiations with any Person (other than Parent or its Representatives) with respect to any Company Acquisition Proposal or any inquiry, proposal or offer that would reasonably be expected to lead to any Company Acquisition Proposal; |
(iv) |
approve, adopt, recommend, agree to or enter into, or propose to approve, adopt, recommend, agree to or enter into, any letter of intent, memorandum of understanding or similar document, agreement, commitment, or agreement in principle with respect to any Company Acquisition Proposal; or |
(v) |
resolve or agree to do any of the foregoing. |
(c) |
Stockholder shall promptly (and in no event later than one (1) Business Day after [its][his/her] receipt of such Company Acquisition Proposal or request) notify Parent in writing of any Company Acquisition Proposal or request (which notification shall include the identity of the Person making or submitting such request or Company Acquisition Proposal and a copy of any such written request or proposal (or, if not in writing, the material terms and conditions thereof)), together with copies of any proposed transaction agreements, and Stockholder shall thereafter keep Parent reasonably informed, on a reasonably current basis (and, in any event, within one (1) Business Day), of the status of such Company Acquisition Proposal or request, including informing Parent of any material change to the terms of such Company Acquisition Proposal, and the status of any negotiations, including any material change in its intentions as previously notified. Any violation of the foregoing restrictions by Stockholder or any of [its] [his/her] Representatives shall be deemed to be a material breach of this Agreement by Stockholder. Promptly following the execution and delivery of this Agreement, Stockholder shall, and shall use [its][his/her] reasonable best efforts to cause [its][his/her] Representatives to, and, solely with respect to a Stockholder that is not an individual, shall cause each of its controlled Affiliates to, immediately cease and cause to be terminated any existing solicitation of, or discussions or negotiations with, any Person (other than Parent and its Representatives) relating to any Company Acquisition Proposal made prior to the date hereof and any access any such Persons may have to any physical or electronic data room relating to any potential Company Acquisition Proposal. |
(a) |
Irrevocable Proxy. |
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(i) |
Stockholder hereby (A) irrevocably grants to, and appoints, Parent, and any person designated in writing by Parent, and each of them individually, Stockholder’s proxy and attorney-in-fact (with full power of substitution), for and in the name, place and stead of Stockholder, to vote all of the Covered Shares or grant a consent or approval in respect of the Covered Shares, in accordance with the terms of Section 2 hereof, solely with respect to matters set forth in Sections 2(i) — (v) hereof, and (B) revokes any and all proxies heretofore given in respect of the Covered Shares. For the avoidance of doubt, nothing herein shall restrict Stockholder from voting or granting consents or approvals in respect of the Covered Shares for any matters other than those set forth in Sections 2(i) — (v) hereof. |
(ii) |
The attorneys-in-fact and proxies named above are hereby authorized and empowered by Stockholder at any time after the date hereof and prior to the Expiration Date to act as Stockholder’s attorney-in-fact and proxy to vote the Covered Shares, and to exercise all voting, consent and similar rights of Stockholder with respect to the Covered Shares (including the power to execute and deliver written consents), solely with respect to matters set forth in Sections 2(i) — (v) hereof, at every Company Stockholders Meeting and in every written consent in lieu of such a meeting in accordance with the terms of Section 2 hereof. |
(iii) |
Stockholder hereby represents to Parent that any proxies heretofore given in respect of the Covered Shares are not irrevocable and that any such proxies are hereby revoked, and Stockholder agrees to promptly notify the Company of such revocation. Stockholder hereby affirms that the irrevocable proxy granted herein is given in connection with the execution of the Merger Agreement and that such irrevocable proxy is given to secure the performance of the duties of Stockholder under this Agreement. Stockholder hereby further affirms that the irrevocable proxy granted herein is coupled with an interest and may under no circumstances be revoked. Stockholder hereby ratifies and confirms all that such irrevocable proxy may lawfully do or cause to be done by virtue hereof. Without limiting the generality of the foregoing, such irrevocable proxy is executed and intended to be irrevocable in accordance with the provisions of Section 212 of the DGCL. If for any reason the proxy granted herein is not irrevocable, Stockholder agrees to vote the Covered Shares in accordance with Section 2 hereof, solely with respect to matters set forth in Sections 2(i) — (v) hereof. |
4.Additional Agreements.
(a) |
Certain Events. In the event of any stock split, stock dividend, merger, reorganization, recapitalization or other change in the capital structure of the Company affecting the Covered Shares or the acquisition of Additional Owned Shares or other securities or rights of the Company by Stockholder, (i) the type and number of Covered Shares shall be adjusted appropriately, and (ii) this Agreement and the obligations hereunder shall automatically attach to any additional Covered Shares or other securities or rights of the Company issued to or acquired by Stockholder. |
(b) |
Stop Transfer. In furtherance of this Agreement, Stockholder hereby authorizes and instructs the Company (including through the Company’s transfer agent) to enter a stop transfer order with respect to all of the Covered Shares, including authorizing the Company to, as promptly as practicable after the date of this Agreement, make a notation on its records and give instructions to the transfer agent for the Covered Shares not to permit, during the term of this Agreement, the Transfer of the Covered Shares unless such Transfer is a Permitted Transfer, provided that promptly following the earlier of (x) the Expiration Date and (y) obtaining the Required Company Stockholder Vote, any such stop transfer instructions imposed pursuant to this Section 4(b) shall be lifted. |
(c) |
Waiver of Appraisal and Dissenters’ Rights and Actions. Stockholder hereby (i) waives and agrees not to exercise any rights of appraisal or rights to dissent from the Mergers that Stockholder may have and (ii) agrees not to commence or participate in, assist or knowingly encourage, and to take all actions necessary to opt out of, any class in any class action with respect to, any action or claim, derivative or otherwise, against Parent, Acquisition Subs, the Company or any of their respective Subsidiaries or Affiliates and each of their successors and assigns relating to the negotiation, execution or delivery of this Agreement or the Merger Agreement or the consummation of the Mergers, including any claim (A) challenging the validity of, or seeking to enjoin the operation of, any provision of this Agreement (including any claim seeking to enjoin or delay the closing of the Mergers or (B) alleging a breach of any fiduciary duty of the Company Board in connection with the Merger Agreement or the transactions contemplated thereby; provided that nothing in this Section 4(c) shall restrict or prohibit Stockholder from asserting (x) its right to receive the Merger Consideration in accordance with the Merger Agreement and the DGCL or (y) counterclaims or defenses in any proceeding brought or claims asserted against it by Parent, Acquisition |
C-4
Subs, the Company or any of their respective Subsidiaries or Affiliates and each of their successors and assigns relating to this Agreement or the Merger Agreement, or from enforcing its rights under this Agreement.
(d) |
Communications. Stockholder shall not, and shall use reasonable best efforts to cause [its][his/her] Representatives not to, make any press release, public announcement or other communication with respect to the business or affairs of any of the Company, Parent or Acquisition Subs, including this Agreement and the Merger Agreement and the transactions contemplated hereby and thereby, without the prior written consent of Parent. Stockholder hereby (i) consents to and authorizes the publication and disclosure by Parent of Stockholder’s identity and holding of Covered Shares, and the nature of Stockholder’s commitments, arrangements and understandings under this Agreement in any press release or any other disclosure document in connection with the Mergers or any other transactions contemplated by the Merger Agreement and (ii) agrees as promptly as practicable to notify Parent of any required corrections with respect to any written information supplied by Stockholder specifically for use in any such disclosure document. |
(e) |
Additional Owned Shares. Stockholder hereby agrees to notify Parent promptly in writing of the number and description of any Additional Owned Shares. |
5. |
Representations and Warranties of Stockholder. Stockholder hereby represents and warrants to Parent as follows: |
(a) |
Title. Stockholder is the sole record and beneficial owner of the Covered Shares. The Owned Shares constitute all of the capital stock and any other equity securities of the Company owned of record or beneficially by Stockholder on the date hereof, and Stockholder is not the beneficial owner of, and does not have any right to acquire (whether currently, upon lapse of time, following the satisfaction of any conditions, upon the occurrence of any event or any combination of the foregoing) any shares of Company Common Stock or any other equity securities of the Company or any securities convertible into or exchangeable or exercisable for shares of Company Common Stock or such other equity securities, in each case other than the Owned Shares and any Additional Owned Shares. Stockholder (or its nominee or custodian for the benefit of Stockholder) has sole voting power, sole power of disposition and sole power to issue instructions with respect to the matters set forth in Sections 3 and 4 hereof and all other matters set forth in this Agreement, in each case with respect to all of the Covered Shares with no limitations, qualifications or restrictions on such rights, subject to applicable securities laws and the terms of this Agreement. Except as permitted by this Agreement, the Owned Shares and the certificates representing such Owned Shares, if any, are now, and at all times prior to the Expiration Date will be, held by Stockholder, or by a nominee or custodian for the benefit of Stockholder, free and clear of any and all liens, pledges, claims, options, proxies, voting trusts or agreements, security interests, understandings or arrangements or any other encumbrances whatsoever on title, transfer or exercise of any rights of a stockholder in respect of the Owned Shares (other than as created by this Agreement) (collectively, “Liens”). |
(b) |
Organization and Qualification. If Stockholder is not an individual, Stockholder is a legal entity duly organized, validly existing and, to the extent such concept is applicable, in good standing under the laws of the jurisdiction of its organization. |
(c) |
Authority. Stockholder has all necessary individual or entity power and authority and legal capacity to, and has taken all action necessary in order to, execute, deliver and perform all of Stockholder’s obligations under this Agreement, and consummate the transactions contemplated hereby, and no other proceedings or actions on the part of Stockholder are necessary to authorize the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. |
(d) |
Due Execution and Delivery. This Agreement has been duly and validly executed and delivered by Stockholder and, assuming due authorization, execution and delivery hereof by Parent, constitutes a legal, valid and binding agreement of Stockholder, enforceable against Stockholder in accordance with its terms, subject to the Bankruptcy and Equity Exception. If Stockholder is an individual and is married, and any of the Covered Shares constitute community property or spousal approval is otherwise necessary for this Agreement to be legal, binding and enforceable, such Stockholder’s spouse has delivered with this Agreement a Spousal Consent in the form attached hereto as Annex A and this Agreement has been duly authorized, executed and delivered by, and constitutes the legal, valid and binding obligation of, Stockholder’s spouse, enforceable against Stockholder’s spouse in accordance with its terms. |
(e) |
No Filings; No Conflict or Default. Except for any required filings under the HSR Act, any competition, antitrust and investment laws or regulations of foreign jurisdictions and the Exchange Act, and for those Governmental Authorizations identified in Part 5.1(c) of the Company Disclosure Schedule, no filing with, and no permit, authorization, consent or |
C-5
approval of, any Governmental Entity or any other Person is necessary for the execution and delivery of this Agreement by Stockholder, the consummation by Stockholder of the transactions contemplated hereby and the compliance by Stockholder with the provisions hereof. None of the execution and delivery of this Agreement by Stockholder, the consummation by Stockholder of the transactions contemplated hereby or compliance by Stockholder with any of the provisions hereof will (i) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, modification or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, permit, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind, including any voting agreement, proxy arrangement, pledge agreement, shareholders agreement or voting trust, to which Stockholder is a party or by which Stockholder or any of Stockholder’s properties or assets may be bound, (ii) violate any judgment, order, writ, injunction, decree or award of any court, administrative agency or other Governmental Entity that is applicable to Stockholder or any of Stockholder’s properties or assets, (iii) constitute a violation by Stockholder of any law or regulation of any jurisdiction, (iv) render Section 203 of the DGCL, or any other state takeover statute or similar statute or regulation, applicable to the Mergers or any other transaction involving Parent, or (v) if Stockholder is not an individual, contravene or conflict with Stockholder’s governing or organizational documents, in each case, except, in the case of clauses (i) through (iv), for any conflict, breach, default or violation described above which would not materially impair the ability of Stockholder to perform [its][his/her] obligations hereunder or consummate the transactions contemplated hereby.
(f) |
No Litigation. There is no suit, claim, action, investigation or proceeding pending or, to the knowledge of Stockholder, threatened against Stockholder at law or in equity before or by any Governmental Entity that questions the beneficial or record ownership of Stockholder’s Covered Shares, the validity of this Agreement or the performance by Stockholder of [its][his/her] obligations under this Agreement or that would reasonably be expected to impair in any material respect the ability of Stockholder to perform [its][his/her] obligations hereunder or to consummate the transactions contemplated hereby. |
(g) |
No Fees. No broker, finder or investment banker is entitled to any brokerage, finder’s or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Stockholder. |
(h) |
Receipt; Reliance. Stockholder has received and reviewed a copy of the Merger Agreement. Stockholder understands and acknowledges that Parent and Acquisition Subs are entering into the Merger Agreement in reliance upon Stockholder’s execution, delivery and performance of this Agreement and the representations, warranties, covenants and other agreements of Stockholder contained herein. |
6.Termination. This Agreement and all rights and obligations of the parties hereunder, including the proxy, shall commence on the date hereof and shall terminate upon the earliest of (such time, the “Expiration Date”) (a) the mutual agreement of Parent and Stockholder, (b) the Effective Time, and (c) the termination of the Merger Agreement in accordance with its terms; provided that (i) nothing herein shall relieve any party hereto from liability for any breach of this Agreement and (ii) this Section 6 and Section 8 shall survive any termination of this Agreement.
7.No Limitation. Nothing in this Agreement shall be construed to prohibit Stockholder or any of Stockholder’s Representatives who is an officer or member of the Company Board from taking any action (or failing to take any action) solely in his or her capacity as an officer or member of the Company Board (or any committee thereof) or from taking any action with respect to any Company Acquisition Proposal as an officer or member of the Company Board (or any committee thereof).
8.Miscellaneous.
(a) |
Entire Agreement. This Agreement (together with Schedule I) constitutes the entire agreement and supersedes all prior and contemporaneous agreements and understandings, both written and oral, among or between any of the parties hereto with respect to the subject matter hereof. |
(b) |
Reasonable Efforts. At the other party’s reasonable request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further lawful action as may be reasonably required or necessary to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated hereby. Without limiting the foregoing, Stockholder shall execute and deliver to Parent and any of its designees any proxies, including with respect to Additional Owned Shares, reasonably requested by Parent in furtherance of this Agreement. |
C-6
(c) |
No Assignment. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties hereto and their respective successors and permitted assigns. Except in connection with a Permitted Transfer, this Agreement shall not be assignable by any party, in whole or in part, by operation of law or otherwise, without the express prior written consent of the other parties hereto. Any attempted assignment in violation of the terms of this Section 8(c) shall be null and void ab initio. |
(d) |
Binding Successors. Without limiting any other rights Parent may have hereunder in respect of any Transfer of the Covered Shares, Stockholder agrees that this Agreement and the obligations hereunder shall attach to the Covered Shares beneficially owned by Stockholder and shall be binding upon any Person to which legal or beneficial ownership of such Covered Shares shall pass, whether by operation of law or otherwise, including, without limitation, Stockholder’s heirs, guardians, administrators, Representatives, successors or permitted assigns. |
(e) |
Amendments. This Agreement may be amended at any time prior to the Effective Time (whether before or after receipt of the Required Company Stockholder Vote) by an instrument in writing signed on behalf of each of the parties hereto. |
(f) |
Notice. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly given and made as follows: (i) if sent by registered or certified mail in the United States, return receipt requested, then such communication shall be deemed duly given and made upon receipt; (ii) if sent by nationally recognized overnight air courier (such as DHL or Federal Express), then such communication shall be deemed duly given and made two (2) Business Days after being sent; (iii) if sent by electronic mail, when transmitted (provided that the transmission of the email is promptly confirmed by telephone or response email); and (iv) if otherwise actually personally delivered to a duly authorized representative of the recipient, then such communication shall be deemed duly given and made when delivered to such authorized representative, provided that such notices, requests, demands and other communications are delivered to the address set forth below, or to such other address as any party shall provide by like notice to the other parties to this Agreement: |
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if to Parent: |
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Lemonade, Inc. |
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5 Crosby Street, 3rd Floor |
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New York, NY 10013 |
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Attention: |
Tim Bixby; Dennis Monaghan |
Email: |
tim.bixby@lemonade.com; dennis.monaghan@lemonade.com;
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with a copy (which shall not constitute notice) to: |
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Latham & Watkins LLP |
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1271 Avenue of the Americas |
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New York, NY 10020 |
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Attention: |
Robert M. Katz |
Email: |
Robert.Katz@lw.com |
with a copy (which shall not constitute notice) to: |
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Amar, Reiter, Jeanne, Shochatovitch & Co., Lawyers |
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Technology Park, The Tower main building (“HaMigdal”) |
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6th floor, 2 Agudat Sport Hapoel Rd. |
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Jerusalem 969580, Israel |
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Attention: |
Daniel Chinn |
Email: |
DanielC@ayr.co.il |
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if to Stockholder: |
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[STOCKHOLDER] |
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[ · ] |
C-7
Attention: |
[ · ] |
Email: |
[ · ] |
with a copy (which shall not constitute notice) to: |
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Kirkland & Ellis LLP |
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601 Lexington Avenue |
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New York, NY 10022 |
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Attention: |
Rajab S. Abbassi; Edward J. Lee |
Email: |
Rajab.Abbassi@kirkland.com; Edward.Lee@kirkland.com |
(g) |
Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties hereto agree that the court making such determination shall have the power to limit the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the parties hereto agree to replace such invalid or unenforceable term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term. |
(h) |
Remedies. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any such right, power or remedy by any party hereto shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. |
(i) |
No Waiver. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party or parties entitled to the benefits thereof only by a written instrument signed by the party granting such waiver. Any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. No failure on the part of any party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy. No single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. |
(j) |
No Third Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. |
(k) |
Applicable Law; Jurisdiction. |
(i) |
This Agreement is made under, and shall be construed and enforced in accordance with, the laws of the State of Delaware applicable to agreements made and to be performed solely therein, without giving effect to principles of conflicts of law. Each of the parties hereto (A) consents to and submits to the exclusive personal jurisdiction of the Court of Chancery of the State of Delaware or, if that court does not have jurisdiction, a federal court sitting in Delaware in any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement; (B) agrees that all claims in respect of such action or proceeding shall be heard and determined in any such court; (C) shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court; and (D) shall not bring any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement in any other court. Each of the parties hereto waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other Person with respect thereto. |
(ii) |
EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LEGAL REQUIREMENTS ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH |
C-8
RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. Each of the parties hereto acknowledges that it and the other parties have been induced to enter into this Agreement and the transactions contemplated by this Agreement, as applicable, by, among other things, the mutual waivers and certifications in this Section 8(k).
(l) |
Specific Performance. Each of the parties hereto agrees that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, and that monetary damages, even if available, would not be an adequate remedy therefor. It is accordingly agreed that, in addition to any other remedy that a party hereto may have under law or in equity, in the event of any breach or threatened breach by Parent or Stockholder of any covenant or obligation of such party contained in this Agreement, the other parties shall be entitled to obtain (i) an Order of specific performance to enforce the observance and performance of such covenant; and (ii) an injunction restraining such breach or threatened breach. In the event that any action is brought in equity to enforce the provisions of this Agreement, no party hereto shall allege, and each party hereto hereby waives the defense or counterclaim, that there is an adequate remedy at law. Each party hereto further agrees that no other party hereto or any other Person shall be required to obtain, furnish or post any bond or similar instrument in connection with or as a condition to obtaining any remedy referred to in this Section 8(l), and each party hereto irrevocably waives any right it may have to require the obtaining, furnishing or posting of any such bond or similar instrument. |
(m) |
Interpretation. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. The words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.” The parties hereto have participated jointly in the negotiation and drafting of this Agreement. No provision of this Agreement shall be interpreted for or against any party hereto because that party or its legal representatives drafted the provision. The words “hereof,” “hereto,” “hereby,” “herein,” “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not any particular section in which such words appear. |
(n) |
Counterparts. This Agreement may be executed and delivered (including by facsimile or other form of electronic transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. The exchange of a fully executed Agreement (in counterparts or otherwise) by facsimile or other electronic delivery shall be sufficient to bind the parties to the terms and conditions of this Agreement. |
(o) |
Expenses. Except as otherwise provided herein, each party hereto shall pay such party’s own expenses incurred in connection with this Agreement. |
(p) |
No Ownership Interest. Nothing contained in this Agreement shall be deemed, upon execution, to vest in Parent any direct or indirect ownership or incidence of ownership of or with respect to any Covered Shares. All rights, ownership and economic benefits of and relating to the Covered Shares shall remain vested in and belong to Stockholder, and Parent shall have no authority to manage, direct, superintend, restrict, regulate, govern or administer any of the policies or operations of the Company or exercise any power or authority to direct Stockholder in the voting of any of the Covered Shares, except as otherwise provided herein. |
(q) |
Capacity as Stockholder. Notwithstanding anything herein to the contrary, Stockholder signs this Agreement solely in Stockholder’s capacity as a stockholder of the Company, and not in any other capacity, and this Agreement shall not limit or otherwise affect the actions (or failure to take any actions) of any Affiliate, employee or designee of Stockholder or any of [its][his/her] Affiliates in his or her capacity, if applicable, as an officer or director of the Company or any other Person. |
[Signature page follows]
C-9
IN WITNESS WHEREOF, Parent and Stockholder have caused this Agreement to be duly executed as of the date first above written.
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LEMONADE, INC. |
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By: |
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Name: |
Daniel Schreiber |
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Title: |
Chief Executive Officer |
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By: |
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Name: |
Shai Wininger |
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Title: |
Chief Executive Officer |
[Signature Page to Voting and Support Agreement]
C-10
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[STOCKHOLDER] |
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By: |
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Name: |
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Title: |
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[Signature Page to Voting and Support Agreement]
C-11
Spousal Consent
I, ____________________, spouse of ___________________ (“Stockholder”), acknowledge that I have read the Voting and Support Agreement, executed by Stockholder, entered into on _______, (the “Agreement”), and that I know the contents of the Agreement. I am aware that the Agreement contains provisions regarding Company Common Stock (each, as defined in the Merger Agreement) that my spouse may own, including any interest that I might have therein.
I understand and agree that my interest, if any, in any Company Common Stock subject to the Agreement shall be irrevocably subject to the Agreement and the other agreements referred to therein. I further understand and agree that any community property interest that I may have in such Company Common Stock shall be similarly subject to the Agreement and the other agreements referred to therein.
I irrevocably constitute and appoint Stockholder as my true and lawful attorney and proxy in my name, place and stead to sign, make, execute, acknowledge, deliver, file and record all documents which may be required, and to manage, vote, act and make all decisions with respect to (whether necessary, incidental, convenient or otherwise), any and all Company Common Stock in which I now have or hereafter acquire any interest and in any and all Company Common Stock now or hereafter held of record by Stockholder (including but not limited to, the right, without further signature, consent or knowledge, to exercise amendments and modifications of, and to terminate, the foregoing agreements and to dispose of any and all such Company Common Stock), with all powers I would possess if personally present, it being expressly understood and intended that the foregoing power of attorney and proxy is coupled with an interest; and this power of attorney is a durable power of attorney and will not be affected by disability, incapacity or death of Stockholder, or dissolution of marriage and this proxy will not terminate without the consent of Stockholder.
I am aware that the legal, financial and related matters contained in the Agreement are complex and that I am free to seek independent professional guidance or counsel with respect to this consent. I have either sought such guidance or counsel or determined after carefully reviewing the Agreement that I will not seek such guidance or counsel.
Dated: |
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Print Name: |
C-13
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Subsection (a) of Section 145 of the General Corporation Law of the State of Delaware, or the DGCL, empowers a corporation to indemnify any person who was or is a party or who is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person acted in any of the capacities set forth above, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and the indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person’s heirs, executors and administrators. Section 145 also empowers the corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify such person against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a corporation’s certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (a) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any transaction from which the director derived an improper personal benefit. Lemonade’s certificate of incorporation limits the liability of Lemonade’s directors to Lemonade or its stockholders (in their capacity as directors but not in their capacity as officers) to the fullest extent permitted by the DGCL. Specifically, Lemonade’s directors will not be personally liable for monetary damages for breach of a director’s fiduciary duty as director, notwithstanding any provision of law imposing such liability, except to the extent that DGCL prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty.
Lemonade’s amended and restated bylaws generally provide for mandatory indemnification of its directors and officers to the full extent provided by the DGCL. In addition, Lemonade has entered into indemnification agreements with Lemonade’s directors and officers that generally provide for mandatory indemnification under circumstances for which indemnification would otherwise be discretionary under Delaware law.
Lemonade maintains insurance on behalf of any person who is or was a director or officer of Lemonade, or is or was a director or officer of Lemonade serving at the request of Lemonade as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not Lemonade would have the power or obligation to indemnify him against such liability under the provisions of Lemonade’s second amended and restated bylaws.
II-1
Item 21. Exhibits and Financial Statement Schedules
Exhibit
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Description |
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2.1† |
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3.1 |
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3.2 |
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4.1 |
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4.2 |
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5.1* |
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Opinion of Latham & Watkins LLP |
10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 |
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10.10 |
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10.11 |
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II-2
Exhibit
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Description |
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10.12 |
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10.13 |
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10.14 |
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10.15 |
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10.16 |
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21.1 |
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23.1 |
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Consent of Ernst & Young LLP, independent registered public accounting firm of Lemonade, Inc. |
23.2 |
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Consent of Moss Adams LLP, independent registered public accounting firm of Metromile, Inc. |
23.3* |
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Consent of Latham & Watkins LLP (included in Exhibit 5.1) |
24.1 |
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Power of Attorney (included on the signature page of this registration statement) |
99.1 |
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99.2 |
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* |
To be filed by amendment. |
† |
Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The undersigned registrant hereby undertakes to provide a copy of any of the omitted schedules upon request by the U.S. Securities and Exchange Commission. |
p |
Filed in Paper |
Item 22.Undertakings
(a) | The undersigned registrant hereby undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”); (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the U.S. Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
(b) | The undersigned registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(c) | The undersigned registrant hereby undertakes to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
II-3
(d) | The undersigned registrant hereby undertakes that, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
(e) | The undersigned registrant undertakes that in a primary offering of securities of the registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) any preliminary prospectus or prospectus of the registrant relating to the offering required to be filed pursuant to Rule 424; (ii) any free writing prospectus relating to the offering prepared by or on behalf of the registrant or used or referred to by the registrant; (iii) the portion of any other free writing prospectus relating to the offering containing material information about the registrant or its securities provided by or on behalf of the registrant; and (iv) any other communication that is an offer in the offering made by the registrant to the purchaser. |
(f) | The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(g) | The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. |
(h) | The undersigned registrant undertakes that every prospectus: (i) that is filed pursuant to the paragraph immediately preceding; or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(i) | Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the undersigned registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. |
(j) | The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. |
II-4
The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York on December 14, 2021.
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Lemonade, Inc. |
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By: |
/s/ Daniel Schreiber |
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Name: Daniel Schreiber |
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Title: Co-Chief Executive Officer |
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By: |
/s/ Tim Bixby |
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Name: Tim Bixby |
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Title: Chief Financial Officer |
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Each person whose signature appears below authorizes Daniel Schreiber, Shai Wininger and Tim Bixby, and any one of them individually, with full power of substitution and resubstitution, his true and lawful attorneys-in-fact, for him in any and all capacities, to sign any amendments (including post-effective amendments or supplements) to this registration statement and to file the same, with exhibits thereto, and other documents in connection therewith, with the SEC.
Signature |
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Title |
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Date |
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/s/ Daniel Schreiber |
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Co-Chief Executive Officer (Principal Executive |
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Daniel Schreiber |
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Officer) and Chairman of the Board of Directors |
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December 14, 2021 |
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/s/ Shai Wininger |
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Co-Chief Executive Officer |
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Shai Wininger |
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December 14, 2021 |
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/s/ Tim Bixby |
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Chief Financial Officer (Principal Financial |
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Tim Bixby |
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Officer and Principal Accounting Officer) |
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December 14, 2021 |
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/s/ Joel Cutler |
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Joel Cutler |
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Director |
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December 14, 2021 |
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/s/ Michael Eisenberg |
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Michael Eisenberg |
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Director |
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December 14, 2021 |
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/s/ Silvija Martincevic |
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Silvija Martincevic |
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Director |
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December 14, 2021 |
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/s/ Irina Novoselsky |
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Irina Novoselsky |
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Director |
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December 14, 2021 |
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/s/ Mwashuma Nyatta |
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Mwashuma Nyatta |
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Director |
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December 14, 2021 |
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/s/ Caryn Seidman-Becker |
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Caryn Seidman-Becker |
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Director |
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December 14, 2021 |
II-6
Exhibit 10.1
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of February 9, 2021, is made and entered into by and among each of INSU Acquisition Corp. II, a Delaware corporation (the “Company”), Insurance Acquisition Sponsor II, LLC, a Delaware limited liability company, Dioptra Advisors II, LLC, a Delaware limited liability company and INSU II PIPE Sponsor, LLC (collectively, the “Sponsor”), Cantor Fitzgerald & Co., a New York general partnership (“Cantor”), the Former MetroMile Stockholders (as defined below) and any person or entity who hereafter becomes a party to this Agreement pursuant to Section 5.2 of this Agreement (each, a “Holder” and collectively, the “Holders”).
RECITALS
WHEREAS, the Company has issued the Sponsor an aggregate of 7,846,667 shares (the “Founder Shares”) of the Company’s Class B common stock, $0.0001 par value per share (the “Class B Common Stock”);
WHEREAS, the Founder Shares are convertible into shares of the Company’s Class A common stock, par value $0.0001 per share (the “Common Stock”), on the terms and conditions provided in the Company’s amended and restated certificate of incorporation;
WHEREAS, the Sponsor and Cantor purchased an aggregate of 540,000 units of the Company (each, a “Placement Unit” and collectively, the “Placement Units”), each Placement Unit consisting of one share of Common Stock (each, a “Placement Share” and collectively, the “Placement Shares”) and one third of one warrant to purchase one share of Common Stock (each, a “Placement Warrant” and collectively, the “Placement Warrants”) in a private placement transaction (the “Private Placement”) occurring simultaneously with the closing of the Company’s initial public offering (the “IPO”);
WHEREAS, on September 2, 2020, the Company, the Sponsor and Cantor entered into a Registration Rights Agreement (the “Original Agreement”), pursuant to which the Company granted the Sponsor and Cantor certain registration rights with respect to certain securities of the Company;
WHEREAS, on the date hereof, upon the closing of the transactions (such transactions, the “Transactions”) contemplated by that certain Agreement and Plan of Merger and Reorganization, dated as of November 24, 2020 (the “Merger Agreement”), by and among the Company, INSU II Merger Sub Corp., a Delaware corporation, and MetroMile, Inc., a Delaware corporation (“MetroMile”), each outstanding share of MetroMile common stock shall be converted into the right to receive cash (if available) and shares of Common Stock;
WHEREAS, on the date hereof, upon the closing of the Transactions, 6,669,667 of the Founder Shares will be converted into shares of Common Stock, on the terms and conditions provided in the Company’s amended and restated certificate of incorporation;
WHEREAS, on the date hereof, the Sponsor has purchased an aggregate of 17,000,000 shares of Common Stock in a transaction exempt from registration under the Securities Act (such transaction, the “PIPE” and such shares, the “PIPE Shares”); and
WHEREAS, in connection with the purchase of the PIPE Shares and the consummation of the Transactions, the Company and the Holders desire to amend and restate the Original Agreement in order to provide the Holders with registration rights on the terms set forth herein.
NOW, THEREFORE, in consideration of the representations, covenants and agreements contained herein, and certain other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
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ARTICLE I
DEFINITIONS
1.1 Definitions. The terms defined in this Article I shall, for all purposes of this Agreement, have the respective meanings set forth below:
“Adverse Disclosure” shall mean any public disclosure of material non-public information, which disclosure, in the good faith judgment of the Board or the Chairman, Chief Executive Officer or principal financial officer of the Company (i) would be required to be made in any Registration Statement or Prospectus in order for the applicable Registration Statement or Prospectus not to contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein (in the case of any Prospectus and any preliminary Prospectus, in the light of the circumstances under which they were made) not misleading, (ii) would not be required to be made at such time if the Registration Statement were not being filed, and (iii) the Company has a bona fide business purpose for not making such information public.
“Agreement” shall have the meaning given in the Preamble.
“Board” shall mean the Board of Directors of the Company.
“Business Day” means any day, other than a Saturday or a Sunday, that is neither a legal holiday nor a day on which banking institutions are generally authorized or required by law or regulation to close in the City of New York, New York.
“Cantor” shall have the meaning given in the Preamble.
“Commission” shall mean the Securities and Exchange Commission.
“Common Stock” shall have the meaning given in the Recitals hereto.
“Company” shall have the meaning given in the Preamble.
“Demand Exercise Notice” shall have the meaning given in subsection 2.1.2.
“Demanding Holders” shall have the meaning given in subsection 2.1.1(b).
“Demand Registration” shall have the meaning given in subsection 2.1.2.
“Demand Registration Period” shall have the meaning given in subsection 2.1.2.
“Demand Registration Request” shall have the meaning given in subsection 2.1.2.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as it may be amended from time to time.
“Filing Date” shall have the meaning given in subsection 2.1.1(a).
“Former MetroMile Stockholders” shall mean former holders of MetroMile common stock who hold five percent (5%) or more of the Common Stock following the Transactions.
“Form S-1” shall mean Form S-1 for the registration of securities under the Securities Act promulgated by the Commission.
“Form S-3” shall mean Form S-3 for the registration of securities under the Securities Act promulgated by the Commission.
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“Founder Lock-up Period” shall mean, with respect to the Founder Shares, the period ending (x)(a) with respect to 1,569,333 of such shares, on the date hereof, (b) with respect to 2,550,167 of such shares, when the closing price of the Common Stock exceeds $15.00 for any 20 trading days within a 30-trading day period following the date hereof and (c) with respect to 2,550,167 of such shares, when the closing price of the Common Stock exceeds $17.00 for any 20 trading days within a 30-trading day period following the date hereof, or (y) in any case, if, after the date hereof, the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of the Company’s stockholders having the right to exchange their shares of Common Stock for cash, securities or other property.
“Founder Shares” shall have the meaning given in the Recitals hereto.
“Holders” shall have the meaning given in the Preamble.
“Initial Stockholders” shall mean the Sponsor.
“Initiating Holders” shall have the meaning given in subsection 2.1.2.
“IPO” shall have the meaning set forth in the Recitals hereto.
“Letter Agreement” shall mean the letter agreement by and among the Company, the Company’s officers and directors, the Sponsor and the other parties thereto.
“Maximum Number of Securities” shall have the meaning given in subsection 2.1.3.
“Merger Agreement” shall have the meaning set forth in the Recitals hereto.
“Minimum Demand Threshold” shall mean $30,000,000.
“Misstatement” shall mean an untrue statement of a material fact or an omission to state a material fact required to be stated in a Registration Statement, preliminary Prospectus or Prospectus, or necessary to make the statements in a Registration Statement, preliminary Prospectus or Prospectus, in light of the circumstances under which they were made, not misleading.
“Original Agreement” shall have the meaning set forth in the Recitals hereto.
“Permitted Transferees” shall mean any person or entity to whom a Holder of Registrable Securities is permitted to transfer such Registrable Securities prior to the expiration of the Founder Lock-up Period or Placement Unit Lock-up Period, as the case may be, under the Letter Agreement, the Placement Unit Subscription Agreements and any other applicable agreement between such Holder and the Company, and to any transferee thereafter.
“Piggy-back Registration” shall have the meaning given in Section 2.2.1.
“PIPE” shall have the meaning set forth in the Recitals hereto.
“PIPE Shares” shall have the meaning set forth in the Recitals hereto.
“Placement Share” or “Placement Shares” shall have the meaning given in the Recitals hereto.
“Placement Unit Lock-up Period” shall mean, with respect to the Placement Units, Placement Shares, Placement Warrants and any of the shares of Common Stock issued or issuable upon the exercise of such Placement Warrants, a period terminating 30 days after the date hereof, subject to certain exceptions set forth in the Letter Agreement and the Placement Unit Subscription Agreements.
“Placement Unit” or “Placement Units” shall have the meaning given in the Recitals hereto.
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“Placement Unit Subscription Agreements” shall mean, collectively, (i) the Unit Subscription Agreement, dated September 2, 2020, between the Company and the Sponsor, and (ii) the Unit Subscription Agreement, dated September 2, 2020, between the Company and Cantor.
“Placement Warrant” or “Placement Warrants” shall have the meaning given in the Recitals hereto.
“Private Placement” shall have the meaning given in the Recitals hereto.
“Pro Rata” shall have the meaning given in Section 2.1.3.
“Prospectus” shall mean the prospectus included in any Registration Statement, as supplemented by any and all prospectus supplements and as amended by any and all post-effective amendments and including all materials incorporated by reference in such prospectus.
“Prospectus Date” shall mean the date of the final Prospectus filed with the Commission and relating to the IPO.
“Registrable Security” shall mean (a) the shares of Common Stock issued or issuable upon the conversion of any Founder Shares, (b) the Placement Warrants (including any shares of Common Stock issued or issuable upon the exercise of any such Placement Warrants), (c) the Placement Shares, (d) the PIPE Shares, (e) the shares of Common Stock issued or issuable pursuant to the Merger Agreement and (f) any other equity security of the Company issued or issuable with respect to any such shares of Common Stock by way of a stock dividend or stock split or in connection with a combination of stock, acquisition, recapitalization, consolidation, reorganization, stock exchange, stock reconstruction and amalgamation or contractual control arrangement with, purchasing all or substantially all of the assets of, or engagement in any other similar transaction; provided, however, that, as to any particular Registrable Security, such securities shall cease to be Registrable Securities when: (i) if a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act, at the earlier of (A) one year following the date the Registration Statement is declared effective or (B) the date that such securities shall have been sold, transferred, disposed of or exchanged in accordance with such Registration Statement; (ii) such securities may otherwise be transferred, new certificates or book entries credits for such securities not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of such securities shall not require registration under the Securities Act; (iii) such securities shall have ceased to be outstanding; (iv) such securities have been sold to, or through, a broker, dealer or underwriter in a public distribution or other public securities transaction; or (v) such securities may be sold without registration pursuant to Rule 144 promulgated under the Securities Act (or any successor rule promulgated by the Commission) without limitation as to volume and manner of sale.
“Registration” shall mean a registration effected by preparing and filing a Registration Statement or similar document in compliance with the requirements of the Securities Act, and the applicable rules and regulations promulgated thereunder, and such Registration Statement becoming effective.
“Registration Expenses” shall mean the out-of-pocket expenses of a Registration, including, without limitation, the following:
(A) all registration and filing fees (including fees with respect to filings required to be made with the Financial Industry Regulatory Authority and any securities exchange on which the Common Stock is then listed);
(B) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel for the Underwriters in connection with blue sky qualifications of Registrable Securities);
(C) printing, messenger, telephone and delivery expenses;
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(D) reasonable fees and disbursements of counsel for the Company
(E) reasonable and documented fees and disbursements (not to exceed $100,000 in the aggregate for all Registrations hereunder) of one counsel for the Sponsor and its affiliates, which shall be selected by Cohen & Company, LLC; and
(F) reasonable fees and disbursements of all independent registered public accountants of the Company incurred specifically in connection with such Registration.
“Registration Statement” shall mean any registration statement that covers the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus included in such registration statement, amendments (including post-effective amendments) and supplements to such registration statement, and all exhibits to and all materials incorporated by reference in such registration statement.
“Requesting Holder” shall have the meaning given in subsection 2.1.3.
“Securities Act” shall mean the Securities Act of 1933, as amended from time to time.
“Shelf Registrable Securities” shall have the meaning given in subsection 2.1.1(b).
“Shelf Registration Statement” shall have the meaning given in subsection 2.1.1(a).
“Shelf Underwriting” shall have the meaning given in subsection 2.1.1(b).
“Shelf Underwriting Notice” shall have the meaning given in subsection 2.1.1(b).
“Shelf Underwriting Request” shall have the meaning given in subsection 2.1.1(b).
“Sponsor“ shall have the meaning given in the Preamble.
“Transactions” shall have the meaning set forth in the Recitals hereto.
“Underwriter” shall mean a securities dealer who purchases any Registrable Securities as principal in an Underwritten Offering and not as part of such dealer’s market-making activities.
“Underwritten Block Trade” shall have the meaning given in Section 2.1.1(b).
“Underwritten Registration” or “Underwritten Offering” shall mean a Registration in which securities of the Company are sold to an Underwriter in a firm commitment underwriting for distribution to the public.
ARTICLE II
REGISTRATIONS
2.1 Demand Registration.
2.1.1 Shelf Registration Statement. (a) As soon as practicable but no later than fifteen (15) Business Days after the date hereof (the “Filing Date”), the Company shall prepare and file with (or confidentially submit to) the Commission a shelf registration statement under Rule 415 of the Securities Act (such registration statement, a “Shelf Registration Statement”) covering the resale of all the Registrable Securities (determined as of two Business Days prior to such filing) on a delayed or continuous basis and shall use its commercially reasonable efforts to have such Shelf Registration Statement declared effective as soon as practicable after the filing thereof and no later than the earlier of (x) the 60th Business Day (or 80th Business Day if the Commission notifies the Company that it will “review” the Registration Statement) following the date hereof and (y) the 10th Business Day after the date the Company is notified (orally or in writing, whichever is earlier) by the Commission that the Registration Statement will not be “reviewed” or will not be subject to further review. Such Shelf Registration Statement shall provide for the resale of the Registrable Securities included therein pursuant to any method or combination of methods legally available to, and requested by, any Holder named therein. The Company shall use its commercially reasonable efforts to maintain the Shelf Registration Statement in accordance with the terms hereof, and shall prepare and file with the Commission such amendments, including post-effective amendments, and supplements as may be necessary to keep a Shelf Registration Statement continuously effective, available for use to permit all Holders named therein to sell their Registrable Securities included therein and in compliance with the provisions of the Securities Act until such time as there are no longer any Registrable Securities.
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(b) Subject to Section 2.3 and Section 2.4, (i) the Holders of a majority-in-interest of the then outstanding number of Registrable Securities held by the Initial Stockholders or the transferees of the Initial Stockholders, (ii) the Holders of a majority-in-interest of the then outstanding number of Registrable Securities held by the Former MetroMile Stockholders or the transferees of the Former MetroMile Stockholders or (iii) Cantor or its designees (the “Demanding Holders”), may make a written demand from time to time to elect to sell all or any part of their Registrable Securities, with a total offering price reasonably expected to exceed, in the aggregate, the Minimum Demand Threshold, pursuant to an Underwritten Offering pursuant to the Shelf Registration Statement, which written demand shall describe the amount and type of securities to be included in such Registration and the intended method(s) of distribution thereof. The Demanding Holders shall make such election by delivering to the Company a written request (a “Shelf Underwriting Request”) for such Underwritten Offering specifying the number of Registrable Securities that the Demanding Holders desire to sell pursuant to such Underwritten Offering (the “Shelf Underwriting”). As promptly as practicable, but no later than two (2) Business Days after receipt of a Shelf Underwriting Request, the Company shall give written notice (the “Shelf Underwriting Notice”) of such Shelf Underwriting Request to the Holders of record of other Registrable Securities registered on such Shelf Registration Statement (“Shelf Registrable Securities”). The Company, subject to Section 2.1.3, shall include in such Shelf Underwriting (x) the Registrable Securities of the Demanding Holders and (y) the Shelf Registrable Securities of any other Holder of Shelf Registrable Securities which shall have made a written request to the Company for inclusion in such Shelf Underwriting (which request shall specify the maximum number of Shelf Registrable Securities intended to be disposed of by such Holder) within five (5) days after the receipt of the Shelf Underwriting Notice. The Company shall, as expeditiously as possible (and in any event within fifteen (15) Business Days after the receipt of a Shelf Underwriting Request), but subject to Section 2.3, use its reasonable best efforts to effect such Shelf Underwriting. The Company shall, at the request of any Demanding Holders, file any prospectus supplement or, if the applicable Shelf Registration Statement is an automatic shelf registration statement, any post-effective amendments and otherwise take any action necessary to include therein all disclosure and language deemed necessary or advisable by the Demanding Holders or any other Holder of Shelf Registrable Securities to effect such Shelf Underwriting. Once a Shelf Registration Statement has been declared effective, the Demanding Holders may request, and the Company shall be required to facilitate, an aggregate of three (3) Shelf Underwritings pursuant to this subsection 2.1.1(b) with respect to any or all Registrable Securities, including one (1) Shelf Underwriting on behalf of Cantor; provided, however, that a Shelf Underwriting shall not be counted for such purposes unless a Registration Statement has become effective and all of the Registrable Securities requested by the Demanding Holders to be registered on behalf of the Demanding Holders in such Shelf Underwriting have been sold; and provided, further, that the number of Shelf Underwritings the Demanding Holders shall be entitled to request shall be reduced by each Demand Registration effected for such Demanding Holder pursuant to Section 2.1.2. Notwithstanding the foregoing, if a Demanding Holder wishes to engage in an underwritten block trade or similar transaction or other transaction with a 2-day or less marketing period (collectively, “Underwritten Block Trade”) off of a Shelf Registration Statement, then notwithstanding the foregoing time periods, such Demanding Holder only needs to notify the Company of the Underwritten Block Trade two (2) Business Days prior to the day such offering is to commence and the Holders of record of other Registrable Securities shall not be entitled to notice of such Underwritten Block Trade and shall not be entitled to participate in such Underwritten Block Trade; provided, however, that the Demanding Holder requesting such Underwritten Block Trade shall use commercially reasonable efforts to work with the Company and the underwriters prior to making such request in order to facilitate preparation of the registration statement, prospectus and other offering documentation related to the Underwritten Block Trade.
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2.1.2 Other Demand Registration. At any time that a Shelf Registration Statement provided for in Section 2.1.1(a) is not available for use by the Holders following such Shelf Registration Statement being declared effective by the Commission (a “Demand Registration Period”), subject to this Section 2.1.2 and Section 2.3 and Section 2.4, at any time and from time to time during such Demand Registration Period, the Demanding Holders shall have the right to make a written demand from time to time to effect one or more registration statements under the Securities Act covering all or any part of their Registrable Securities, with a total offering price reasonably expected to exceed, in the aggregate, the Minimum Demand Threshold, by delivering a written demand therefor to the Company, which written demand shall describe the amount and type of securities to be included in such Registration and the intended method(s) of distribution thereof. Any such request by any Demanding Holder pursuant to this Section 2.1.2 is referred to herein as a “Demand Registration Request,” and the registration so requested is referred to herein as a “Demand Registration” (with respect to any Demand Registration, the Demanding Holders making such demand for registration being referred to as the “Initiating Holders”). Subject to Section 2.3, the Demanding Holders shall be entitled to request (and the Company shall be required to effect) an aggregate of three (3) Demand Registrations pursuant to this subsection 2.1.2 with respect to any or all Registrable Securities, including one (1) Demand Registration on behalf of Cantor; provided, however, that a Demand Registration shall not be counted for such purposes unless a Registration Statement has become effective and all of the Registrable Securities requested by the Demanding Holders to be registered on behalf of the Demanding Holders in such Demand Registration have been sold; and provided, further, that the number of Demand Registrations the Demanding Holders shall be entitled to request shall be reduced by each Shelf Underwriting effected for such Demanding Holder pursuant to Section 2.1.1(b). The Company shall give written notice (the “Demand Exercise Notice”) of such Demand Registration Request to each of the Holders of record of Registrable Securities as promptly as practicable but no later than two (2) Business Days after receipt of the Demand Registration Request. The Company, subject to Sections 2.3 and 2.4, shall include in a Demand Registration (x) the Registrable Securities of the Initiating Holders and (y) the Registrable Securities of any other Holder of Registrable Securities which shall have made a written request to the Company for inclusion in such registration pursuant to Section 2.1.2 (which request shall specify the maximum number of Registrable Securities intended to be disposed of by such Holder) within five (5) days following the receipt of any such Demand Exercise Notice. The Company shall, as expeditiously as possible, but subject to Section 2.3, use its reasonable best efforts to (x) file or confidentially submit with the Commission (no later than (A) sixty (60) days from the Company’s receipt of the applicable Demand Registration Request if the Demand Registration is on Form S-1 or similar long-form registration or (B) thirty (30) days from the Company’s receipt of the applicable Demand Registration Request if the Demand Registration is on Form S-3 or any similar short-form registration), (y) cause to be declared effective as soon as reasonably practicable such registration statement under the Securities Act that includes the Registrable Securities which the Company has been so requested to register, for distribution in accordance with the intended method of distribution and (z) if requested by the Initiating Holders, obtain acceleration of the effective date of the registration statement relating to such registration.
2.1.3 Reduction of Underwritten Offering. If the managing Underwriter or Underwriters in an Underwritten Registration pursuant to a Shelf Underwriting or Demand Registration, in good faith, advises the Company, the Demanding Holders and any other Holders participating in the Underwritten Registration (if any) (the “Requesting Holders”) in writing that the dollar amount or number of Registrable Securities that such Holders desire to sell, taken together with all other shares of Common Stock or other equity securities that the Company desires to sell and the shares of Common Stock, if any, as to which a Registration has been requested pursuant to separate written contractual piggy-back registration rights held by any other stockholders who desire to sell, exceeds the maximum dollar amount or maximum number of equity securities that can be sold in the Underwritten Offering without adversely affecting the proposed offering price, the timing, the distribution method, or the probability of success of such offering (such maximum dollar amount or maximum number of such securities, as applicable, the “Maximum Number of Securities”), then the Company shall include in such Underwritten Offering, as follows: (i) first, the Registrable Securities of the Demanding Holders and the Requesting Holders (if any) (pro rata based on the respective number of Registrable Securities that each Demanding Holder and Requesting Holder (if any) has requested be included in such Underwritten Registration and the aggregate number of Registrable Securities that the Demanding Holders and Requesting Holders have collectively requested be included in such Underwritten Registration (such proportion is referred to herein as “Pro Rata”)) that can be sold without exceeding the Maximum Number of Securities; (ii) second, to the extent that the Maximum Number of Securities has not been reached under the foregoing clause (i), the shares of Common Stock or other equity securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Securities; and (iii) third, to the extent that the Maximum Number of Securities has not been reached under the foregoing clauses (i) and (ii), the shares of Common Stock or other equity securities of other persons or entities that the Company is obligated to register in a Registration pursuant to separate written contractual arrangements with such persons and that can be sold without exceeding the Maximum Number of Securities.
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2.1.4 Demand Registration Withdrawal. A majority-in-interest of the Demanding Holders initiating a Shelf Underwriting or Demand Registration, pursuant to a Registration under subsection 2.1.1 or 2.1.2 shall have the right in their sole discretion to withdraw from a Registration pursuant to such Demand Registration upon written notification to the Company and the Underwriter or Underwriters (if any) of their intention to withdraw from such Registration prior to (i) in the case of a Shelf Underwriting, the filing of a preliminary prospectus supplement setting forth the terms of the Underwritten Offering with the Commission and (ii) in the case of a Demand Registration, the effectiveness of the Registration Statement filed with the Commission with respect to the Registration of their Registrable Securities pursuant to such Demand Registration. Notwithstanding anything to the contrary in this Agreement, the Company shall be responsible for the Registration Expenses incurred in connection with a Registration pursuant to a Shelf Underwriting or Demand Registration prior to its withdrawal under this subsection 2.1.4.
2.2 Piggy-back Registration.
2.2.1 Piggy-back Rights. If, at any time on or after the date hereof, the Company proposes to file a Registration Statement under the Securities Act with respect to an offering of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into equity securities, for its own account or for the account of stockholders of the Company (or by the Company and by the stockholders of the Company including, without limitation, pursuant to Section 2.1 hereof), other than a Registration Statement (i) filed in connection with any employee stock option or other benefit plan, (ii) for an exchange offer, as part of a merger, consolidation or similar transaction or for an offering of securities solely to the Company’s existing stockholders, (iii) for an offering of debt that is convertible into equity securities of the Company, or (iv) for a dividend reinvestment plan, then the Company shall give written notice of such proposed filing to all of the Holders of Registrable Securities as soon as practicable but not less than ten (10) days before the anticipated filing date of such Registration Statement, which notice shall (A) describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing Underwriter or Underwriters, if any, in such offering, and (B) offer to all of the Holders of Registrable Securities the opportunity to register the sale of such number of Registrable Securities as such Holders may request in writing within five (5) Business Days after receipt of such written notice (such Registration a “Piggy-back Registration”). The Company shall, in good faith, cause such Registrable Securities to be included in such Piggy-back Registration and shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed Underwritten Offering to permit the Registrable Securities requested by the Holders pursuant to this subsection 2.2.1 to be included in a Piggy-back Registration on the same terms and conditions as any similar securities of the Company included in such Registration and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method(s) of distribution thereof. All such Holders proposing to distribute their Registrable Securities through an Underwritten Offering under this subsection 2.2.1 shall enter into an underwriting agreement in customary form with the Underwriter(s) selected for such Underwritten Offering by the Company. The Company may postpone or withdraw the filing or the effectiveness of a Piggyback Registration at any time in its sole discretion.
2.2.2 Reduction of Piggy-back Registration. If the managing Underwriter or Underwriters in an Underwritten Registration that is to be a Piggy-back Registration, in good faith, advises the Company and the Holders of Registrable Securities participating in the Piggy-back Registration in writing that the dollar amount or number of the shares of Common Stock that the Company desires to sell, taken together with (i) the shares of Common Stock, if any, as to which Registration has been demanded pursuant to separate written contractual arrangements with persons or entities other than the Holders of Registrable Securities hereunder, (ii) the Registrable Securities as to which registration has been requested pursuant to Section 2.2.1 hereof, and (iii) the shares of Common Stock, if any, as to which Registration has been requested pursuant to separate written contractual piggy- back registration rights of other stockholders of the Company, exceeds the Maximum Number of Securities, then:
(a) If the Registration is undertaken for the Company’s account, the Company shall include in any such Registration (A) first, the shares of Common Stock or other equity securities that the Company desires to sell, which can be sold without exceeding the Maximum Number of Securities; (B) second, to the extent that the Maximum Number of Securities has not been reached under the foregoing clause (A), the Registrable Securities of Holders exercising their rights to register their Registrable Securities pursuant to subsection 2.2.1 hereof, Pro Rata, which can be sold without exceeding the Maximum Number of Securities; and (C) third, to the extent that the Maximum Number of Securities has not been reached under the foregoing clauses (A) and (B), the shares of Common Stock, if any, as to which Registration has been requested pursuant to written contractual registration rights of other stockholders of the Company, Pro Rata, which can be sold without exceeding the Maximum Number of Securities; and
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(b) If the Registration is pursuant to a request by persons or entities other than the Holders of Registrable Securities, then the Company shall include in any such Registration (A) first, the shares of Common Stock or other equity securities, if any, of such requesting persons or entities, which can be sold without exceeding the Maximum Number of Securities; (B) second, to the extent that the Maximum Number of Securities has not been reached under the foregoing clause (A), the Registrable Securities of Holders exercising their rights to register their Registrable Securities pursuant to subsection 2.2.1, Pro Rata, which can be sold without exceeding the Maximum Number of Securities (C) third, to the extent that the Maximum Number of Securities has not been reached under the foregoing clauses (A) and (B), the shares of Common Stock or other equity securities that the Company desires to sell which can be sold without exceeding the Maximum Number of Securities; and (D) fourth, to the extent that the Maximum Number of Securities has not been reached under the foregoing clauses (A), (B) and (C), the shares of Common Stock or other equity securities for the account of other persons or entities that the Company is obligated to register pursuant to separate written contractual arrangements with such persons or entities, Pro Rata, which can be sold without exceeding the Maximum Number of Securities.
2.2.3 Piggy-back Registration Withdrawal. Any Holder of Registrable Securities shall have the right to withdraw from a Piggy-back Registration for any or no reason whatsoever upon written notification to the Company and the Underwriter or Underwriters (if any) of his, her or its intention to withdraw from such Piggy-back Registration prior to the effectiveness of the Registration Statement filed with the Commission with respect to such Piggy-back Registration. The Company (in its sole discretion or as the result of a request for withdrawal by persons pursuant to separate written contractual obligations) may postpone or withdraw the filing or effectiveness of a Piggy-back Registration. Notwithstanding anything to the contrary in this Agreement, the Company shall be responsible for the Registration Expenses incurred in connection with the Piggy-back Registration prior to its withdrawal under this subsection 2.2.3.
2.2.4 Unlimited Piggy-back Registration Rights. For purposes of clarity, any Registration effected pursuant to Section 2.2 hereof shall not be counted as a Registration pursuant to a Shelf Underwriting or Demand Registration effected under Section 2.1 hereof.
2.3 Restrictions on Registration Rights. The Company shall not be obligated to effect any Shelf Underwriting or Demand Registration within 180 days after the effective date of a previous Shelf Underwriting or Demand Registration or a previous Piggy-back Registration in which holders of Registrable Securities were permitted to register 75% of the Registrable Securities requested to be included therein. If in the good faith judgment of the Board, Registration would be detrimental to the Company and the Board concludes as a result that it is essential to defer the filing of such Registration Statement or the undertaking of such Underwritten Offering at such time, then in each case the Company shall furnish to such Holders a certificate signed by the Chairman of the Board stating that in the good faith judgment of the Board it would be detrimental to the Company for such Registration Statement to be filed or to undertake such Underwritten Offering in the near future and that it is therefore essential to defer the filing of such Registration Statement or undertaking of such Underwritten Offering, then in such event, the Company shall have the right to defer its obligation for up to 120 days; provided, however, that the Company shall not defer its obligation in this manner more than twice in any period of twelve consecutive months.
2.4 Lock-Up. Notwithstanding anything to the contrary in this Agreement, the Company shall not be obligated to effect any Shelf Underwriting, Demand Registration or Piggy-back Registration of (i) any Founder Shares subject to the Founder Lock-Up Period prior to the expiration of the Founder Lock-Up Period applicable to such Founder Shares, (ii) any Placement Units, Placement Shares or Placement Warrants during the Placement Unit Lock-Up Period or (iii) any Registrable Securities held by the Former MetroMile Stockholders prior to the expiration of the applicable Lock-Up Agreement (as defined in the Merger Agreement). Nothing in this Section 2.4 shall limit the Company’s obligation to register all of the Registrable Securities, including such Founder Shares, Placement Units, Placement Shares and Placement Warrants, on the Shelf Registration Statement required pursuant to Section 2.1.1(a).
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ARTICLE III
COMPANY PROCEDURES
3.1 General Procedures. If at any time on or after the date hereof the Company is required to effect the Registration of Registrable Securities, the Company shall use its reasonable best efforts to effect such Registration to permit the sale of such Registrable Securities in accordance with the intended plan of distribution thereof, and pursuant thereto the Company shall:
3.1.1 prepare and file with the Commission a Registration Statement with respect to such Registrable Securities and use its reasonable best efforts to cause such Registration Statement to become effective and remain effective until all Registrable Securities covered by such Registration Statement have been sold;
3.1.2 prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement, and such supplements to the Prospectus, as may be reasonably requested by any Holder or any Underwriter of Registrable Securities or as may be required by the rules, regulations or instructions applicable to the registration form used by the Company or by the Securities Act or rules and regulations thereunder to keep the Registration Statement effective until all Registrable Securities covered by such Registration Statement are sold in accordance with the intended plan of distribution set forth in such Registration Statement or supplement to the Prospectus and either (i) any underwriter overallotment option has terminated by its terms or (ii) the underwriters have advised the Company that they will not exercise such option or any remaining portion thereof;
3.1.3 furnish without charge to the Underwriters, if any, and each Holder of Registrable Securities included in such Registration, or such Holders’ legal counsel, copies of the Prospectus included in such Registration Statement (including each preliminary Prospectus), and each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), and such other documents as the Underwriters and each Holder of Registrable Securities included in such Registration or the legal counsel for any such Holders may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holders;
3.1.4 prior to any public offering of Registrable Securities, use its best efforts to (i) register or qualify the Registrable Securities covered by the Registration Statement under such securities or “blue sky” laws of such jurisdictions in the United States as any Holder of Registrable Securities included in such Registration Statement (in light of their intended plan of distribution) may reasonably request and (ii) take such action necessary to cause such Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable the Holders of Registrable Securities included in such Registration Statement to consummate the disposition of such Registrable Securities in such jurisdictions; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify or take any action to which it would be subject to general service of process or taxation in any such jurisdiction where it is not then otherwise so subject;
3.1.5 use commercially reasonable efforts to cause all such Registrable Securities to be listed on each securities exchange or automated quotation system on which similar securities issued by the Company are then listed;
3.1.6 provide a transfer agent or warrant agent, as applicable, and registrar for all such Registrable Securities no later than the effective date of such Registration Statement;
3.1.7 advise each seller of such Registrable Securities, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for such purpose and promptly use its commercially reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued;
3.1.8 at least five (5) days prior to the filing of any Registration Statement or Prospectus or any amendment or supplement to such Registration Statement or Prospectus or any document that is to be incorporated by reference into such Registration Statement or Prospectus, furnish a copy thereof to each seller of such Registrable Securities and its counsel, including, without limitation, providing copies promptly upon receipt of any comment letters received with respect to any such Registration Statement or Prospectus. The Company shall not include the name of any Holder or any information regarding any Holder in any Registration Statement or Prospectus, any amendment or supplement to such Registration Statement or Prospectus, any document that is to be incorporated by reference into such Registration Statement or Prospectus, or any response to any comment letter, without the prior written consent of such Holder and providing each such Holder or its counsel a reasonable amount of time to review and comment on such applicable document, which comments the Company shall include unless contrary to applicable law;
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3.1.9 in the event of an Underwritten Offering, permit the participating Holders to rely on any “cold comfort” letter from the Company’s independent registered public accountants provided to the managing Underwriter of such offering;
3.1.10 in the event of an Underwritten Offering, permit the participating Holders to rely on any opinion(s) of counsel representing the Company for the purposes of such Registration issued to the managing Underwriter of such offering covering legal matters with respect to the Registration;
3.1.11 in the event of any Underwritten Offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing Underwriter of such offering;
3.1.12 make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning with the first day of the Company’s first full calendar quarter after the effective date of the Registration Statement which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder, and which requirement will be deemed to be satisfied if the Company timely files complete and accurate information on Forms 10-Q, 10-K and 8-K under the Exchange Act and otherwise complies with Rule 158 under the Securities Act;
3.1.13 if the Registration involves the Registration of Registrable Securities involving gross proceeds in excess of $30,000,000, use its reasonable efforts to make available senior executives of the Company to participate in customary “road show” presentations that may be reasonably requested by the Underwriter in any Underwritten Offering; and
3.1.14 otherwise, in good faith, cooperate reasonably with, and take such customary actions as may reasonably be requested by the Holders, in connection with such Registration.
3.2 Registration Expenses. The Registration Expenses of all Registrations shall be borne by the Company. It is acknowledged by the Holders that the Holders shall bear all incremental selling expenses relating to the sale of Registrable Securities, such as Underwriters’ commissions and discounts, brokerage fees, Underwriter marketing costs and fees and expenses of legal counsel representing the Holders in excess or in addition to the legal fees and expenses included as Registration Expenses.
3.3 Requirements for Participation in Underwritten Offerings. No person may participate in any Underwritten Offering for equity securities of the Company pursuant to a Registration initiated by the Company hereunder unless such person (i) agrees to sell such person’s securities on the basis provided in any underwriting arrangements approved by the Company and (ii) completes and executes all customary questionnaires, powers of attorney, indemnities, lock-up agreements, underwriting agreements and other customary documents as may be reasonably required under the terms of such underwriting arrangements.
3.4 Suspension of Sales; Adverse Disclosure. Upon receipt of written notice from the Company that a Registration Statement or Prospectus contains a Misstatement, each of the Holders shall forthwith discontinue disposition of Registrable Securities until he, she or it is advised in writing by the Company that the use of the Prospectus may be resumed and he, she or it has received copies of a supplemented or amended Prospectus correcting the Misstatement (it being understood that the Company hereby covenants to prepare and file such supplement or amendment as soon as reasonably practicable after the time of such notice) and, if so directed by the Company, each Holder shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such Holder’s possession, of the Prospectus covering such Registrable Securities at the time of receipt of such notice. If the continued use of a Registration Statement in respect of any Registration at any time would require the Company to make an Adverse Disclosure, or would require the inclusion in such Registration Statement of (i) financial statements that are unavailable to the Company for reasons beyond the Company’s control, (ii) audited financial statements as of a date other than the Company’s fiscal year end (unless the Holders requesting Registration agree to pay the reasonable expenses of this audit), or (iii) pro forma financial statements that are required to be included in a registration statement, the Company may, upon giving prompt written notice of such action to the Holders, delay the filing or initial effectiveness of, or suspend the use of, such Registration Statement for no more than 180 days. In the event the Company exercises its rights under the preceding sentence, the Holders agree to suspend, immediately upon their receipt of the notice referred to above, their use of the Prospectus relating to any Registration in connection with any sale or offer to sell Registrable Securities. The Company shall immediately notify the Holders of the expiration of any period during which it exercised its rights under this Section 3.4.
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3.5 Reporting Obligations. As long as any Holder shall own Registrable Securities, the Company, at all times while it shall be reporting under the Exchange Act, covenants to use reasonable best efforts to file timely (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Sections 13(a) or 15(d) of the Exchange Act and to promptly upon request by a Holder furnish such Holder with true and complete copies of such filings. The Company further covenants that it shall take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell shares of Common Stock held by such Holder without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including providing any legal opinions. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements.
3.6 Limitations on Registration Rights. Notwithstanding anything herein to the contrary, (i) Cantor may not exercise its rights under Section 2.1 and 2.2 hereunder after five (5) and seven (7) years, respectively, after the effective date of the registration statement relating to the Company’s IPO and (ii) Cantor may not exercise its rights under Section 2.1 more than one time.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
4.1 Indemnification.
4.1.1 The Company agrees to indemnify, to the extent permitted by law, each Holder of Registrable Securities, its officers and directors and each person who controls such Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses (including reasonable attorneys’ fees) caused by any untrue or alleged untrue statement of material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such Holder expressly for use therein.
4.1.2 In connection with any Registration Statement in which a Holder of Registrable Securities is participating, such Holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such Registration Statement or Prospectus and, to the extent permitted by law, shall indemnify the Company, its directors and officers and agents and each person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses (including, without limitation, reasonable attorneys’ fees) resulting from any untrue or alleged untrue statement of material fact contained in the Registration Statement, Prospectus or preliminary Prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue or alleged untrue statement or omission is contained in any information or affidavit so furnished in writing by such Holder expressly for use therein; provided, however, that the obligation to indemnify shall be several, not joint and several, among such Holders of Registrable Securities, and the liability of each such Holder of Registrable Securities shall be in proportion to and limited to the net proceeds received by such Holder from the sale of Registrable Securities pursuant to such Registration Statement. The Holders of Registrable Securities shall indemnify the Underwriters, their officers, directors and each person who controls such Underwriters (within the meaning of the Securities Act) to the same extent as provided in the foregoing with respect to indemnification of the Company.
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4.1.3 Any person entitled to indemnification herein shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any person’s right to indemnification hereunder to the extent such failure has not materially prejudiced the indemnifying party) and (ii) unless in such indemnified party’s reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel (plus local counsel) for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. No indemnifying party shall, without the consent of the indemnified party, consent to the entry of any judgment or enter into any settlement which cannot be settled in all respects by the payment of money (and such money is so paid by the indemnifying party pursuant to the terms of such settlement) or which settlement does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation.
4.1.4 The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and shall survive the transfer of securities. The Company and each Holder of Registrable Securities participating in an offering also agrees to make such provisions as are reasonably requested by any indemnified party for contribution to such party in the event the Company’s or such Holder’s indemnification is unavailable for any reason.
4.1.5 If the indemnification provided under Section 4.1 hereof from the indemnifying party is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities and expenses referred to herein, then the indemnifying party, in lieu of indemnifying the indemnified party, shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities and expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and the indemnified party, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, was made by, or relates to information supplied by, such indemnifying party or indemnified party, and the indemnifying party’s and indemnified party’s relative intent, knowledge, access to information and opportunity to correct or prevent such action; provided, however, that the liability of any Holder under this subsection 4.1.5 shall be limited to the amount of the net proceeds received by such Holder in such offering giving rise to such liability. The amount paid or payable by a party as a result of the losses or other liabilities referred to above shall be deemed to include, subject to the limitations set forth in subsections 4.1.1, 4.1.2 and 4.1.3 above, any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this subsection 4.1.5 were determined by pro rata allocation or by any other method of allocation, which does not take account of the equitable considerations referred to in this subsection 4.1.5. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution pursuant to this subsection 4.1.5 from any person who was not guilty of such fraudulent misrepresentation.
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ARTICLE V
MISCELLANEOUS
5.1 Notices. Any notice or communication under this Agreement must be in writing and given by (i) deposit in the United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return
receipt requested, (ii) delivery in person or by courier service providing evidence of delivery, or (iii) transmission by hand delivery, electronic mail or facsimile. Each notice or communication that is mailed, delivered, or transmitted in the manner described above shall be deemed sufficiently given, served, sent, and received, in the case of mailed notices, on the third business day following the date on which it is mailed and, in the case of notices delivered by courier service, hand delivery, electronic mail or facsimile, at such time as it is delivered to the addressee (with the delivery receipt of the intended recipient or the affidavit of messenger) or at such time as delivery is refused by the addressee upon presentation. Any notice or communication under this Agreement must be addressed to
the Company at:
INSU Acquisition Corp. II
2929 Arch Street, Suite 1703
Philadelphia, PA 19104-2870
Attention: Joseph W. Pooler, Jr.
Email: jpooler@cohenandcompany.com
with a copy to:
Ledgewood P.C.
Two Commerce Square, Suite 3400
2001 Market Street
Philadelphia, PA 19103
Attention: Derick S. Kauffman
Email: dkauffman@ledgewood.com
and to the Holders, at such Holder’s address referenced in Schedule A.
Any party may change its address for notice at any time and from time to time by written notice to the other parties hereto, and such change of address shall become effective thirty (30) days after delivery of such notice as provided in this Section 5.1.
5.2 Assignment; No Third Party Beneficiaries.
5.2.1 This Agreement and the rights, duties and obligations of the Company hereunder may not be assigned or delegated by the Company in whole or in part. Prior to the expiration of the Founder Lock-up Period or Placement Unit Lock-up Period, as the case may be, no Holder may assign or delegate his, her or its rights, duties or obligations under this Agreement in whole or in part. Notwithstanding the above, as it applies to the Registrable Securities, the Holder may transfer such securities during the respective lock-up period to any Permitted Transferee (as such term is defined in that certain Warrant Agreement between the Company and Continental Stock Transfer & Trust Company) but only if such Permitted Transferee agrees to become bound by the transfer restrictions set forth in this Agreement, the Letter Agreement and, if applicable, the Placement Unit Subscription Agreements.
5.2.2 Except as set forth in subsection 5.2.1 hereof, this Agreement and the rights, duties and obligations of the Holders of Registrable Securities hereunder may be assigned or delegated by such Holder of Registrable Securities in conjunction with and to the extent of any transfer of Registrable Securities by any such Holder.
5.2.3 This Agreement and the provisions hereof shall be binding upon and shall inure to the benefit of each of the Holders, the permitted assigns and its successors and the permitted assigns of the Holders.
5.2.4 This Agreement shall not confer any rights or benefits on any persons that are not parties hereto, other than as expressly set forth in this Agreement and Section 5.2 hereof.
5.2.5 No assignment by any party hereto of such party’s rights, duties and obligations hereunder shall be binding upon or obligate the Company unless and until the Company shall have received (i) written notice of such assignment as provided in Section 5.1 hereof and (ii) the written agreement of the assignee, in a form reasonably satisfactory to the Company, to be bound by the terms and provisions of this Agreement (which may be accomplished by an addendum or certificate of joinder to this Agreement). Any transfer or assignment made other than as provided in this Section 5.2 shall be null and void.
5.3 Counterparts. This Agreement may be executed in multiple counterparts (including facsimile or PDF counterparts), each of which shall be deemed an original, and all of which together shall constitute the same instrument, but only one of which need be produced.
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5.4 Governing Law; Venue. THE PARTIES EXPRESSLY AGREE THAT THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS OF SUCH JURISDICTION. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in the federal courts of the United States or the courts of the State of New York in each case located in the city of New York, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding.
5.5 Amendments and Modifications. Upon the written consent of the Company and the Holders of at least a majority in interest of the then outstanding Registrable Securities, compliance with any of the provisions, covenants and conditions set forth in this Agreement may be waived, or any of such provisions, covenants or conditions may be amended or modified; provided, however, that notwithstanding the foregoing, any amendment hereto or waiver hereof that adversely affects one Holder, solely in its capacity as a holder of the shares of capital stock of the Company, in a manner that is materially different from the other Holders (in such capacity) shall require the consent of the Holder so affected. No course of dealing between any Holder or the Company and any other party hereto or any failure or delay on the part of a Holder or the Company in exercising any rights or remedies under this Agreement shall operate as a waiver of any rights or remedies of any Holder or the Company. No single or partial exercise of any rights or remedies under this Agreement by a party shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder or thereunder by such party.
5.6 Other Registration Rights. The Company represents and warrants that no person, other than a Holder of Registrable Securities and holders of PIPE shares, has any right to require the Company to register any securities of the Company for sale or to include such securities of the Company in any Registration filed by the Company for the sale of securities for its own account or for the account of any other person.
5.7 Termination. This Agreement shall terminate upon the earlier of (i) the fifth anniversary of the date hereof or (ii) the date as of which (A) all of the Registrable Securities have either been sold pursuant to a Registration Statement or cease to be Registrable Securities (but in no event prior to the applicable period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder) or (B) the Holders of all Registrable Securities are permitted to sell the Registrable Securities under Rule 144 (or any similar provision) under the Securities Act without limitation on the amount of securities sold or the manner of sale. The provisions of Section 3.5 and Article IV shall survive any termination.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the date first written above.
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COMPANY: |
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INSU ACQUISITION CORP. II |
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a Delaware corporation |
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By: |
/s/ John M. Butler |
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Name: |
John M. Butler |
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Title: |
Chief Executive Officer and President |
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HOLDERS: |
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INSURANCE ACQUISITION SPONSOR II, LLC |
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a Delaware limited liability company |
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By: |
/s/ Daniel G. Cohen |
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Name: |
Daniel G. Cohen |
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Title: |
Chief Executive Officer |
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DIOPTRA ADVISORS II, LLC |
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a Delaware limited liability company |
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By: |
/s/ Daniel G. Cohen |
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Name: |
Daniel G. Cohen |
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Title: |
Chief Executive Officer |
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INSU II PIPE SPONSOR, LLC |
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a Delaware limited liability company |
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By: |
/s/ Joseph W. Pooler |
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Name: |
Joseph W. Pooler, Jr. |
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Title: |
EVP and Chief Financial Officer |
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CANTOR FITZGERALD & CO. |
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a New York general partnership |
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By: |
/s/ Sage Kelly |
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Name: |
Sage Kelly |
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Title: |
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/s/ Daniel G. Cohen |
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Daniel G. Cohen, individually |
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/s/ John M. Butler |
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John M. Butler, individually |
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/s/ Joseph W. Pooler, Jr |
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Joseph W. Pooler, Jr., individually |
[Signature Page to Amended and Restated Registration Rights Agreement]
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/s/ John C. Chrystal |
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John C. Chrystal, individually |
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/s/ Sheila Nicoll |
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Sheila Nicoll, individually |
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/s/ Sasson Posner |
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Sasson Posner, individually |
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/s/ Andrew Hohns |
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Andrew Hohns, individually |
[Signature Page to Amended and Restated Registration Rights Agreement]
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/s/ Dan Preston |
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Dan Preston, individually |
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/s/ Colin Bryan |
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Colin Bryan, individually |
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/s/ David Friedberg |
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David Friedberg, individually |
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/s/ Vikas Singhal |
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Vikas Singhal, individually |
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/s/ Betsy Cohen |
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Betsy Cohen, individually |
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/s/ Lindsay Alexovich |
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Lindsay Alexovich, individually |
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/s/ Mark Gundacker |
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Mark Gundacker, individually |
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/s/ Jesse McKendry |
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Jesse McKendry, individually |
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/s/ Paw Andersen |
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Paw Andersen, individually |
[Signature Page to Amended and Restated Registration Rights Agreement]
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THE GRAVES 2018 IRREVOCABLE |
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DESCENDANTS’ TRUST II |
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By: |
First Republic Trust Company of |
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Delaware LLC |
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Its; |
Trustee |
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By: |
/s/ Chris Limbach |
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Name: |
Chris Limbach |
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Title: |
Senior Trust Officer |
[Signature Page to Amended and Restated Registration Rights Agreement]
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/s/ Ryan Allen Graves |
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Ryan Graves, individually |
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THE GRAVES IRREVOCABLE |
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REMAINDER TRUST U/A/D 2/24/2015 |
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By: |
/s/ Ryan Allen Graves |
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Name: |
Ryan Graves |
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Title: |
Co-Trustee |
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By: |
/s/ Molly Graves |
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Name: |
Molly Graves |
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Title: |
Co-Trustee |
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SALTWATER CAPITAL LLC |
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By: |
/s/ Ryan Allen Graves |
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Name: |
Ryan Graves |
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Title: |
Manager |
[Signature Page to Amended and Restated Registration Rights Agreement]
Schedule A
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Holder |
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Address |
Insurance Acquisition Sponsor II, LLC |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
Dioptra Advisors II, LLC |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
Daniel G. Cohen |
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3 Columbus Circle, 24th Floor, New York, NY 10019 |
John M. Butler |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
Joseph W. Pooler, Jr. |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
John C. Chrystal |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
Sheila Nicoll |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
Sasson Posner |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
Andrew Hohns |
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2929 Arch Street, Suite 1703, Philadelphia, PA 19104 |
Cantor Fitzgerald & Co. |
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499 Park Avenue, New York, NY 10022 |
Exhibit 10.2
METROMILE, INC.
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT (this “Agreement”) is dated as of _________________, 20__ and is between Metromile, Inc., a Delaware corporation (the “Company”), and ______________ (“Indemnitee”).
RECITALS
A. Indemnitee’s service to the Company substantially benefits the Company.
B. Individuals are reluctant to serve as directors or officers of corporations or in certain other capacities unless they are provided with adequate protection through insurance or indemnification against the risks of claims and actions against them arising out of such service.
C. Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and any insurance as adequate under the present circumstances, and Indemnitee may not be willing to serve as a director or officer without additional protection.
D. In order to induce Indemnitee to continue to provide services to the Company, it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance expenses on behalf of, Indemnitee as permitted by applicable law.
E. This Agreement is a supplement to and in furtherance of the indemnification provided in the Company’s certificate of incorporation and bylaws, and any resolutions adopted pursuant thereto, and this Agreement shall not be deemed a substitute therefor, nor shall this Agreement be deemed to limit, diminish or abrogate any rights of Indemnitee thereunder.
AGREEMENT
The parties agree as follows:
1. Definitions.
(a) “Beneficial Owner” shall have the meaning given to such term in Rule 13d-3 under the Securities Exchange Act of 1934, as amended; provided, however, that “Beneficial Owner” shall exclude any Person otherwise becoming a Beneficial Owner solely by reason of (i) the stockholders of the Company approving a merger of the Company with another Person, or entering into tender or support agreements relating thereto, provided such merger was approved by the Company’s board of directors, or (ii) the Company’s board of directors approving a sale of securities by the Company to such Person.
(b) A “Change in Control” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:
(i) Acquisition of Stock by Third Party. Any Person (as defined below) becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities;
(ii) Change in Board Composition. During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constituted the Company’s board of directors and any Approved Directors cease for any reason to constitute a majority of the members of the Company’s board of directors. “Approved Directors” means new directors whose election or nomination by the board of directors was approved by a vote of at least two thirds of the directors then still in office who either were directors at the beginning of such two-year period or whose election or nomination for election was previously so approved; or
(iii) Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect a majority of the board of directors or other governing body of such surviving entity.
(c) “Corporate Status” describes the status of a person who is or was a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise.
(d) “DGCL” means the General Corporation Law of the State of Delaware.
(e) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
(f) “Enterprise” means the Company and any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary.
(g) “Expenses” include all reasonably and actually incurred attorneys’ fees, retainers, court costs, transcript costs, fees and costs of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersede as bond or other appeal bond or their equivalent, and (ii) for purposes of Section 10(d), Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.
(h) “Independent Counsel” means a law firm, or a partner or member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent (i) the Company, any Enterprise or Indemnitee in any matter material to any such party (other than as Independent Counsel with respect to matters concerning Indemnitee under this Agreement, or other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.
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(i) “Person” shall have the meaning used for such term in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended; provided, however, that Person shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
(j) “Proceeding” means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, whether formal or informal, including any appeal therefrom and including without limitation any such Proceeding pending as of the date of this Agreement, in which Indemnitee was, is or will be involved as a party, a potential party, a non-party witness or otherwise by reason of (i) the fact that Indemnitee is or was a director or officer of the Company, (ii) any action taken by Indemnitee or any action or inaction on Indemnitee’s part while acting as a director or officer of the Company, or (iii) the fact that he or she is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification or advancement of expenses can be provided under this Agreement.
(k) “to the fullest extent permitted by applicable law” means to the fullest extent permitted by all applicable laws, including without limitation: (i) the fullest extent permitted by DGCL as of the date of this Agreement and (ii) the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.
(l) In connection with any Proceeding relating to an employee benefit plan: references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.
2. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or witness or other participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 2, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.
3. Indemnity in Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a witness or other participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 3 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged by a court of competent jurisdiction to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such expenses as the Delaware Court of Chancery or such other court shall deem proper.
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4. Indemnification for Expenses of a Party Who is wholly or partly Successful. To the extent that Indemnitee is a party to, and is successful (on the merits or otherwise) in defense of, any Proceeding or any claim, issue or matter therein, the Company shall indemnify Indemnitee against all Expenses incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. For purposes of this Section 4, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
5. Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any Proceeding (or any part of any Proceeding):
(a) for which payment has actually been made to or on behalf of Indemnitee under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid;
(b) for an accounting or disgorgement of profits pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of federal, state or local statutory law or common law, if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);
(c) for any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Securities Exchange Act of 1934, as amended (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act), if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);
(d) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees, agents or other indemnitees, unless (i) the Company’s board of directors authorized the Proceeding (or the relevant part of the Proceeding) prior to its initiation, (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law, (iii) otherwise authorized in Section 10(d) or (iv) otherwise required by applicable law; provided, for the avoidance of doubt, Indemnitee shall not be deemed for purposes of this paragraph, to have initiated any Proceeding (or any part of a Proceeding) by reason of (i) having asserted any affirmative defenses in connection with a claim not initiated by Indemnitee or (ii) having made any counterclaim (whether permissive or mandatory) in connection with any claim not initiated by Indemnitee; or
(e) if prohibited by the DGCL or other applicable law.
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6. Advances of Expenses. The Company shall advance the Expenses incurred by Indemnitee in connection with any Proceeding prior to its final disposition, and such advancement shall be made as soon as reasonably practicable, but in any event no later than 30 days, after the receipt by the Company of a written statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditure made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice). Advances shall be unsecured and interest free and made without regard to Indemnitee’s ability to repay such advances. Indemnitee hereby undertakes to repay any advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company, except, with respect to advances of expenses made pursuant to Section 10(c), in which case Indemnitee makes the undertaking provided in Section 10(c). This Section 6 shall not apply to the extent advancement is prohibited by law and shall not apply to any Proceeding (or any part of any Proceeding) for which indemnity is not permitted under this Agreement, but shall apply to any Proceeding (or any part of any Proceeding) referenced in Section 5(b) or 5(c) prior to a determination that Indemnitee is not entitled to be indemnified by the Company.
7. Procedures for Notification and Defense of Claim.
(a) Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses as soon as reasonably practicable following the receipt by Indemnitee of notice thereof. The written notification to the Company shall include, in reasonable detail, a description of the nature of the Proceeding and the facts underlying the Proceeding. The failure by Indemnitee to notify the Company will not relieve the Company from any liability that it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights, except to the extent that such failure or delay materially prejudices the Company.
(b) If, at the time of the receipt of a notice of a Proceeding pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect that may be applicable to the Proceeding, the Company shall give prompt notice of the commencement of the Proceeding to the insurers in accordance with the procedures set forth in the applicable policies. The Company shall thereafter take all commercially reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.
(c) In the event the Company may be obligated to make any indemnity in connection with a Proceeding, the Company shall be entitled to assume the defense of such Proceeding with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, conditioned or delayed, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee for any fees or expenses of counsel subsequently incurred by Indemnitee with respect to the same Proceeding. Notwithstanding the Company’s assumption of the defense of any such Proceeding, the Company shall be obligated to pay the fees and expenses of Indemnitee’s separate counsel to the extent (i) the employment of separate counsel by Indemnitee is authorized by the Company, (ii) counsel for the Company shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense such that Indemnitee needs to be separately represented, (iii) the Company is not financially or legally able to perform its indemnification obligations, or (iv) the Company shall not have retained, or shall not continue to retain, counsel to defend such Proceeding. Regardless of any provision in this Agreement, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitee’s personal expense. The Company shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Company.
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(d) Indemnitee shall give the Company such information and cooperation in connection with the Proceeding as may be reasonably appropriate.
(e) The Company shall not be liable to indemnify Indemnitee for any settlement of any Proceeding (or any part thereof) effected without the Company’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed. The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in a settlement to which the Company has given its prior written consent, such settlement shall be treated as a success on the merits in the settled action, suit or proceeding.
(f) The Company shall not settle any Proceeding (or any part thereof) in a manner that imposes any penalty or liability on Indemnitee not paid by the Company without Indemnitee’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.
8. Procedures upon Application for Indemnification.
(a) To obtain indemnification, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and as is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of the Proceeding. Any delay in providing the request will not relieve the Company from its obligations under this Agreement, except to the extent such failure is prejudicial.
(b) Upon written request by Indemnitee for indemnification pursuant to Section 8(a), a determination with respect to Indemnitee’s entitlement thereto shall be made as follows, provided that a Change in Control shall not have occurred: (i) by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors; (ii) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors; (iii) if there are no such Disinterested Directors or, if a majority of Disinterested Directors so direct, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee; or (iv) if so directed by the Company’s board of directors, by the stockholders of the Company. If a Change in Control shall have occurred, a determination with respect to Indemnitee’s entitlement to indemnification shall be made by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee. If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making the determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) actually and reasonably incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company, to the extent permitted by applicable law.
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(c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b), the Independent Counsel shall be selected as provided in this Section 8(c). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Company’s board of directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Company’s board of directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within ten days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after the later of (i) submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) and (ii) the final disposition of the Proceeding, the parties have not agreed upon an Independent Counsel, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection that shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 8(b). Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 10(a), the Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).
(d) The Company shall pay the reasonable fees and expenses of any Independent Counsel and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
9. Presumptions and Effect of Certain Proceedings.
(a) In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall, to the fullest extent not prohibited by law, presume that Indemnitee is entitled to indemnification under this Agreement, and the Company shall, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption by clear and convincing evidence.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
(c) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith to the extent Indemnitee relied in good faith on (i) the records or books of account of the Enterprise, including financial statements, (ii) information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, (iii) the advice of legal counsel for the Enterprise or its board of directors or counsel selected by any committee of the board of directors or (iv) information or records given or reports made to the Enterprise by an independent certified public accountant, an appraiser, investment banker or other expert selected with reasonable care by the Enterprise or its board of directors or any committee of the board of directors. The provisions of this Section 9(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.
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(d) Neither the knowledge, actions nor failure to act of any other director, officer, agent or employee of the Enterprise shall be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.
10. Remedies of Indemnitee.
(a) Subject to Section 10(e), in the event that (i) a determination is made pursuant to Section 9 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 6 or 10(d), (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 8 within 30 days after the later of the receipt by the Company of the request for indemnification or the final disposition of the Proceeding, (iv) payment of indemnification pursuant to this Agreement is not made (A) within ten days after a determination has been made that Indemnitee is entitled to indemnification or (B) with respect to indemnification pursuant to Sections 4, 5 and 10(d), within 30 days after receipt by the Company of a written request therefor, or (v) the Company or any other person or entity takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of his or her entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his or her option, may seek an award in arbitration with respect to his or her entitlement to such indemnification or advancement of Expenses, to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 12 months following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his or her rights under Section 4. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration in accordance with this Agreement.
(b) Neither (i) the failure of the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders that Indemnitee has not met the applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. In the event that a determination shall have been made pursuant to Section 8 that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial, or arbitration, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 10, the Company shall, to the fullest extent not prohibited by law, have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be, and the burden of proof shall be by clear and convincing evidence.
(c) To the fullest extent not prohibited by law, the Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 10 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. If a determination shall have been made pursuant to Section 10 that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statements not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.
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(d) To the extent not prohibited by law, the Company shall indemnify Indemnitee against all Expenses incurred by Indemnitee in connection with any action for indemnification or advancement of Expenses from the Company under this Agreement, any other agreement, the Company’s certificate of incorporation or bylaws or under any directors’ and officers’ liability insurance policies maintained by the Company to the extent Indemnitee is successful in such action, and, if requested by Indemnitee, shall (as soon as reasonably practicable, but in any event no later than 30 days, after receipt by the Company of a written request therefor) advance such Expenses to Indemnitee, subject to the provisions of Section 6. Indemnitee hereby undertakes to repay such advances to the extent the Indemnitee is ultimately unsuccessful in such action or arbitration.
(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification shall be required to be made prior to the final disposition of the Proceeding.
11. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amounts incurred by Indemnitee, whether for Expenses, judgments, fines or amounts paid or to be paid in settlement, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the events and transactions giving rise to such Proceeding; and (ii) the relative fault of Indemnitee and the Company (and its other directors, officers, employees and agents) in connection with such events and transactions.
12. Non-exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company’s certificate of incorporation or bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company’s certificate of incorporation and bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change, subject to the restrictions expressly set forth herein or therein. Except as expressly set forth herein, no right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. Except as expressly set forth herein, the assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
13. Primary Responsibility. The Company acknowledges that to the extent Indemnitee is serving as a director on the Company’s board of directors at the request or direction of a private equity or venture capital fund or other entity and/or certain of its affiliates (collectively, the “Secondary Indemnitors”), Indemnitee may have certain rights to indemnification and advancement of expenses provided by such Secondary Indemnitors. The Company agrees that, as between the Company and the Secondary Indemnitors, the Company is primarily responsible for amounts required to be indemnified or advanced under the Company’s certificate of incorporation or bylaws or this Agreement and any obligation of the Secondary Indemnitors to provide indemnification or advancement for the same amounts is secondary to those Company obligations. To the extent not in contravention of any insurance policy or policies providing liability or other insurance for the Company or any director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise, the Company waives any right of contribution or subrogation against the Secondary Indemnitors with respect to the liabilities for which the Company is primarily responsible under this Section 13. In the event of any payment by the Secondary Indemnitors of amounts otherwise required to be indemnified or advanced by the Company under the Company’s certificate of incorporation or bylaws or this Agreement, the Secondary Indemnitors shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee for indemnification or advancement of expenses under the Company’s certificate of incorporation or bylaws or this Agreement or, to the extent such subrogation is unavailable and contribution is found to be the applicable remedy, shall have a right of contribution with respect to the amounts paid. The Secondary Indemnitors are express third-party beneficiaries of the terms of this Section 13.
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14. No Duplication of Payments. Subject to Section 13, the Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received payment for such amounts under any insurance policy, contract, agreement or otherwise.
15. Insurance. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, trustees, general partners, managing members, officers, employees, agents or fiduciaries of the Company or any other Enterprise, Indemnitee shall be covered by such policy or policies to the same extent as the most favorably-insured persons under such policy or policies in a comparable position.
16. Subrogation. Subject to Section 13, in the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
17. Services to the Company. Indemnitee agrees to serve as a director or officer of the Company or, at the request of the Company, as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of another Enterprise, for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation or is removed from such position. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that any employment with the Company (or any of its subsidiaries or any Enterprise) is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, with or without notice, except as may be otherwise expressly provided in any executed, written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), any existing formal severance policies adopted by the Company’s board of directors or, with respect to service as a director or officer of the Company, the Company’s certificate of incorporation or bylaws or the DGCL. No such document shall be subject to any oral modification thereof.
18. Duration. This Agreement shall continue until and terminate upon the later of (a) ten years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of any other Enterprise, as applicable; or (b) one year after the final termination of any Proceeding, including any appeal, then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any Proceeding commenced by Indemnitee pursuant to Section 10 relating thereto.
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19. Successors. This Agreement shall be binding upon the Company and its successors and assigns, including any direct or indirect successor, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators. Further, the Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by written agreement, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.
20. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order or other applicable law, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (ii) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (iii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.
21. Enforcement. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.
22. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Company’s certificate of incorporation and bylaws and applicable law.
23. Modification and Waiver. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by the parties hereto. No amendment, alteration or repeal of this Agreement shall adversely affect any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal. No waiver of any of the provisions of this Agreement shall constitute or be deemed a waiver of any other provision of this Agreement nor shall any waiver constitute a continuing waiver.
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24. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail or otherwise delivered by hand, messenger or courier service addressed:
(a) if to Indemnitee, to Indemnitee’s address, facsimile number or electronic mail address as shown on the signature page of this Agreement or in the Company’s records, as may be updated in accordance with the provisions hereof; or
(b) if to the Company, to 425 Market St #700, San Francisco, CA 9410580 Attention: Chief Executive Officer or at such other current address as the Company shall have furnished to Indemnitee.
Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered (or if sent via a nationally-recognized overnight courier service, freight prepaid, specifying next-business-day delivery, one business day after deposit with the courier), or (ii) if sent via mail, at the earlier of its receipt or five days after the same has been deposited in a regularly-maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent via facsimile, upon confirmation of facsimile transfer or, if sent via electronic mail, upon confirmation of delivery when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day.
25. Applicable Law and Consent to Jurisdiction. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 10(a), the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Delaware Court of Chancery, and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court of Chancery for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, The Corporation Trust Company, Wilmington, Delaware as its agent in the State of Delaware as such party’s agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court of Chancery, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court of Chancery has been brought in an improper or inconvenient forum.
26. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
27. Captions. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
(signature page follows)
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The parties are signing this Indemnification Agreement as of the date stated in the introductory sentence.
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Exhibit 10.3
METROMILE, INC.
2021 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: [DATE]
APPROVED BY THE STOCKHOLDERS: [DATE]
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ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS. |
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Annex B-i
(a) Plan Purpose. The Company, by means of the Plan, seeks to secure and retain the services of Employees, Directors and Consultants, to provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and to provide a means by which such persons may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Awards.
(b) Available Awards. The Plan provides for the grant of the following Awards: (i) Incentive Stock Options; (ii) Nonstatutory Stock Options; (iii) SARs; (iv) Restricted Stock Awards; (v) RSU Awards; (vi) Performance Awards; and (vii) Other Awards.
(c) Adoption Date; Effective Date. The Plan will come into existence on the Adoption Date, but no Award may be granted prior to the Effective Date.
2. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve. Subject to adjustment in accordance with Section 2(c) and any adjustments as necessary to implement any Capitalization Adjustments, the aggregate number of shares of Common Stock that may be issued pursuant to Awards will not exceed [ ] shares of Common Stock (equal to ten percent (10%) of the total number of issued and outstanding shares of Common Stock immediately after the consummation of the transactions contemplated by the Merger Agreement). In addition, subject to any adjustments as necessary to implement any Capitalization Adjustments, such aggregate number of shares of Common Stock will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2022 and ending on (and including) January 1, 2031, in an amount equal to five percent (5%) of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding year; provided, however that the Board may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of Common Stock.
(b) Aggregate Incentive Stock Option Limit. Notwithstanding anything to the contrary in Section 2(a) and subject to any adjustments as necessary to implement any Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options is [ ] shares (equal to three hundred percent (300%) of the total number of shares of Common Stock initially reserved for issuance under Section 2(a)).
(c) Share Reserve Operation.
(i) Limit Applies to Common Stock Issued Pursuant to Awards. For clarity, the Share Reserve is a limit on the number of shares of Common Stock that may be issued pursuant to Awards and does not limit the granting of Awards, except that the Company will keep available at all times the number of shares of Common Stock reasonably required to satisfy its obligations to issue shares pursuant to such Awards. Shares may be issued in connection with a merger or acquisition as permitted by, as applicable, Nasdaq Listing Rule 5635(c), NYSE Listed Company Manual Section 303A.08, NYSE American Company Guide Section 711 or other applicable rule, and such issuance will not reduce the number of shares available for issuance under the Plan.
(ii) Actions that Do Not Constitute Issuance of Common Stock and Do Not Reduce Share Reserve. The following actions do not result in an issuance of shares under the Plan and accordingly do not reduce the number of shares subject to the Share Reserve and available for issuance under the Plan: (1) the expiration or termination of any portion of an Award without the shares covered by such portion of the Award having been issued; (2) the settlement of any portion of an Award in cash (i.e., the Participant receives cash rather than Common Stock); (3) the withholding of shares that would otherwise be issued by the Company to satisfy the exercise, strike or purchase price of an Award; or (4) the withholding of shares that would otherwise be issued by the Company to satisfy a tax withholding obligation in connection with an Award.
(iii) Reversion of Previously Issued Shares of Common Stock to Share Reserve. The following shares of Common Stock previously issued pursuant to an Award and accordingly initially deducted from the Share Reserve will be added back to the Share Reserve and again become available for issuance under the Plan: (1) any shares that are forfeited back to or repurchased by the Company because of a failure to meet a contingency or condition required for the vesting of such shares; (2) any shares that are reacquired by the Company to satisfy the exercise, strike or purchase price of an Award; and (3) any shares that are reacquired by the Company to satisfy a tax withholding obligation in connection with an Award.
Annex B-1
(d) Parent Vested RSU Share Reserve. An additional 1,993,988 shares of Common Stock, subject to any adjustments as necessary to implement any Capitalization Adjustments, shall be reserved under this Plan to be used exclusively for the grant of Parent Vested RSUs (as defined in the Merger Agreement) pursuant to the terms and conditions of the Merger Agreement and may be used solely for such purpose (the “Parent Vested RSU Share Reserve”). The shares of Common Stock issuable under any Parent Vested RSUs that may be awarded under this Section 2(d) shall be in addition to and shall not reduce the Share Reserve, provided that Parent Vested RSUs shall constitute Awards under this Plan for all other relevant purposes. The shares of Common Stock underlying any Parent Vested RSUs that are forfeited, canceled, held back upon exercise of an Parent Vested RSU or settlement of a Parent Vested RSU to cover tax withholding, reacquired or repurchased by the Company, satisfied without the issuance of Common Stock or otherwise terminated (other than by exercise) shall not be added back to the Share Reserve.
3. ELIGIBILITY AND LIMITATIONS.
(a) Eligible Award Recipients. Subject to the terms of the Plan, Employees, Directors and Consultants are eligible to receive Awards.
(b) Specific Award Limitations.
(i) Limitations on Incentive Stock Option Recipients. Incentive Stock Options may be granted only to Employees of the Company or a “parent corporation” or “subsidiary corporation” thereof (as such terms are defined in Sections 424(e) and (f) of the Code).
(ii) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds $100,000 (or such other limit established in the Code) or otherwise does not comply with the rules governing Incentive Stock Options, the Options or portions thereof that exceed such limit (according to the order in which they were granted) or otherwise do not comply with such rules will be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).
(iii) Limitations on Incentive Stock Options Granted to Ten Percent Stockholders. A Ten Percent Stockholder may not be granted an Incentive Stock Option unless (i) the exercise price of such Option is at least 110% of the Fair Market Value on the date of grant of such Option and (ii) the Option is not exercisable after the expiration of five years from the date of grant of such Option.
(iv) Limitations on Nonstatutory Stock Options and SARs. Nonstatutory Stock Options and SARs may not be granted to Employees, Directors and Consultants who are providing Continuous Service only to any “parent” of the Company (as such term is defined in Rule 405) unless the stock underlying such Awards is treated as “service recipient stock” under Section 409A because the Awards are granted pursuant to a corporate transaction (such as a spin off transaction) or unless such Awards otherwise comply with the distribution requirements of Section 409A.
(c) Aggregate Incentive Stock Option Limit. The aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options is the number of shares specified in Section 2(b).
(d) Non-Employee Director Compensation Limit. The aggregate value of all compensation granted or paid, as applicable, to any individual for service as a Non-Employee Director with respect to any calendar year, including Awards granted and cash fees paid by the Company to such Non-Employee Director, will not exceed (i) $750,000 in total value or (ii) in the event such Non-Employee Director is first appointed or elected to the Board during such Annual Period, $1,000,000 in total value, in each case calculating the value of any equity awards based on the grant date fair value of such equity awards for financial reporting purposes. The limitations in this Section 3(d) shall apply commencing with the first calendar year that begins following the Effective Date.
Annex B-2
4. OPTIONS AND STOCK APPRECIATION RIGHTS.
Each Option and SAR will have such terms and conditions as determined by the Board. Each Option will be designated in writing as an Incentive Stock Option or Nonstatutory Stock Option at the time of grant; provided, however, that if an Option is not so designated, then such Option will be a Nonstatutory Stock Option, and the shares purchased upon exercise of each type of Option will be separately accounted for. Each SAR will be denominated in shares of Common Stock equivalents. The terms and conditions of separate Options and SARs need not be identical; provided, however, that each Option Agreement and SAR Agreement will conform (through incorporation of provisions hereof by reference in the Award Agreement or otherwise) to the substance of each of the following provisions:
(a) Term. Subject to Section 3(b) regarding Ten Percent Stockholders, no Option or SAR will be exercisable after the expiration of ten years from the date of grant of such Award or such shorter period specified in the Award Agreement.
(b) Exercise or Strike Price. Subject to Section 3(b) regarding Ten Percent Stockholders, the exercise or strike price of each Option or SAR will not be less than 100% of the Fair Market Value on the date of grant of such Award. Notwithstanding the foregoing, an Option or SAR may be granted with an exercise or strike price lower than 100% of the Fair Market Value on the date of grant of such Award if such Award is granted pursuant to an assumption of or substitution for another option or stock appreciation right pursuant to a Corporate Transaction and in a manner consistent with the provisions of Sections 409A and, if applicable, 424(a) of the Code.
(c) Exercise Procedure and Payment of Exercise Price for Options. In order to exercise an Option, the Participant must provide notice of exercise to the Plan Administrator in accordance with the procedures specified in the Option Agreement or otherwise provided by the Company. The Board has the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to utilize a particular method of payment. The exercise price of an Option may be paid, to the extent permitted by Applicable Law and as determined by the Board, by one or more of the following methods of payment to the extent set forth in the Option Agreement:
(i) by cash or check, bank draft or money order payable to the Company;
(ii) pursuant to a “cashless exercise” program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the Common Stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the exercise price to the Company from the sales proceeds;
(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock that are already owned by the Participant free and clear of any liens, claims, encumbrances or security interests, with a Fair Market Value on the date of exercise that does not exceed the exercise price, provided that (1) at the time of exercise the Common Stock is publicly traded, (2) any remaining balance of the exercise price not satisfied by such delivery is paid by the Participant in cash or other permitted form of payment, (3) such delivery would not violate any Applicable Law or agreement restricting the redemption of the Common Stock, (4) any certificated shares are endorsed or accompanied by an executed assignment separate from certificate, and (5) such shares have been held by the Participant for any minimum period necessary to avoid adverse accounting treatment as a result of such delivery;
(iv) if the Option is a Nonstatutory Stock Option, by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value on the date of exercise that does not exceed the exercise price, provided that (1) such shares used to pay the exercise price will not be exercisable thereafter and (2) any remaining balance of the exercise price not satisfied by such net exercise is paid by the Participant in cash or other permitted form of payment; or
(v) in any other form of consideration that may be acceptable to the Board and permissible under Applicable Law.
Annex B-3
(d) Exercise Procedure and Payment of Appreciation Distribution for SARs. In order to exercise any SAR, the Participant must provide notice of exercise to the Plan Administrator in accordance with the SAR Agreement. The appreciation distribution payable to a Participant upon the exercise of a SAR will not be greater than an amount equal to the excess of (i) the aggregate Fair Market Value on the date of exercise of a number of shares of Common Stock equal to the number of Common Stock equivalents that are vested and being exercised under such SAR, over (ii) the strike price of such SAR. Such appreciation distribution may be paid to the Participant in the form of Common Stock or cash (or any combination of Common Stock and cash) or in any other form of payment, as determined by the Board and specified in the SAR Agreement.
(e) Transferability. Options and SARs may not be transferred to third party financial institutions for value. The Board may impose such additional limitations on the transferability of an Option or SAR as it determines. In the absence of any such determination by the Board, the following restrictions on the transferability of Options and SARs will apply, provided that except as explicitly provided herein, neither an Option nor a SAR may be transferred for consideration and provided, further, that if an Option is an Incentive Stock Option, such Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer:
(i) Restrictions on Transfer. An Option or SAR will not be transferable, except by will or by the laws of descent and distribution, and will be exercisable during the lifetime of the Participant only by the Participant; provided, however, that the Board may permit transfer of an Option or SAR in a manner that is not prohibited by applicable tax and securities laws upon the Participant’s request, including to a trust if the Participant is considered to be the sole beneficial owner of such trust (as determined under Section 671 of the Code and applicable state law) while such Option or SAR is held in such trust, provided that the Participant and the trustee enter into a transfer and other agreements required by the Company.
(ii) Domestic Relations Orders. Notwithstanding the foregoing, subject to the execution of transfer documentation in a format acceptable to the Company and subject to the approval of the Board or a duly authorized Officer, an Option or SAR may be transferred pursuant to a domestic relations order.
(f) Vesting. The Board may impose such restrictions on or conditions to the vesting and/or exercisability of an Option or SAR as determined by the Board. Except as otherwise provided in the Award Agreement or other written agreement between a Participant and the Company or an Affiliate, vesting of Options and SARs will cease upon termination of the Participant’s Continuous Service.
(g) Termination of Continuous Service for Cause. Except as explicitly otherwise provided in the Award Agreement or other written agreement between a Participant and the Company or an Affiliate, if a Participant’s Continuous Service is terminated for Cause, the Participant’s Options and SARs will terminate and be forfeited immediately upon such termination of Continuous Service, and the Participant will be prohibited from exercising any portion (including any vested portion) of such Awards on and after the date of such termination of Continuous Service and the Participant will have no further right, title or interest in such forfeited Award, the shares of Common Stock subject to the forfeited Award, or any consideration in respect of the forfeited Award.
(h) Post-Termination Exercise Period Following Termination of Continuous Service for Reasons Other than Cause. Subject to Section 4(i), if a Participant’s Continuous Service terminates for any reason other than for Cause, the Participant may exercise his or her Option or SAR to the extent vested, but only within the following period of time or, if applicable, such other period of time provided in the Award Agreement or other written agreement between a Participant and the Company or an Affiliate; provided, however, that in no event may such Award be exercised after the expiration of its maximum term (as set forth in Section 4(a)):
(i) three months following the date of such termination if such termination is a termination without Cause (other than any termination due to the Participant’s Disability or death);
(ii) 12 months following the date of such termination if such termination is due to the Participant’s Disability;
(iii) 18 months following the date of such termination if such termination is due to the Participant’s death; or
Annex B-4
(iv) 18 months following the date of the Participant’s death if such death occurs following the date of such termination but during the period such Award is otherwise exercisable (as provided in (i) or (ii) above).
Following the date of such termination, to the extent the Participant does not exercise such Award within the applicable Post-Termination Exercise Period (or, if earlier, prior to the expiration of the maximum term of such Award), such unexercised portion of the Award will terminate, and the Participant will have no further right, title or interest in the terminated Award, the shares of Common Stock subject to the terminated Award, or any consideration in respect of the terminated Award.
(i) Restrictions on Exercise; Extension of Exercisability. A Participant may not exercise an Option or SAR at any time that the issuance of shares of Common Stock upon such exercise would violate Applicable Law. Except as otherwise provided in the Award Agreement or other written agreement between a Participant and the Company or an Affiliate, if a Participant’s Continuous Service terminates for any reason other than for Cause and, at any time during the last thirty days of the applicable Post-Termination Exercise Period: (i) the exercise of the Participant’s Option or SAR would be prohibited solely because the issuance of shares of Common Stock upon such exercise would violate Applicable Law, or (ii) the immediate sale of any shares of Common Stock issued upon such exercise would violate the Company’s Trading Policy, then the applicable Post-Termination Exercise Period will be extended to the last day of the calendar month that commences following the date the Award would otherwise expire, with an additional extension of the exercise period to the last day of the next calendar month to apply if any of the foregoing restrictions apply at any time during such extended exercise period, generally without limitation as to the maximum permitted number of extensions); provided, however, that in no event may such Award be exercised after the expiration of its maximum term (as set forth in Section 4(a)).
(j) Non-Exempt Employees. No Option or SAR, whether or not vested, granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, will be first exercisable for any shares of Common Stock until at least six months following the date of grant of such Award. Notwithstanding the foregoing, in accordance with the provisions of the Worker Economic Opportunity Act, any vested portion of such Award may be exercised earlier than six months following the date of grant of such Award in the event of (i) such Participant’s death or Disability, (ii) a Corporate Transaction in which such Award is not assumed, continued or substituted, (iii) a Change in Control, or (iv) such Participant’s retirement (as such term may be defined in the Award Agreement or another applicable agreement or, in the absence of any such definition, in accordance with the Company’s then current employment policies and guidelines). This Section 4(j) is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option or SAR will be exempt from his or her regular rate of pay.
(k) Whole Shares. Options and SARs may be exercised only with respect to whole shares of Common Stock or their equivalents.
5. AWARDS OTHER THAN OPTIONS AND STOCK APPRECIATION RIGHTS.
(a) Restricted Stock Awards and RSU Awards. Each Restricted Stock Award and RSU Award will have such terms and conditions as determined by the Board; provided, however, that each Restricted Stock Award Agreement and RSU Award Agreement will conform (through incorporation of the provisions hereof by reference in the Award Agreement or otherwise) to the substance of each of the following provisions:
(i) Form of Award.
(1) RSAs: To the extent consistent with the Company’s Bylaws, at the Board’s election, shares of Common Stock subject to a Restricted Stock Award may be (i) held in book entry form subject to the Company’s instructions until such shares become vested or any other restrictions lapse, or (ii) evidenced by a certificate, which certificate will be held in such form and manner as determined by the Board. Unless otherwise determined by the Board, a Participant will have voting and other rights as a stockholder of the Company with respect to any shares subject to a Restricted Stock Award.
(2) RSUs: A RSU Award represents a Participant’s right to be issued on a future date the number of shares of Common Stock that is equal to the number of restricted stock units subject to the RSU Award. As a holder of a RSU Award, a Participant is an unsecured creditor of the Company with respect to the Company’s unfunded obligation, if any, to issue shares of Common Stock in settlement of such Award and nothing contained in
Annex B-5
the Plan or any RSU Agreement, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between a Participant and the Company or an Affiliate or any other person. A Participant will not have voting or any other rights as a stockholder of the Company with respect to any RSU Award (unless and until shares are actually issued in settlement of a vested RSU Award).
(ii) Consideration.
(1) RSA: A Restricted Stock Award may be granted in consideration for (A) cash or check, bank draft or money order payable to the Company, (B) past services to the Company or an Affiliate, or (C) any other form of consideration (including future services) as the Board may determine and permissible under Applicable Law.
(2) RSU: Unless otherwise determined by the Board at the time of grant, a RSU Award will be granted in consideration for the Participant’s services to the Company or an Affiliate, such that the Participant will not be required to make any payment to the Company (other than such services) with respect to the grant or vesting of the RSU Award, or the issuance of any shares of Common Stock pursuant to the RSU Award. If, at the time of grant, the Board determines that any consideration must be paid by the Participant (in a form other than the Participant’s services to the Company or an Affiliate) upon the issuance of any shares of Common Stock in settlement of the RSU Award, such consideration may be paid in any form of consideration as the Board may determine and permissible under Applicable Law.
(iii) Vesting. The Board may impose such restrictions on or conditions to the vesting of a Restricted Stock Award or RSU Award as determined by the Board. Except as otherwise provided in the Award Agreement or other written agreement between a Participant and the Company or an Affiliate, vesting of Restricted Stock Awards and RSU Awards will cease upon termination of the Participant’s Continuous Service.
(iv) Termination of Continuous Service. Except as otherwise provided in the Award Agreement or other written agreement between a Participant and the Company or an Affiliate, if a Participant’s Continuous Service terminates for any reason, (i) the Company may receive through a forfeiture condition or a repurchase right any or all of the shares of Common Stock held by the Participant under his or her Restricted Stock Award that have not vested as of the date of such termination as set forth in the Restricted Stock Award Agreement and (ii) any portion of his or her RSU Award that has not vested will be forfeited upon such termination and the Participant will have no further right, title or interest in the RSU Award, the shares of Common Stock issuable pursuant to the RSU Award, or any consideration in respect of the RSU Award.
(v) Dividends and Dividend Equivalents. Dividends or dividend equivalents may be paid or credited, as applicable, with respect to any shares of Common Stock subject to a Restricted Stock Award or RSU Award, as determined by the Board and specified in the Award Agreement).
(vi) Settlement of RSU Awards. A RSU Award may be settled by the issuance of shares of Common Stock or cash (or any combination thereof) or in any other form of payment, as determined by the Board and specified in the RSU Award Agreement. At the time of grant, the Board may determine to impose such restrictions or conditions that delay such delivery to a date following the vesting of the RSU Award.
(b) Performance Awards. With respect to any Performance Award, the length of any Performance Period, the Performance Goals to be achieved during the Performance Period, the other terms and conditions of such Award, and the measure of whether and to what degree such Performance Goals have been attained will be determined by the Board.
(c) Other Awards. Other forms of Awards valued in whole or in part by reference to, or otherwise based on, Common Stock, including the appreciation in value thereof (e.g., options or stock rights with an exercise price or strike price less than 100% of the Fair Market Value at the time of grant) may be granted either alone or in addition to Awards provided for under Section 4 and the preceding provisions of this Section 5. Subject to the provisions of the Plan, the Board will have sole and complete discretion to determine the persons to whom and the time or times at which such Other Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Awards and all other terms and conditions of such Other Awards.
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6. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board shall appropriately and proportionately adjust: (i) the class(es) and maximum number of shares of Common Stock subject to the Plan, including the Parent Vested RSU Share Reserve, and the maximum number of shares by which the Share Reserve may annually increase pursuant to Section 2(a); (ii) the class(es) and maximum number of shares that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 2(a); and (iii) the class(es) and number of securities and exercise price, strike price or purchase price of Common Stock subject to outstanding Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. Notwithstanding the foregoing, no fractional shares or rights for fractional shares of Common Stock shall be created in order to implement any Capitalization Adjustment. The Board shall determine an appropriate equivalent benefit, if any, for any fractional shares or rights to fractional shares that might be created by the adjustments referred to in the preceding provisions of this Section.
(b) Dissolution or Liquidation. Except as otherwise provided in the Award Agreement, in the event of a dissolution or liquidation of the Company, all outstanding Awards (other than Awards consisting of vested and outstanding shares of Common Stock not subject to a forfeiture condition or the Company’s right of repurchase) will terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the Company’s repurchase rights or subject to a forfeiture condition may be repurchased or reacquired by the Company notwithstanding the fact that the holder of such Award is providing Continuous Service, provided, however, that the Board may determine to cause some or all Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.
(c) Corporate Transaction. The following provisions will apply to Awards in the event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Award or any other written agreement between the Company or any Affiliate and the Participant or unless otherwise expressly provided by the Board at the time of grant of an Award.
(i) Awards May Be Assumed. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue any or all Awards outstanding under the Plan or may substitute similar awards for Awards outstanding under the Plan (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to Awards may be assigned by the Company to the successor of the Company (or the successor’s parent company, if any), in connection with such Corporate Transaction. A surviving corporation or acquiring corporation (or its parent) may choose to assume or continue only a portion of an Award or substitute a similar award for only a portion of an Award, or may choose to assume or continue the Awards held by some, but not all Participants. The terms of any assumption, continuation or substitution will be set by the Board.
(ii) Awards Held by Current Participants. In the event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue such outstanding Awards or substitute similar awards for such outstanding Awards, then with respect to Awards that have not been assumed, continued or substituted and that are held by Participants whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction (referred to as the “Current Participants”), the vesting of such Awards (and, with respect to Options and Stock Appreciation Rights, the time when such Awards may be exercised) will be accelerated in full to a date prior to the effective time of such Corporate Transaction (contingent upon the effectiveness of the Corporate Transaction) as the Board determines (or, if the Board does not determine such a date, to the date that is five (5) days prior to the effective time of the Corporate Transaction), and such Awards will terminate if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction, and any reacquisition or repurchase rights held by the Company with respect to such Awards will lapse (contingent upon the effectiveness of the Corporate Transaction). With respect to the vesting of Performance Awards that will accelerate upon the occurrence of a Corporate Transaction pursuant to this subsection (ii) and that have multiple vesting levels depending on the level of performance, unless otherwise provided in the Award Agreement or unless otherwise provided by the Board, the vesting of such Performance Awards will accelerate at 100% of the target level upon the occurrence of the Corporate Transaction. With respect to the vesting of Awards that will accelerate upon the occurrence of a Corporate Transaction pursuant to this subsection (ii) and are settled in the form of a cash payment, such cash payment will be made no later than 30 days following the occurrence of the Corporate Transaction.
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(iii) Awards Held by Persons other than Current Participants. In the event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue such outstanding Awards or substitute similar awards for such outstanding Awards, then with respect to Awards that have not been assumed, continued or substituted and that are held by persons other than Current Participants, such Awards will terminate if not exercised (if applicable) prior to the occurrence of the Corporate Transaction; provided, however, that any reacquisition or repurchase rights held by the Company with respect to such Awards will not terminate and may continue to be exercised notwithstanding the Corporate Transaction.
(iv) Payment for Awards in Lieu of Exercise. Notwithstanding the foregoing, in the event an Award will terminate if not exercised prior to the effective time of a Corporate Transaction, the Board may provide, in its sole discretion, that the holder of such Award may not exercise such Award but will receive a payment, in such form as may be determined by the Board, equal in value, at the effective time, to the excess, if any, of (1) the value of the property the Participant would have received upon the exercise of the Award (including, at the discretion of the Board, any unvested portion of such Award), over (2) any exercise price payable by such holder in connection with such exercise.
(d) Appointment of Stockholder Representative. As a condition to the receipt of an Award under this Plan, a Participant will be deemed to have agreed that the Award will be subject to the terms of any agreement governing a Corporate Transaction involving the Company, including, without limitation, a provision for the appointment of a stockholder representative that is authorized to act on the Participant’s behalf with respect to any escrow, indemnities and any contingent consideration.
(e) No Restriction on Right to Undertake Transactions. The grant of any Award under the Plan and the issuance of shares pursuant to any Award does not affect or restrict in any way the right or power of the Company or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, rights or options to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
(a) Administration by Board. The Board will administer the Plan unless and until the Board delegates administration of the Plan to a Committee or Committees, as provided in subsection (c) below.
(b) Powers of Board. The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine from time to time (1) which of the persons eligible under the Plan will be granted Awards; (2) when and how each Award will be granted; (3) what type or combination of types of Award will be granted; (4) the provisions of each Award granted (which need not be identical), including the time or times when a person will be permitted to receive an issuance of Common Stock or other payment pursuant to an Award; (5) the number of shares of Common Stock or cash equivalent with respect to which an Award will be granted to each such person; (6) the Fair Market Value applicable to an Award; and (7) the terms of any Performance Award that is not valued in whole or in part by reference to, or otherwise based on, the Common Stock, including the amount of cash payment or other property that may be earned and the timing of payment.
(ii) To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Award Agreement, in a manner and to the extent it deems necessary or expedient to make the Plan or Award fully effective.
(iii) To settle all controversies regarding the Plan and Awards granted under it.
(iv) To accelerate the time at which an Award may first be exercised or the time during which an Award or any part thereof will vest, notwithstanding the provisions in the Award Agreement stating the time at which it may first be exercised or the time during which it will vest.
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(v) To prohibit the exercise of any Option, SAR or other exercisable Award during a period of up to 30 days prior to the consummation of any pending stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the shares of Common Stock or the share price of the Common Stock including any Corporate Transaction, for reasons of administrative convenience.
(vi) To suspend or terminate the Plan at any time. Suspension or termination of the Plan will not Materially Impair rights and obligations under any Award granted while the Plan is in effect except with the written consent of the affected Participant.
(vii) To amend the Plan in any respect the Board deems necessary or advisable; provided, however, that stockholder approval will be required for any amendment to the extent required by Applicable Law. Except as provided above, rights under any Award granted before amendment of the Plan will not be Materially Impaired by any amendment of the Plan unless (1) the Company requests the consent of the affected Participant, and (2) such Participant consents in writing.
(viii) To submit any amendment to the Plan for stockholder approval.
(ix) To approve forms of Award Agreements for use under the Plan and to amend the terms of any one or more Awards, including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided however, that, a Participant’s rights under any Award will not be Materially Impaired by any such amendment unless (1) the Company requests the consent of the affected Participant, and (2) such Participant consents in writing.
(x) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Awards.
(xi) To adopt such procedures and sub-plans as are necessary or appropriate to permit and facilitate participation in the Plan by, or take advantage of specific tax treatment for Awards granted to, Employees, Directors or Consultants who are foreign nationals or employed outside the United States (provided that Board approval will not be necessary for immaterial modifications to the Plan or any Award Agreement to ensure or facilitate compliance with the laws of the relevant foreign jurisdiction).
(xii) To effect, at any time and from time to time, subject to the consent of any Participant whose Award is Materially Impaired by such action, (1) the reduction of the exercise price (or strike price) of any outstanding Option or SAR; (2) the cancellation of any outstanding Option or SAR and the grant in substitution therefor of (A) a new Option, SAR, Restricted Stock Award, RSU Award or Other Award, under the Plan or another equity plan of the Company, covering the same or a different number of shares of Common Stock, (B) cash and/or (C) other valuable consideration (as determined by the Board); or (3) any other action that is treated as a repricing under generally accepted accounting principles.
(c) Delegation to Committee.
(i) General. The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration of the Plan is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to another Committee or a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board will thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. Each Committee may retain the authority to concurrently administer the Plan with Committee or subcommittee to which it has delegated its authority hereunder and may, at any time, revest in such Committee some or all of the powers previously delegated. The Board may retain the authority to concurrently administer the Plan with any Committee and may, at any time, revest in the Board some or all of the powers previously delegated.
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(ii) Rule 16b-3 Compliance. To the extent an Award is intended to qualify for the exemption from Section 16(b) of the Exchange Act that is available under Rule 16b-3 of the Exchange Act, the Award will be granted by the Board or a Committee that consists solely of two or more Non-Employee Directors, as determined under Rule 16b-3(b)(3) of the Exchange Act and thereafter any action establishing or modifying the terms of the Award will be approved by the Board or a Committee meeting such requirements to the extent necessary for such exemption to remain available.
(d) Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board or any Committee in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
(e) Delegation to an Officer. The Board or any Committee may delegate to one or more Officers the authority to do one or both of the following (i) designate Employees who are not Officers to be recipients of Options and SARs (and, to the extent permitted by Applicable Law, other types of Awards) and, to the extent permitted by Applicable Law, the terms thereof, and (ii) determine the number of shares of Common Stock to be subject to such Awards granted to such Employees; provided, however, that the resolutions or charter adopted by the Board or any Committee evidencing such delegation will specify the total number of shares of Common Stock that may be subject to the Awards granted by such Officer and that such Officer may not grant an Award to himself or herself. Any such Awards will be granted on the applicable form of Award Agreement most recently approved for use by the Board or the Committee, unless otherwise provided in the resolutions approving the delegation authority. Notwithstanding anything to the contrary herein, neither the Board nor any Committee may delegate to an Officer who is acting solely in the capacity of an Officer (and not also as a Director) the authority to determine the Fair Market Value.
(a) Withholding Authorization. As a condition to acceptance of any Award under the Plan, a Participant authorizes withholding from payroll and any other amounts payable to such Participant, and otherwise agree to make adequate provision for (including), any sums required to satisfy any U.S. federal, state, local and/or foreign tax or social insurance contribution withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise, vesting or settlement of such Award, as applicable. Accordingly, a Participant may not be able to exercise an Award even though the Award is vested, and the Company shall have no obligation to issue shares of Common Stock subject to an Award, unless and until such obligations are satisfied.
(b) Satisfaction of Withholding Obligation. To the extent permitted by the terms of an Award Agreement, the Company may, in its sole discretion, satisfy any U.S. federal, state, local and/or foreign tax or social insurance withholding obligation relating to an Award by any of the following means or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Award; (iii) withholding cash from an Award settled in cash; (iv) withholding payment from any amounts otherwise payable to the Participant; (v) by allowing a Participant to effectuate a “cashless exercise” pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board; or (vi) by such other method as may be set forth in the Award Agreement.
(c) No Obligation to Notify or Minimize Taxes; No Liability to Claims. Except as required by Applicable Law the Company has no duty or obligation to any Participant to advise such holder as to the time or manner of exercising such Award. Furthermore, the Company has no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of an Award or a possible period in which the Award may not be exercised. The Company has no duty or obligation to minimize the tax consequences of an Award to the holder of such Award and will not be liable to any holder of an Award for any adverse tax consequences to such holder in connection with an Award. As a condition to accepting an Award under the Plan, each Participant (i) agrees to not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates related to tax liabilities arising from such Award or other Company compensation and (ii) acknowledges that such Participant was advised to consult with his or her own personal tax, financial and other legal advisors regarding the tax consequences of the Award and has either done so or knowingly and voluntarily declined to do so. Additionally, each Participant acknowledges any Option or SAR granted under the Plan is exempt from Section 409A only if the exercise or strike price is at least equal to the “fair market value” of the Common Stock on the date of grant as determined by the Internal Revenue Service and there is no other impermissible deferral of compensation associated
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with the Award. Additionally, as a condition to accepting an Option or SAR granted under the Plan, each Participant agrees not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates in the event that the Internal Revenue Service asserts that such exercise price or strike price is less than the “fair market value” of the Common Stock on the date of grant as subsequently determined by the Internal Revenue Service.
(d) Withholding Indemnification. As a condition to accepting an Award under the Plan, in the event that the amount of the Company’s and/or its Affiliate’s withholding obligation in connection with such Award was greater than the amount actually withheld by the Company and/or its Affiliates, each Participant agrees to indemnify and hold the Company and/or its Affiliates harmless from any failure by the Company and/or its Affiliates to withhold the proper amount.
(a) Source of Shares. The stock issuable under the Plan will be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise.
(b) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Awards will constitute general funds of the Company.
(c) Corporate Action Constituting Grant of Awards. Corporate action constituting a grant by the Company of an Award to any Participant will be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Award is communicated to, or actually received or accepted by, the Participant. In the event that the corporate records (e.g., Board consents, resolutions or minutes) documenting the corporate action approving the grant contain terms (e.g., exercise price, vesting schedule or number of shares) that are inconsistent with those in the Award Agreement or related grant documents as a result of a clerical error in the Award Agreement or related grant documents, the corporate records will control and the Participant will have no legally binding right to the incorrect term in the Award Agreement or related grant documents.
(d) Stockholder Rights. No Participant will be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Award unless and until (i) such Participant has satisfied all requirements for exercise of the Award pursuant to its terms, if applicable, and (ii) the issuance of the Common Stock subject to such Award is reflected in the records of the Company.
(e) No Employment or Other Service Rights. Nothing in the Plan, any Award Agreement or any other instrument executed thereunder or in connection with any Award granted pursuant thereto will confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Award was granted or affect the right of the Company or an Affiliate to terminate at will and without regard to any future vesting opportunity that a Participant may have with respect to any Award (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state or foreign jurisdiction in which the Company or the Affiliate is incorporated, as the case may be. Further, nothing in the Plan, any Award Agreement or any other instrument executed thereunder or in connection with any Award will constitute any promise or commitment by the Company or an Affiliate regarding the fact or nature of future positions, future work assignments, future compensation or any other term or condition of employment or service or confer any right or benefit under the Award or the Plan unless such right or benefit has specifically accrued under the terms of the Award Agreement and/or Plan.
(f) Change in Time Commitment. In the event a Participant’s regular level of time commitment in the performance of his or her services for the Company and any Affiliates is reduced (for example, and without limitation, if the Participant is an Employee of the Company and the Employee has a change in status from a full-time Employee to a part-time Employee or takes an extended leave of absence) after the date of grant of any Award to the Participant, the Board may determine, to the extent permitted by Applicable Law, to (i) make a corresponding reduction in the number of shares or cash amount subject to any portion of such Award that is scheduled to vest or become payable after the date of such change in time commitment, and (ii) in lieu of or in combination with such a reduction, extend the vesting or payment schedule applicable to such Award. In the event of any such reduction, the Participant will have no right with respect to any portion of the Award that is so reduced or extended.
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(g) Execution of Additional Documents. As a condition to accepting an Award under the Plan, the Participant agrees to execute any additional documents or instruments necessary or desirable, as determined in the Plan Administrator’s sole discretion, to carry out the purposes or intent of the Award, or facilitate compliance with securities and/or other regulatory requirements, in each case at the Plan Administrator’s request.
(h) Electronic Delivery and Participation. Any reference herein or in an Award Agreement to a “written” agreement or document will include any agreement or document delivered electronically, filed publicly at www.sec.gov (or any successor website thereto) or posted on the Company’s intranet (or other shared electronic medium controlled by the Company to which the Participant has access). By accepting any Award the Participant consents to receive documents by electronic delivery and to participate in the Plan through any on-line electronic system established and maintained by the Plan Administrator or another third party selected by the Plan Administrator. The form of delivery of any Common Stock (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined by the Company.
(i) Clawback/Recovery. All Awards granted under the Plan will be subject to recoupment in accordance with any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other Applicable Law and any clawback policy that the Company otherwise adopts, to the extent applicable and permissible under Applicable Law. In addition, the Board may impose such other clawback, recovery or recoupment provisions in an Award Agreement as the Board determines necessary or appropriate, including but not limited to a reacquisition right in respect of previously acquired shares of Common Stock or other cash or property upon the occurrence of Cause. No recovery of compensation under such a clawback policy will be an event giving rise to a Participant’s right to voluntary terminate employment upon a “resignation for good reason,” or for a “constructive termination” or any similar term under any plan of or agreement with the Company.
(j) Securities Law Compliance. A Participant will not be issued any shares in respect of an Award unless either (i) the shares are registered under the Securities Act; or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Each Award also must comply with other Applicable Law governing the Award, and a Participant will not receive such shares if the Company determines that such receipt would not be in material compliance with Applicable Law.
(k) Transfer or Assignment of Awards; Issued Shares. Except as expressly provided in the Plan or the form of Award Agreement, Awards granted under the Plan may not be transferred or assigned by the Participant. After the vested shares subject to an Award have been issued, or in the case of Restricted Stock and similar awards, after the issued shares have vested, the holder of such shares is free to assign, hypothecate, donate, encumber or otherwise dispose of any interest in such shares provided that any such actions are in compliance with the provisions herein, the terms of the Trading Policy and Applicable Law.
(l) Effect on Other Employee Benefit Plans. The value of any Award granted under the Plan, as determined upon grant, vesting or settlement, shall not be included as compensation, earnings, salaries, or other similar terms used when calculating any Participant’s benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.
(m) Deferrals. To the extent permitted by Applicable Law, the Board, in its sole discretion, may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Award may be deferred and may also establish programs and procedures for deferral elections to be made by Participants. Deferrals by will be made in accordance with the requirements of Section 409A.
(n) Section 409A. Unless otherwise expressly provided for in an Award Agreement, the Plan and Award Agreements will be interpreted to the greatest extent possible in a manner that makes the Plan and the Awards granted hereunder exempt from Section 409A, and, to the extent not so exempt, in compliance with the requirements of Section 409A. If the Board determines that any Award granted hereunder is not exempt from and is therefore subject to Section 409A, the Award Agreement evidencing such Award will incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code, and to the extent an Award Agreement is silent on terms necessary for compliance, such terms are hereby incorporated by reference into the Award Agreement. Notwithstanding anything to the contrary in this Plan (and unless the Award Agreement
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specifically provides otherwise), if the shares of Common Stock are publicly traded, and if a Participant holding an Award that constitutes “deferred compensation” under Section 409A is a “specified employee” for purposes of Section 409A, no distribution or payment of any amount that is due because of a “separation from service” (as defined in Section 409A without regard to alternative definitions thereunder) will be issued or paid before the date that is six months and one day following the date of such Participant’s “separation from service” or, if earlier, the date of the Participant’s death, unless such distribution or payment can be made in a manner that complies with Section 409A, and any amounts so deferred will be paid in a lump sum on the day after such six month period elapses, with the balance paid thereafter on the original schedule.
(o) CHOICE OF LAW. This Plan and any controversy arising out of or relating to this Plan shall be governed by, and construed in accordance with, the internal laws of the State of Delaware, without regard to conflict of law principles that would result in any application of any law other than the law of the State of Delaware.
(a) Compliance with Law. The Company will seek to obtain from each regulatory commission or agency, as may be deemed to be necessary, having jurisdiction over the Plan such authority as may be required to grant Awards and to issue and sell shares of Common Stock upon exercise or vesting of the Awards; provided, however, that this undertaking will not require the Company to register under the Securities Act the Plan, any Award or any Common Stock issued or issuable pursuant to any such Award. If, after reasonable efforts and at a reasonable cost, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary or advisable for the lawful issuance and sale of Common Stock under the Plan, the Company will be relieved from any liability for failure to issue and sell Common Stock upon exercise or vesting of such Awards unless and until such authority is obtained. A Participant is not eligible for the grant of an Award or the subsequent issuance of Common Stock pursuant to the Award if such grant or issuance would be in violation of any Applicable Law.
11. ADDITIONAL RULES FOR AWARDS SUBJECT TO SECTION 409A.
(a) Application. Unless the provisions of this Section of the Plan are expressly superseded by the provisions in the form of Award Agreement, the provisions of this Section shall apply and shall supersede anything to the contrary set forth in the Award Agreement for a Non-Exempt Award.
(b) Non-Exempt Awards Subject to Non-Exempt Severance Arrangements. To the extent a Non-Exempt Award is subject to Section 409A due to application of a Non-Exempt Severance Arrangement, the following provisions of this subsection (b) apply.
(i) If the Non-Exempt Award vests in the ordinary course during the Participant’s Continuous Service in accordance with the vesting schedule set forth in the Award Agreement, and does not accelerate vesting under the terms of a Non-Exempt Severance Arrangement, in no event will the shares be issued in respect of such Non-Exempt Award any later than the later of: (i) December 31st of the calendar year that includes the applicable vesting date, or (ii) the 60th day that follows the applicable vesting date.
(ii) If vesting of the Non-Exempt Award accelerates under the terms of a Non-Exempt Severance Arrangement in connection with the Participant’s Separation from Service, and such vesting acceleration provisions were in effect as of the date of grant of the Non-Exempt Award and, therefore, are part of the terms of such Non-Exempt Award as of the date of grant, then the shares will be earlier issued in settlement of such Non-Exempt Award upon the Participant’s Separation from Service in accordance with the terms of the Non-Exempt Severance Arrangement, but in no event later than the 60th day that follows the date of the Participant’s Separation from Service. However, if at the time the shares would otherwise be issued the Participant is subject to the distribution limitations contained in Section 409A applicable to “specified employees,” as defined in Section 409A(a)(2)(B)(i) of the Code, such shares shall not be issued before the date that is six months following the date of such Participant’s Separation from Service, or, if earlier, the date of the Participant’s death that occurs within such six month period.
(iii) If vesting of a Non-Exempt Award accelerates under the terms of a Non-Exempt Severance Arrangement in connection with a Participant’s Separation from Service, and such vesting acceleration provisions were not in effect as of the date of grant of the Non-Exempt Award and, therefore, are not a part of the terms of such Non-Exempt Award on the date of grant, then such acceleration of vesting of the Non-Exempt Award shall
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not accelerate the issuance date of the shares, but the shares shall instead be issued on the same schedule as set forth in the Grant Notice as if they had vested in the ordinary course during the Participant’s Continuous Service, notwithstanding the vesting acceleration of the Non-Exempt Award. Such issuance schedule is intended to satisfy the requirements of payment on a specified date or pursuant to a fixed schedule, as provided under Treasury Regulations Section 1.409A-3(a)(4).
(c) Treatment of Non-Exempt Awards Upon a Corporate Transaction for Employees and Consultants. The provisions of this subsection (c) shall apply and shall supersede anything to the contrary set forth in the Plan with respect to the permitted treatment of any Non-Exempt Award in connection with a Corporate Transaction if the Participant was either an Employee or Consultant upon the applicable date of grant of the Non-Exempt Award.
(i) Vested Non-Exempt Awards. The following provisions shall apply to any Vested Non-Exempt Award in connection with a Corporate Transaction:
(1) If the Corporate Transaction is also a Section 409A Change in Control then the Acquiring Entity may not assume, continue or substitute the Vested Non-Exempt Award. Upon the Section 409A Change in Control the settlement of the Vested Non-Exempt Award will automatically be accelerated and the shares will be immediately issued in respect of the Vested Non-Exempt Award. Alternatively, the Company may instead provide that the Participant will receive a cash settlement equal to the Fair Market Value of the shares that would otherwise be issued to the Participant upon the Section 409A Change in Control.
(2) If the Corporate Transaction is not also a Section 409A Change in Control, then the Acquiring Entity must either assume, continue or substitute each Vested Non-Exempt Award. The shares to be issued in respect of the Vested Non-Exempt Award shall be issued to the Participant by the Acquiring Entity on the same schedule that the shares would have been issued to the Participant if the Corporate Transaction had not occurred. In the Acquiring Entity’s discretion, in lieu of an issuance of shares, the Acquiring Entity may instead substitute a cash payment on each applicable issuance date, equal to the Fair Market Value of the shares that would otherwise be issued to the Participant on such issuance dates, with the determination of the Fair Market Value of the shares made on the date of the Corporate Transaction.
(ii) Unvested Non-Exempt Awards. The following provisions shall apply to any Unvested Non-Exempt Award unless otherwise determined by the Board pursuant to subsection (e) of this Section.
(1) In the event of a Corporate Transaction, the Acquiring Entity shall assume, continue or substitute any Unvested Non-Exempt Award. Unless otherwise determined by the Board, any Unvested Non-Exempt Award will remain subject to the same vesting and forfeiture restrictions that were applicable to the Award prior to the Corporate Transaction. The shares to be issued in respect of any Unvested Non-Exempt Award shall be issued to the Participant by the Acquiring Entity on the same schedule that the shares would have been issued to the Participant if the Corporate Transaction had not occurred. In the Acquiring Entity’s discretion, in lieu of an issuance of shares, the Acquiring Entity may instead substitute a cash payment on each applicable issuance date, equal to the Fair Market Value of the shares that would otherwise be issued to the Participant on such issuance dates, with the determination of Fair Market Value of the shares made on the date of the Corporate Transaction.
(2) If the Acquiring Entity will not assume, substitute or continue any Unvested Non-Exempt Award in connection with a Corporate Transaction, then such Award shall automatically terminate and be forfeited upon the Corporate Transaction with no consideration payable to any Participant in respect of such forfeited Unvested Non-Exempt Award. Notwithstanding the foregoing, to the extent permitted and in compliance with the requirements of Section 409A, the Board may in its discretion determine to elect to accelerate the vesting and settlement of the Unvested Non-Exempt Award upon the Corporate Transaction, or instead substitute a cash payment equal to the Fair Market Value of such shares that would otherwise be issued to the Participant, as further provided in subsection (e)(ii) below. In the absence of such discretionary election by the Board, any Unvested Non-Exempt Award shall be forfeited without payment of any consideration to the affected Participants if the Acquiring Entity will not assume, substitute or continue the Unvested Non-Exempt Awards in connection with the Corporate Transaction.
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(3) The foregoing treatment shall apply with respect to all Unvested Non-Exempt Awards upon any Corporate Transaction, and regardless of whether or not such Corporate Transaction is also a Section 409A Change in Control.
(d) Treatment of Non-Exempt Awards Upon a Corporate Transaction for Non-Employee Directors.The following provisions of this subsection (d) shall apply and shall supersede anything to the contrary that may be set forth in the Plan with respect to the permitted treatment of a Non-Exempt Director Award in connection with a Corporate Transaction.
(i) If the Corporate Transaction is also a Section 409A Change in Control then the Acquiring Entity may not assume, continue or substitute the Non-Exempt Director Award. Upon the Section 409A Change in Control the vesting and settlement of any Non-Exempt Director Award will automatically be accelerated and the shares will be immediately issued to the Participant in respect of the Non-Exempt Director Award. Alternatively, the Company may provide that the Participant will instead receive a cash settlement equal to the Fair Market Value of the shares that would otherwise be issued to the Participant upon the Section 409A Change in Control pursuant to the preceding provision.
(ii) If the Corporate Transaction is not also a Section 409A Change in Control, then the Acquiring Entity must either assume, continue or substitute the Non-Exempt Director Award. Unless otherwise determined by the Board, the Non-Exempt Director Award will remain subject to the same vesting and forfeiture restrictions that were applicable to the Award prior to the Corporate Transaction. The shares to be issued in respect of the Non-Exempt Director Award shall be issued to the Participant by the Acquiring Entity on the same schedule that the shares would have been issued to the Participant if the Corporate Transaction had not occurred. In the Acquiring Entity’s discretion, in lieu of an issuance of shares, the Acquiring Entity may instead substitute a cash payment on each applicable issuance date, equal to the Fair Market Value of the shares that would otherwise be issued to the Participant on such issuance dates, with the determination of Fair Market Value made on the date of the Corporate Transaction.
(e) If the RSU Award is a Non-Exempt Award, then the provisions in this Section 11(e) shall apply and supersede anything to the contrary that may be set forth in the Plan or the Award Agreement with respect to the permitted treatment of such Non-Exempt Award:
(i) Any exercise by the Board of discretion to accelerate the vesting of a Non-Exempt Award shall not result in any acceleration of the scheduled issuance dates for the shares in respect of the Non-Exempt Award unless earlier issuance of the shares upon the applicable vesting dates would be in compliance with the requirements of Section 409A.
(ii) The Company explicitly reserves the right to earlier settle any Non-Exempt Award to the extent permitted and in compliance with the requirements of Section 409A, including pursuant to any of the exemptions available in Treasury Regulations Section 1.409A-3(j)(4)(ix).
(iii) To the extent the terms of any Non-Exempt Award provide that it will be settled upon a Change in Control or Corporate Transaction, to the extent it is required for compliance with the requirements of Section 409A, the Change in Control or Corporate Transaction event triggering settlement must also constitute a Section 409A Change in Control. To the extent the terms of a Non-Exempt Award provides that it will be settled upon a termination of employment or termination of Continuous Service, to the extent it is required for compliance with the requirements of Section 409A, the termination event triggering settlement must also constitute a Separation From Service. However, if at the time the shares would otherwise be issued to a Participant in connection with a “separation from service” such Participant is subject to the distribution limitations contained in Section 409A applicable to “specified employees,” as defined in Section 409A(a)(2)(B)(i) of the Code, such shares shall not be issued before the date that is six months following the date of the Participant’s Separation From Service, or, if earlier, the date of the Participant’s death that occurs within such six month period.
(iv) The provisions in this subsection (e) for delivery of the shares in respect of the settlement of a RSU Award that is a Non-Exempt Award are intended to comply with the requirements of Section 409A so that the delivery of the shares to the Participant in respect of such Non-Exempt Award will not trigger the additional tax imposed under Section 409A, and any ambiguities herein will be so interpreted.
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If all or any part of the Plan or any Award Agreement is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of the Plan or such Award Agreement not declared to be unlawful or invalid. Any Section of the Plan or any Award Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
The Board may suspend or terminate the Plan at any time. No Incentive Stock Options may be granted after the tenth anniversary of the earlier of: (i) the Adoption Date, or (ii) the date the Plan is approved by the Company’s stockholders. No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
As used in the Plan, the following definitions apply to the capitalized terms indicated below:
(a) “Acquiring Entity” means the surviving or acquiring corporation (or its parent company) in connection with a Corporate Transaction.
(b) “Adoption Date” means the date the Plan is first approved by the Board or Compensation Committee.
(c) “Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such terms are defined in Rule 405 promulgated under the Securities Act. The Board may determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.
(d) “Applicable Law” means shall mean any applicable securities, federal, state, foreign, material local or municipal or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, listing rule, regulation, judicial decision, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body (including under the authority of any applicable self-regulating organization such as the Nasdaq Stock Market, New York Stock Exchange, or the Financial Industry Regulatory Authority).
(e) “Award” means any right to receive Common Stock, cash or other property granted under the Plan (including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a RSU Award, a SAR, a Performance Award or any Other Award).
(f) “Award Agreement” means a written agreement between the Company and a Participant evidencing the terms and conditions of an Award. The Award Agreement generally consists of the Grant Notice and the agreement containing the written summary of the general terms and conditions applicable to the Award and which is provided to a Participant along with the Grant Notice.
(g) “Board” means the Board of Directors of the Company (or its designee). Any decision or determination made by the Board shall be a decision or determination that is made in the sole discretion of the Board (or its designee), and such decision or determination shall be final and binding on all Participants.
(h) “Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Award after the Effective Date without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, reverse stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the Company will not be treated as a Capitalization Adjustment.
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(i) “Cause” has the meaning ascribed to such term in any written agreement between the Participant and the Company defining such term and, in the absence of such agreement, such term means, with respect to a Participant, the occurrence of any of the following events: (i) such Participant’s attempted commission of, or participation in, a fraud or act of dishonesty against the Company; (ii) such Participant’s intentional, material violation of any contract or agreement between the Participant and the Company or of any statutory duty owed to the Company; (iii) such Participant’s unauthorized use or disclosure of the Company’s confidential information or trade secrets; or (iv) such Participant’s gross or willful misconduct. The determination that a termination of the Participant’s Continuous Service is either for Cause or without Cause will be made by the Board with respect to Participants who are executive officers of the Company and by the Company’s Chief Executive Officer with respect to Participants who are not executive officers of the Company. Any determination by the Company that the Continuous Service of a Participant was terminated with or without Cause for the purposes of outstanding Awards held by such Participant will have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.
(j) “Change in Control” or “Change of Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events; provided, however, to the extent necessary to avoid adverse personal income tax consequences to the Participant in connection with an Award, also constitutes a Section 409A Change in Control:
(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company directly from the Company, (B) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person that acquires the Company’s securities in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities, or (C) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;
(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than 50% of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than 50% of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;
(iii) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than 50% of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or
(iv) individuals who, on the date the Plan is adopted by the Board, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board.
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Notwithstanding the foregoing or any other provision of this Plan, (A) the term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company, and (B) the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.
(k) “Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(l) “Committee” means the Compensation Committee and any other committee of Directors to whom authority has been delegated by the Board or Compensation Committee in accordance with the Plan.
(m) “Common Stock” means the Class A common stock of the Company.
(n) “Company” means Metromile, Inc., a Delaware corporation.
(o) “Compensation Committee” means the Compensation Committee of the Board.
(p) “Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, will not cause a Director to be considered a “Consultant” for purposes of the Plan. Notwithstanding the foregoing, a person is treated as a Consultant under this Plan only if a Form S-8 Registration Statement under the Securities Act is available to register either the offer or the sale of the Company’s securities to such person.
(q) “Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Director or Consultant or a change in the Entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s service with the Company or an Affiliate, will not terminate a Participant’s Continuous Service; provided, however, that if the Entity for which a Participant is rendering services ceases to qualify as an Affiliate, as determined by the Board, such Participant’s Continuous Service will be considered to have terminated on the date such Entity ceases to qualify as an Affiliate. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or to a Director will not constitute an interruption of Continuous Service. To the extent permitted by law, the Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous Service will be considered interrupted in the case of (i) any leave of absence approved by the Board or chief executive officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence will be treated as Continuous Service for purposes of vesting in an Award only to such extent as may be provided in the Company’s leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law. In addition, to the extent required for exemption from or compliance with Section 409A, the determination of whether there has been a termination of Continuous Service will be made, and such term will be construed, in a manner that is consistent with the definition of “separation from service” as defined under Treasury Regulation Section 1.409A-1(h) (without regard to any alternative definition thereunder).
(r) “Corporate Transaction” means the consummation, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least 50% of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
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(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(s) “Director” means a member of the Board.
(t) “determine” or “determined” means as determined by the Board or the Committee (or its designee) in its sole discretion.
(u) “Disability” means, with respect to a Participant, such Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, as provided in Section 22(e)(3) of the Code, and will be determined by the Board on the basis of such medical evidence as the Board deems warranted under the circumstances.
(v) “Effective Date” means [ ].
(w) “Employee” means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, will not cause a Director to be considered an “Employee” for purposes of the Plan.
(x) “Employer” means the Company or the Affiliate of the Company that employs the Participant.
(y) “Entity” means a corporation, partnership, limited liability company or other entity.
(z) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
(aa) “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” will not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to a registered public offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date, is the Owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then outstanding securities.
(bb) “Fair Market Value” means, as of any date, unless otherwise determined by the Board, the value of the Common Stock (as determined on a per share or aggregate basis, as applicable) determined as follows:
(i) If the Common Stock is listed on any established stock exchange or traded on any established market, the Fair Market Value will be the closing sales price for such stock as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in a source the Board deems reliable.
(ii) If there is no closing sales price for the Common Stock on the date of determination, then the Fair Market Value will be the closing selling price on the last preceding date for which such quotation exists.
(iii) In the absence of such markets for the Common Stock, or if otherwise determined by the Board, the Fair Market Value will be determined by the Board in good faith and in a manner that complies with Sections 409A and 422 of the Code.
(cc) “Governmental Body” means any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or regulatory body, or quasi-governmental body of any nature (including any governmental division, department, administrative agency or bureau, commission, authority, instrumentality, official, ministry, fund, foundation, center, organization, unit, body or Entity and any court or other tribunal, and for the
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avoidance of doubt, any Tax authority) or other body exercising similar powers or authority; or (d) self-regulatory organization (including the Nasdaq Stock Market, New York Stock Exchange, and the Financial Industry Regulatory Authority).
(dd) “Grant Notice” means the notice provided to a Participant that he or she has been granted an Award under the Plan and which includes the name of the Participant, the type of Award, the date of grant of the Award, number of shares of Common Stock subject to the Award or potential cash payment right, (if any), the vesting schedule for the Award (if any) and other key terms applicable to the Award.
(ee) “Incentive Stock Option” means an option granted pursuant to Section 4 of the Plan that is intended to be, and qualifies as, an “incentive stock option” within the meaning of Section 422 of the Code.
(ff) “Materially Impair” means any amendment to the terms of the Award that materially adversely affects the Participant’s rights under the Award. A Participant’s rights under an Award will not be deemed to have been Materially Impaired by any such amendment if the Board, in its sole discretion, determines that the amendment, taken as a whole, does not materially impair the Participant’s rights. For example, the following types of amendments to the terms of an Award do not Materially Impair the Participant’s rights under the Award: (i) imposition of reasonable restrictions on the minimum number of shares subject to an Option that may be exercised; (ii) to maintain the qualified status of the Award as an Incentive Stock Option under Section 422 of the Code; (iii) to change the terms of an Incentive Stock Option in a manner that disqualifies, impairs or otherwise affects the qualified status of the Award as an Incentive Stock Option under Section 422 of the Code; (iv) to clarify the manner of exemption from, or to bring the Award into compliance with or qualify it for an exemption from, Section 409A; or (v) to comply with other Applicable Laws.
(gg) “Merger Agreement” means that certain Agreement and Plan of Merger and Reorganization, dated as of November 24, 2020, as it may be amended, by and among INSU Acquisition Corp. II, a Delaware corporation (“Parent”), INSU II Merger Sub Corp., a Delaware corporation and a direct wholly owned subsidiary of Parent (“Merger Sub”), and the Company.
(hh) “Non-Employee Director” means a Director who either (i) is not a current employee or officer of the Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.
(ii) “Non-Exempt Award” means any Award that is subject to, and not exempt from, Section 409A, including as the result of (i) a deferral of the issuance of the shares subject to the Award which is elected by the Participant or imposed by the Company, (ii) the terms of any Non-Exempt Severance Agreement.
(jj) “Non-Exempt Director Award” means a Non-Exempt Award granted to a Participant who was a Director but not an Employee on the applicable grant date.
(kk) “Non-Exempt Severance Arrangement” means a severance arrangement or other agreement between the Participant and the Company that provides for acceleration of vesting of an Award and issuance of the shares in respect of such Award upon the Participant’s termination of employment or separation from service (as such term is defined in Section 409A(a)(2)(A)(i) of the Code (and without regard to any alternative definition thereunder) (“Separation from Service”) and such severance benefit does not satisfy the requirements for an exemption from application of Section 409A provided under Treasury Regulations Section 1.409A-1(b)(4), 1.409A-1(b)(9) or otherwise.
(ll) “Nonstatutory Stock Option” means any option granted pursuant to Section 4 of the Plan that does not qualify as an Incentive Stock Option.
(mm) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.
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(nn) “Option” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.
(oo) “Option Agreement” means a written agreement between the Company and the Optionholder evidencing the terms and conditions of the Option grant. The Option Agreement includes the Grant Notice for the Option and the agreement containing the written summary of the general terms and conditions applicable to the Option and which is provided to a Participant along with the Grant Notice. Each Option Agreement will be subject to the terms and conditions of the Plan.
(pp) “Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
(qq) “Other Award” means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 5(c).
(rr) “Other Award Agreement” means a written agreement between the Company and a holder of an Other Award evidencing the terms and conditions of an Other Award grant. Each Other Award Agreement will be subject to the terms and conditions of the Plan.
(ss) “Own,” “Owned,” “Owner,” “Ownership” means that a person or Entity will be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.
(tt) “Participant” means an Employee, Director or Consultant to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Award.
(uu) “Performance Award” means an Award that may vest or may be exercised or a cash award that may vest or become earned and paid contingent upon the attainment during a Performance Period of certain Performance Goals and which is granted under the terms and conditions of Section 5(b) pursuant to such terms as are approved by the Board. In addition, to the extent permitted by Applicable Law and set forth in the applicable Award Agreement, the Board may determine that cash or other property may be used in payment of Performance Awards. Performance Awards that are settled in cash or other property are not required to be valued in whole or in part by reference to, or otherwise based on, the Common Stock.
(vv) “Performance Criteria” means the one or more criteria that the Board will select for purposes of establishing the Performance Goals for a Performance Period. The Performance Criteria that will be used to establish such Performance Goals may be based on any measure of performance selected by the Board.
(ww) “Performance Goals” means, for a Performance Period, the one or more goals established by the Board for the Performance Period based upon the Performance Criteria. Performance Goals may be based on a Company-wide basis, with respect to one or more business units, divisions, Affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless specified otherwise by the Board (i) in the Award Agreement at the time the Award is granted or (ii) in such other document setting forth the Performance Goals at the time the Performance Goals are established, the Board will appropriately make adjustments in the method of calculating the attainment of Performance Goals for a Performance Period as follows: (1) to exclude restructuring and/or other nonrecurring charges; (2) to exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted accounting principles; (4) to exclude the effects of any statutory adjustments to corporate tax rates; (5) to exclude the effects of items that are “unusual” in nature or occur “infrequently” as determined under generally accepted accounting principles; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to assume that any business divested by the Company achieved performance objectives at targeted levels during the balance of a Performance Period following such divestiture; (8) to exclude the effect of any change in the outstanding shares of common stock of the Company by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends; (9) to exclude the effects of stock based compensation and the award of bonuses under the Company’s bonus plans; (10) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to expense under generally accepted accounting principles; and (11) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under generally
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accepted accounting principles. In addition, the Board retains the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of Performance Goals and to define the manner of calculating the Performance Criteria it selects to use for such Performance Period. Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified in the Award Agreement or the written terms of a Performance Cash Award.
(xx) “Performance Period” means the period of time selected by the Board over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to vesting or exercise of an Award. Performance Periods may be of varying and overlapping duration, at the sole discretion of the Board.
(yy) “Plan” means this Metromile, Inc. 2021 Equity Incentive Plan, as amended from time to time.
(zz) “Plan Administrator” means the person, persons, and/or third-party administrator designated by the Company to administer the day to day operations of the Plan and the Company’s other equity incentive programs.
(aaa) “Post-Termination Exercise Period” means the period following termination of a Participant’s Continuous Service within which an Option or SAR is exercisable, as specified in Section 4(h).
(bbb) “Prospectus” means the document containing the Plan information specified in Section 10(a) of the Securities Act.
(ccc) “Restricted Stock Award” or “RSA” means an Award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 5(a).
(ddd) “Restricted Stock Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. The Restricted Stock Award Agreement includes the Grant Notice for the Restricted Stock Award and the agreement containing the written summary of the general terms and conditions applicable to the Restricted Stock Award and which is provided to a Participant along with the Grant Notice. Each Restricted Stock Award Agreement will be subject to the terms and conditions of the Plan.
(eee) “RSU Award” or “RSU” means an Award of restricted stock units representing the right to receive an issuance of shares of Common Stock which is granted pursuant to the terms and conditions of Section 5(a).
(fff) “RSU Award Agreement” means a written agreement between the Company and a holder of a RSU Award evidencing the terms and conditions of a RSU Award grant. The RSU Award Agreement includes the Grant Notice for the RSU Award and the agreement containing the written summary of the general terms and conditions applicable to the RSU Award and which is provided to a Participant along with the Grant Notice. Each RSU Award Agreement will be subject to the terms and conditions of the Plan.
(ggg) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.
(hhh) “Rule 405” means Rule 405 promulgated under the Securities Act.
(iii) “Section 409A” means Section 409A of the Code and the regulations and other guidance thereunder.
(jjj) “Section 409A Change in Control” means a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the Company’s assets, as provided in Section 409A(a)(2)(A)(v) of the Code and Treasury Regulations Section 1.409A-3(i)(5) (without regard to any alternative definition thereunder).
(kkk) “Securities Act” means the Securities Act of 1933, as amended.
(lll) “Share Reserve” means the number of shares available for issuance under the Plan as set forth in Section 2(a).
(mmm) “Stock Appreciation Right” or “SAR” means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 4.
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(nnn) “SAR Agreement” means a written agreement between the Company and a holder of a SAR evidencing the terms and conditions of a SAR grant. The SAR Agreement includes the Grant Notice for the SAR and the agreement containing the written summary of the general terms and conditions applicable to the SAR and which is provided to a Participant along with the Grant Notice. Each SAR Agreement will be subject to the terms and conditions of the Plan.
(ooo) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation will have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than 50%.
(ppp) “Ten Percent Stockholder” means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Affiliate.
(qqq) “Trading Policy” means the Company’s policy permitting certain individuals to sell Company shares only during certain “window” periods and/or otherwise restricts the ability of certain individuals to transfer or encumber Company shares, as in effect from time to time.
(rrr) “Unvested Non-Exempt Award” means the portion of any Non-Exempt Award that had not vested in accordance with its terms upon or prior to the date of any Corporate Transaction.
(sss) “Vested Non-Exempt Award” means the portion of any Non-Exempt Award that had vested in accordance with its terms upon or prior to the date of a Corporate Transaction.
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Exhibit 10.4
METROMILE, INC.
2021 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: [DATE]
APPROVED BY THE STOCKHOLDERS: [DATE]
1. GENERAL; PURPOSE.
(a) The Plan provides a means by which Eligible Employees of the Company and certain designated Related Corporations may be given an opportunity to purchase shares of Common Stock. The Plan permits the Company to grant a series of Purchase Rights to Eligible Employees under an Employee Stock Purchase Plan.
(b) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Related Corporations.
2. ADMINISTRATION.
(a) The Board will administer the Plan unless and until the Board delegates administration of the Plan to a Committee or Committees, as provided in Section 2(c).
(b) The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine how and when Purchase Rights will be granted and the provisions of each Offering (which need not be identical).
(ii) To designate from time to time which Related Corporations of the Company will be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Purchase Rights, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it deems necessary or expedient to make the Plan fully effective.
(iv) To settle all controversies regarding the Plan and Purchase Rights granted under the Plan.
(v) To suspend or terminate the Plan at any time as provided in Section 12.
(vi) To amend the Plan at any time as provided in Section 12.
(vii) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Related Corporations and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan.
(viii) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States.
(c) The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references to the Board in this Plan and in any applicable Offering Document will thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated. Whether or not the Board has delegated administration of the Plan to a Committee, the Board will have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan.
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(d) All determinations, interpretations and constructions made by the Board in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the maximum number of shares of Common Stock that may be issued under the Plan will not exceed [ ] shares of Common Stock (equal to one and a half percent (1.5%) of the total number of issued and outstanding shares of Common Stock immediately after the consummation of the transactions contemplated by the Merger Agreement) (the “Initial Share Reserve”), plus the number of shares of Common Stock that are automatically added on January 1st of each year for a period of up to ten years, commencing on January 1, 2022 and ending on (and including) January 1, 2031, in an amount equal to the lesser of (i) one percent (1.0%) of the total number of shares of Capital Stock outstanding on December 31st of the preceding calendar year, and (ii) [ ] shares of Common Stock (equal to two hundred percent (200%) of the Initial Share Reserve). Notwithstanding the foregoing, the Board may act prior to the first day of any calendar year to provide that there will be no January 1st increase in the share reserve for such calendar year or that the increase in the share reserve for such calendar year will be a lesser number of shares of Common Stock than would otherwise occur pursuant to the preceding sentence.
(b) If any Purchase Right granted under the Plan terminates without having been exercised in full, the shares of Common Stock not purchased under such Purchase Right will again become available for issuance under the Plan.
(c) The stock purchasable under the Plan will be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market.
4. GRANT OF PURCHASE RIGHTS; OFFERING.
(a) The Board may from time to time grant or provide for the grant of Purchase Rights to Eligible Employees under an Offering (consisting of one or more Purchase Periods) on an Offering Date or Offering Dates selected by the Board. Each Offering will be in such form and will contain such terms and conditions as the Board will deem appropriate, and will comply with the requirement of Section 423(b)(5) of the Code that all Employees granted Purchase Rights will have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering will include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering will be effective, which period will not exceed 27 months beginning with the Offering Date, and the substance of the provisions contained in Sections 5 through 8, inclusive.
(b) If a Participant has more than one Purchase Right outstanding under the Plan, unless he or she otherwise indicates in forms delivered to the Company: (i) each form will apply to all of his or her Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-granted Purchase Right, if different Purchase Rights have identical exercise prices) will be exercised to the fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted Purchase Right if different Purchase Rights have identical exercise prices) will be exercised.
(c) The Board will have the discretion to structure an Offering so that if the Fair Market Value of a share of Common Stock on the first Trading Day of a new Purchase Period within that Offering is less than or equal to the Fair Market Value of a share of Common Stock on the Offering Date for that Offering, then (i) that Offering will terminate immediately as of that first Trading Day, and (ii) the Participants in such terminated Offering will be automatically enrolled in a new Offering beginning on the first Trading Day of such new Purchase Period.
5. ELIGIBILITY.
(a) Purchase Rights may be granted only to Employees of the Company or, as the Board may designate in accordance with Section 2(b), to Employees of a Related Corporation. Except as provided in Section 5(b), an Employee will not be eligible to be granted Purchase Rights unless, on the Offering Date, the Employee has been in the employ of the Company or the Related Corporation, as the case may be, for such continuous period preceding such Offering Date as the Board may require, but in no event will the required period of continuous employment be equal to or greater than two years. In addition, the Board may provide that no Employee will be eligible to be granted
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Purchase Rights under the Plan unless, on the Offering Date, such Employee’s customary employment with the Company or the Related Corporation is more than 20 hours per week and more than five months per calendar year or such other criteria as the Board may determine consistent with Section 423 of the Code.
(b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Purchase Right under that Offering, which Purchase Right will thereafter be deemed to be a part of that Offering. Such Purchase Right will have the same characteristics as any Purchase Rights originally granted under that Offering, as described herein, except that:
(i) the date on which such Purchase Right is granted will be the “Offering Date” of such Purchase Right for all purposes, including determination of the exercise price of such Purchase Right;
(ii) the period of the Offering with respect to such Purchase Right will begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Purchase Right under that Offering.
(c) No Employee will be eligible for the grant of any Purchase Rights if, immediately after any such Purchase Rights are granted, such Employee owns stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or of any Related Corporation. For purposes of this Section 5(c), the rules of Section 424(d) of the Code will apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding Purchase Rights and options will be treated as stock owned by such Employee.
(d) As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted Purchase Rights only if such Purchase Rights, together with any other rights granted under all Employee Stock Purchase Plans of the Company and any Related Corporations, do not permit such Eligible Employee’s rights to purchase stock of the Company or any Related Corporation to accrue at a rate which, when aggregated, exceeds $25,000 of Fair Market Value of such stock (determined at the time such rights are granted, and which, with respect to the Plan, will be determined as of their respective Offering Dates) for each calendar year in which such rights are outstanding at any time.
(e) Officers of the Company and any designated Related Corporation, if they are otherwise Eligible Employees, will be eligible to participate in Offerings under the Plan. Notwithstanding the foregoing, the Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code will not be eligible to participate.
6. PURCHASE RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, will be granted a Purchase Right to purchase up to that number of shares of Common Stock purchasable either with a percentage or with a maximum dollar amount, as designated by the Board, but in either case not exceeding 15% of such Employee’s earnings (as defined by the Board in each Offering) during the period that begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date will be no later than the end of the Offering.
(b) The Board will establish one or more Purchase Dates during an Offering on which Purchase Rights granted for that Offering will be exercised and shares of Common Stock will be purchased in accordance with such Offering.
(c) In connection with each Offering made under the Plan, the Board may specify (i) a maximum number of shares of Common Stock that may be purchased by any Participant on any Purchase Date during such Offering, (ii) a maximum aggregate number of shares of Common Stock that may be purchased by all Participants pursuant to such Offering and/or (iii) a maximum aggregate number of shares of Common Stock that may be purchased by all Participants on any Purchase Date under the Offering. If the aggregate purchase of shares of Common Stock issuable upon exercise of Purchase Rights granted under the Offering would exceed any such maximum aggregate
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number, then, in the absence of any Board action otherwise, a pro rata (based on each Participant’s accumulated Contributions) allocation of the shares of Common Stock available will be made in as nearly a uniform manner as will be practicable and equitable.
(d) The purchase price of shares of Common Stock acquired pursuant to Purchase Rights will be not less than the lesser of:
(i) an amount equal to 85% of the Fair Market Value of the shares of Common Stock on the Offering Date; or
(ii) an amount equal to 85% of the Fair Market Value of the shares of Common Stock on the applicable Purchase Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An Eligible Employee may elect to participate in an Offering and authorize payroll deductions as the means of making Contributions by completing and delivering to the Company, within the time specified in the Offering, an enrollment form provided by the Company. The enrollment form will specify the amount of Contributions not to exceed the maximum amount specified by the Board. Each Participant’s Contributions will be credited to a bookkeeping account for such Participant under the Plan and will be deposited with the general funds of the Company except where applicable law requires that Contributions be deposited with a third party. If permitted in the Offering, a Participant may begin such Contributions with the first practicable payroll occurring on or after the Offering Date (or, in the case of a payroll date that occurs after the end of the prior Offering but before the Offering Date of the next new Offering, Contributions from such payroll will be included in the new Offering). If permitted in the Offering, a Participant may thereafter reduce (including to zero) or increase his or her Contributions. If specifically provided in the Offering, in addition to or instead of making Contributions by payroll deductions, a Participant may make Contributions through the payment by cash or check prior to a Purchase Date.
(b) During an Offering, a Participant may cease making Contributions and withdraw from the Offering by delivering to the Company a withdrawal form provided by the Company. The Company may impose a deadline before a Purchase Date for withdrawing. Upon such withdrawal, such Participant’s Purchase Right in that Offering will immediately terminate and the Company will distribute as soon as practicable to such Participant all of his or her accumulated but unused Contributions and such Participant’s Purchase Right in that Offering shall thereupon terminate. A Participant’s withdrawal from that Offering will have no effect upon his or her eligibility to participate in any other Offerings under the Plan, but such Participant will be required to deliver a new enrollment form to participate in subsequent Offerings.
(c) Unless otherwise required by applicable law, Purchase Rights granted pursuant to any Offering under the Plan will terminate immediately if the Participant either (i) is no longer an Employee for any reason or for no reason (subject to any post-employment participation period required by law) or (ii) is otherwise no longer eligible to participate. The Company will distribute to such individual as soon as practicable all of his or her accumulated but unused Contributions.
(d) During a Participant’s lifetime, Purchase Rights will be exercisable only by such Participant. Purchase Rights are not transferable by a Participant, except by will, by the laws of descent and distribution, or, if permitted by the Company, by a beneficiary designation as described in Section 10.
(e) Unless otherwise specified in the Offering or required by applicable law, the Company will have no obligation to pay interest on Contributions.
8. EXERCISE OF PURCHASE RIGHTS.
(a) On each Purchase Date, each Participant’s accumulated Contributions will be applied to the purchase of shares of Common Stock, up to the maximum number of shares of Common Stock permitted by the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares will be issued unless specifically provided for in the Offering.
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(b) Unless otherwise provided in the Offering, if any amount of accumulated Contributions remains in a Participant’s account after the purchase of shares of Common Stock and such remaining amount is less than the amount required to purchase one share of Common Stock on the final Purchase Date of an Offering, then such remaining amount will be held in such Participant’s account for the purchase of shares of Common Stock under the next Offering under the Plan, unless such Participant withdraws from or is not eligible to participate in such next Offering, in which case such amount will be distributed to such Participant after the final Purchase Date without interest (unless the payment of interest is otherwise required by applicable law). If the amount of Contributions remaining in a Participant’s account after the purchase of shares of Common Stock is at least equal to the amount required to purchase one (1) whole share of Common Stock on the final Purchase Date of an Offering, then such remaining amount will be distributed in full to such Participant after the final Purchase Date of such Offering without interest.
(c) No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be issued upon such exercise under the Plan are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable federal, state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date the shares of Common Stock are not so registered or the Plan is not in such compliance, no Purchase Rights will be exercised on such Purchase Date, and the Purchase Date will be delayed until the shares of Common Stock are subject to such an effective registration statement and the Plan is in material compliance, except that the Purchase Date will in no event be more than 6 months from the Offering Date. If, on the Purchase Date, as delayed to the maximum extent permissible, the shares of Common Stock are not registered and the Plan is not in material compliance with all applicable laws, no Purchase Rights will be exercised and all accumulated but unused Contributions will be distributed to the Participants without interest.
9. COVENANTS OF THE COMPANY.
The Company will seek to obtain from each U.S. federal or state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Purchase Rights and issue and sell shares of Common Stock thereunder unless the Company determines, in its sole discretion, that doing so would cause the Company to incur costs that are unreasonable. If, after commercially reasonable efforts, the Company is unable to obtain the authority that counsel for the Company deems necessary for the grant of Purchase Rights or the lawful issuance and sale of Common Stock under the Plan, and at a commercially reasonable cost, the Company will be relieved from any liability for failure to grant Purchase Rights and/or to issue and sell Common Stock upon exercise of such Purchase Rights.
10. DESIGNATION OF BENEFICIARY.
(a) The Company may, but is not obligated to, permit a Participant to submit a form designating a beneficiary who will receive any shares of Common Stock and/or Contributions from the Participant’s account under the Plan if the Participant dies before such shares and/or Contributions are delivered to the Participant. The Company may, but is not obligated to, permit the Participant to change such designation of beneficiary. Any such designation and/or change must be on a form approved by the Company.
(b) If a Participant dies, and in the absence of a valid beneficiary designation, the Company will deliver any shares of Common Stock and/or Contributions to the executor or administrator of the estate of the Participant. If no executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or Contributions without interest (unless the payment of interest is otherwise required by applicable law) to the Participant’s spouse, dependents or relatives, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
11. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; CORPORATE TRANSACTIONS.
(a) In the event of a Capitalization Adjustment, the Board will appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities by which the share reserve is to increase automatically each year pursuant to Section 3(a), (iii) the class(es) and number of securities subject to, and the purchase price applicable to outstanding Offerings and Purchase Rights, and (iv) the class(es) and number of securities that are the subject of the purchase limits under each ongoing Offering. The Board will make these adjustments, and its determination will be final, binding and conclusive.
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(b) In the event of a Corporate Transaction, then: (i) any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue outstanding Purchase Rights or may substitute similar rights (including a right to acquire the same consideration paid to the stockholders in the Corporate Transaction) for outstanding Purchase Rights, or (ii) if any surviving or acquiring corporation (or its parent company) does not assume or continue such Purchase Rights or does not substitute similar rights for such Purchase Rights, then the Participants’ accumulated Contributions will be used to purchase shares of Common Stock within ten business days prior to the Corporate Transaction under the outstanding Purchase Rights, and the Purchase Rights will terminate immediately after such purchase.
12. AMENDMENT, TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may amend the Plan at any time in any respect the Board deems necessary or advisable. However, except as provided in Section 11(a) relating to Capitalization Adjustments, stockholder approval will be required for any amendment of the Plan for which stockholder approval is required by applicable law or listing requirements.
(b) The Board may suspend or terminate the Plan at any time. No Purchase Rights may be granted under the Plan while the Plan is suspended or after it is terminated.
(c) Any benefits, privileges, entitlements and obligations under any outstanding Purchase Rights granted before an amendment, suspension or termination of the Plan will not be materially impaired by any such amendment, suspension or termination except (i) with the consent of the person to whom such Purchase Rights were granted, (ii) as necessary to comply with any laws, listing requirements, or governmental regulations (including, without limitation, the provisions of Section 423 of the Code and the regulations and other interpretive guidance issued thereunder relating to Employee Stock Purchase Plans) including without limitation any such regulations or other guidance that may be issued or amended after the date the Plan is adopted by the Board, or (iii) as necessary to obtain or maintain favorable tax, listing, or regulatory treatment. To be clear, the Board may amend outstanding Purchase Rights without a Participant’s consent if such amendment is necessary to ensure that the Purchase Right and/or the Plan complies with the requirements of Section 423 of the Code.
Notwithstanding anything in the Plan or any Offering Document to the contrary, the Board will be entitled to: (i) establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars; (ii) permit Contributions in excess of the amount designated by a Participant in order to adjust for mistakes in the Company’s processing of properly completed Contribution elections; (iii) establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant’s Contributions; (iv) amend any outstanding Purchase Rights or clarify any ambiguities regarding the terms of any Offering to enable the Purchase Rights to qualify under and/or comply with Section 423 of the Code; and (v) establish other limitations or procedures as the Board determines in its sole discretion advisable that are consistent with the Plan. The actions of the Board pursuant to this paragraph will not be considered to alter or impair any Purchase Rights granted under an Offering as they are part of the initial terms of each Offering and the Purchase Rights granted under each Offering.
13. EFFECTIVE DATE OF PLAN.
The Plan will become effective on [ ]. No Purchase Rights will be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval must be within 12 months before or after the date the Plan is adopted (or if required under Section 12(a) above, materially amended) by the Board.
14. MISCELLANEOUS PROVISIONS.
(a) Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights will constitute general funds of the Company.
(b) A Participant will not be deemed to be the holder of, or to have any of the rights of a holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the Participant’s shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the books of the Company (or its transfer agent).
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(c) The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in the Offering will in any way alter the at will nature of a Participant’s employment or be deemed to create in any way whatsoever any obligation on the part of any Participant to continue in the employ of the Company or a Related Corporation, or on the part of the Company or a Related Corporation to continue the employment of a Participant.
(d) The provisions of the Plan will be governed by the laws of the State of Delaware without resort to that state’s conflict of laws rules.
15. DEFINITIONS.
As used in the Plan, the following definitions will apply to the capitalized terms indicated below:
(a) “Board” means the Board of Directors of the Company.
(b) “Capital Stock” means each and every class of common stock of the Company, regardless of the number of votes per share.
(c) “Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Purchase Right after the date the Plan is adopted by the Board without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other similar equity restructuring transaction, as that term is used in Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the Company will not be treated as a Capitalization Adjustment.
(d) “Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(e) “Committee” means a committee of one or more members of the Board to whom authority has been delegated by the Board in accordance with Section 2(c).
(f) “Common Stock” means the Class A common stock of the Company.
(g) “Company” means Metromile, Inc., a Delaware corporation.
(h) “Contributions” means the payroll deductions and other additional payments specifically provided for in the Offering that a Participant contributes to fund the exercise of a Purchase Right. A Participant may make additional payments into his or her account if specifically provided for in the Offering, and then only if the Participant has not already had the maximum permitted amount withheld during the Offering through payroll deductions.
(i) “Corporate Transaction” means the consummation, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its subsidiaries;
(ii) a sale or other disposition of more than 50% of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
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(j) “Director” means a member of the Board.
(k) “Eligible Employee” means an Employee who meets the requirements set forth in the document(s) governing the Offering for eligibility to participate in the Offering, provided that such Employee also meets the requirements for eligibility to participate set forth in the Plan.
(l) “Employee” means any person, including an Officer or Director, who is “employed” for purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. However, service solely as a Director, or payment of a fee for such services, will not cause a Director to be considered an “Employee” for purposes of the Plan.
(m) “Employee Stock Purchase Plan” means a plan that grants Purchase Rights intended to be options issued under an “employee stock purchase plan,” as that term is defined in Section 423(b) of the Code.
(n) “Exchange Act” means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder.
(o) “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or traded on any established market, the Fair Market Value of a share of Common Stock will be, unless otherwise determined by the Board, the closing sales price for such stock as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in such source as the Board deems reliable. Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on the date of determination, then the Fair Market Value will be the closing sales price on the last preceding date for which such quotation exists.
(ii) In the absence of such markets for the Common Stock, the Fair Market Value will be determined by the Board in good faith in compliance with applicable laws and in a manner that complies with Sections 409A of the Code.
(p) “Merger Agreement” means that certain Merger Agreement, dated as of November 24, 2020, as it may be amended, by and among INSU Acquisition Corp. II, a Delaware corporation (“Parent”), INSU II Merger Sub Corp., a Delaware corporation and a direct, wholly owned subsidiary of Parent, and the Company.
(q) “Offering” means the grant to Eligible Employees of Purchase Rights, with the exercise of those Purchase Rights automatically occurring at the end of one or more Purchase Periods. The terms and conditions of an Offering will generally be set forth in the “Offering Document” approved by the Board for that Offering.
(r) “Offering Date” means a date selected by the Board for an Offering to commence.
(s) “Officer” means a person who is an officer of the Company or a Related Corporation within the meaning of Section 16 of the Exchange Act.
(t) “Participant” means an Eligible Employee who holds an outstanding Purchase Right.
(u) “Plan” means this Metromile, Inc. 2021 Employee Stock Purchase Plan, as amended from time to time.
(v) “Purchase Date” means one or more dates during an Offering selected by the Board on which Purchase Rights will be exercised and on which purchases of shares of Common Stock will be carried out in accordance with such Offering.
(w) “Purchase Period” means a period of time specified within an Offering, generally beginning on the Offering Date or on the first Trading Day following a Purchase Date, and ending on a Purchase Date. An Offering may consist of one or more Purchase Periods.
(x) “Purchase Right” means an option to purchase shares of Common Stock granted pursuant to the Plan.
(y) “Related Corporation” means any “parent corporation” or “subsidiary corporation” of the Company whether now or subsequently established, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.
Annex C-8
(z) “Securities Act” means the Securities Act of 1933, as amended.
(aa) “Trading Day” means any day on which the exchange(s) or market(s) on which shares of Common Stock are listed, including but not limited to the NYSE, Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or any successors thereto, is open for trading.
Annex C-9
Exhibit 10.5
METROMILE, INC.
OMNIBUS AMENDMENT NO. 2 TO THE
NOTE PURCHASE AND SECURITY AGREEMENT
February 9, 2021
This OMNIBUS AMENDMENT NO. 2 (this “Amendment”) to the Note Purchase and Security Agreement, dated as of April 14, 2020, by and among Metromile, Inc. (the “Company”), INSU Acquisition Corp. II, a Delaware corporation (the “Parent”), the other undersigned Guarantors, the Holders, and the Agent (as each term is defined therein, as amended prior to the date hereof, the “Note Purchase Agreement”) is entered into as of the date hereof, by and among the Company, HSCM BERMUDA FUND LTD. (“Bermuda”) and HS SANTANONI LP (“Santanoni”). This Amendment amends the Note Purchase Agreement and each Note issued pursuant thereto. All capitalized terms not defined herein shall have the meanings ascribed to them in the Note Purchase Agreement.
R E C I T A L S
WHEREAS, pursuant to Section 12(a) of the Note Purchase Agreement, any term of the Note Purchase Agreement or the Notes may be amended, waived or modified only upon the written consent of the Company and the Majority Holders (together, the “Requisite Parties”);
WHEREAS, together, Bermuda and Santanoni comprise the Majority Holders, such that the Company and the Majority Holders comprise the Requisite Parties.
WHEREAS, the Requisite Parties now desire to amend the Note Purchase Agreement as set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Requisite Parties agree as follows:
1. Amendments to Note Purchase Agreement. The Note Purchase Agreement is, effective as of the Amendment No. 2 Effective Date, hereby amended to delete the stricken text (indicated textually in the same manner as the following example: stricken text) and to add the double-underlined text (indicated textually in the same manner as the following example: double-underlined text) as set forth in the pages of the Note Purchase Agreement attached hereto as Exhibit A hereto (the Note Purchase Agreement, as so amended, being referred to as the “Amended Note Purchase Agreement”).
2. Effectiveness. Sections 1 and 4 of this Amendment shall become effective on the date (such date, if any, the “Amendment No. 2 Effective Date”) that the following conditions have been satisfied:
2.1 The Majority Holders shall have received executed signature pages hereto from each of the Company, Bermuda, and Santanoni.
2.2 The Metromile Acquisition shall have been consummated, or substantially simultaneously, shall be consummated, in accordance with the terms of the Merger Agreement.
3. Waiver. Subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, each of Bermuda and Santanoni, as applicable, hereby waive Defaults and/or Events of Default existing prior to the date of this Amendment resulting from the failure to comply with the notice requirements as a result of a Change of Control in connection with the Metromile Acquisition.
4. Parent Joinder.
4.1 Parent, effective as of the Amendment No. 2 Effective Date, hereby agrees to be bound as a Guarantor party to the Note Purchase Agreement by all of the terms, covenants and conditions set forth in the Note Purchase Agreement to the same extent that it would have been bound if it had been a signatory to the Note Purchase Agreement on the date of the Note Purchase Agreement. Without limiting the generality of the foregoing, the Parent hereby grants Agent, for the benefit of the Holders, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Agent, for the benefit of the Holders, the Collateral and expressly assumes all obligations and liabilities of an Obligor thereunder.
4.2 Annexed hereto are supplements to each of the schedules to the Note Purchase Agreement, as applicable, with respect to Parent. Such supplements shall be deemed to be part of the Note Purchase Agreement.
5. Miscellaneous.
5.1 Full Force and Effect. Except as otherwise provided in Section 1 above, the terms and conditions of the the Note Purchase Agreement, and the Notes, as applicable, shall remain in full force and effect. All references in the Note Purchase Agreement to the “Agreement” shall refer to the Note Purchase Agreement, as amended.
5.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Amendment shall inure to the benefit of and be binding upon the respective successors and assigns of the parties.
5.3 Governing Law. This Amendment shall be governed by and construed under the laws of the State of New York as applied to agreements among New York residents, made and to be performed entirely within the State of New York.
5.4 Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
5.5 Amendments and Waivers. Any term of this Amendment may be amended and the observance of any term of this Amendment may be waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Requisite Parties; provided, however, that neither any term of this Amendment that is applicable to all of the Holders, nor the Notes, may be amended or waived with respect to any Holder without the written consent of such Holder, unless such amendment or waiver applies to all Holders in the same fashion. In accordance with Section 12(c) of the Note Purchase Agreement, as applicable, this Amendment shall be binding upon each party to the Notes and any future holder of such Notes, and each party to the Note Purchase Agreement and any future party to the Note Purchase Agreement.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
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COMPANY: |
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METROMILE, INC. |
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By: |
/s/ Dan Preston |
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Name: |
Dan Preston |
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Title: |
Chief Executive Officer |
[Signature Page to Omnibus Amendment No. 2 to Note Purchase Agreement]
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
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GUARANTORS: |
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METROMILE INSURANCE SERVICES LLC |
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By: |
/s/ Dan Preston |
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Name: |
Dan Preston |
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Title: |
Chief Executive Officer |
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METROMILE ENTERPRISE SOLUTIONS, LLC |
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By: |
/s/ Dan Preston |
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Name: |
Dan Preston |
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Title: |
Chief Executive Officer |
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INSU ACQUISITION CORP. II |
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By: |
/s/ John M. Butler |
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Name: |
John M. Butler |
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Title: |
Chief Executive Officer and President |
[Signature Page to Omnibus Amendment No. 2 to Note Purchase Agreement]
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
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HOLDER: |
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HSCM BERMUDA FUND LTD. |
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By: Hudson Structured Capital Management Ltd., its Manager |
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By: |
/s/ Edouard Von Herberstein |
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Name: |
Edouard Von Herberstein |
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Title: |
Partner |
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E-mail: |
ajay.mehra@hscm.com |
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Address: |
c/o Hudson Structured Capital Management Ltd. |
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Attention: Ajay Mehra, Partner & General Counsel |
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2187 Atlantic Street |
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Stamford, CT 06902 |
[Signature Page to Omnibus Amendment No. 2 to Note Purchase Agreement]
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
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HOLDER: |
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HS SANTANONI LP |
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By: Hudson Structured Capital Management Ltd., its Manager |
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By: |
/s/ Edouard Von Herberstein |
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Name: |
Edouard Von Herberstein |
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Title: |
Partner |
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E-mail: |
ajay.mehra@hscm.com |
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Address: |
c/o Hudson Structured Capital Management Ltd. |
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Attention: Ajay Mehra, Partner & General Counsel |
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2187 Atlantic Street |
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Stamford, CT 06902 |
[Signature Page to Omnibus Amendment No. 2 to Note Purchase Agreement]
EXHIBIT A TO AMENDMENT NO. 2
MARKED VERSION REFLECTING CHANGES
PURSUANT TO AMENDMENT NO. 2
ADDED TEXT SHOWN UNDERSCORED
DELETED TEXT SHOWN STRIKETHROUGH
NOTE PURCHASE AND SECURITY AGREEMENT
This Note Purchase and Security Agreement, dated as of April 14, 2020 (this “Agreement”), is entered into by and among METROMILE, INC., a Delaware corporation (the “Company”), INSU ACQUISITION CORP. II, a Delaware corporation (the “Parent”), the undersigned Guarantors, the persons listed on the Schedule of Holders attached hereto as Exhibit B (collectively, the “Holders”, and each, a “Holder”) and HSCM BERMUDA FUND LTD., as collateral agent (“Agent”).
RECITALS
A. On the terms and subject to the conditions set forth herein, the Holders are willing to purchase from the Company, and the Company is willing to sell and issue to the Holders Senior Secured Subordinated PIK Notes due 2025 in the form attached hereto as Exhibit A (collectively, the “Notes” and each, a “Note”) having an aggregate principal amount of up to $50,000,000.
B. Capitalized terms shall have the meanings set forth in Section 10.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing, and the representations, warranties, and conditions set forth below, the parties hereto, intending to be legally bound, hereby agree as follows:
1. The Notes.
(a) Sale and Issuance of the Notes. Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Holder and each Holder agrees to purchase from the Company, at each Closing, Notes in the principal amount specified opposite such Holder’s name as set forth on Exhibit B, at the purchase price of 100% of the principal amount thereof (the “Original Principal Amount”) by wire transfer to a bank account designated by the Company. The Holders’ obligations hereunder are several and not joint obligations and no Person shall have any liability to any other Holder for the performance or non-performance of any obligation by any other Holder hereunder. The aggregate principal amount for all Notes issued hereunder shall not exceed $50,000,000 unless otherwise determined by the Company and the Holders holding of a majority of the then outstanding aggregate principal amount of the Notes (the “Majority Holders”).
(b) Closings. The initial purchase and sale of the Notes shall take place remotely via the exchange of documents and signatures on the date of this Agreement and may not exceed $35,000,000 in aggregate principal amount of the Notes, with at least $20,000,000 aggregate principal amount of Notes purchased by Hudson Structured Capital Management Ltd. or its affiliates (collectively, “Hudson”). No Notes shall be issued to investors other than Hudson at any Closing occurring after the date that is 45 days from the date of this Agreement (the “Closing Deadline”). Exhibit B to this Agreement shall be updated by the Company to reflect the Notes purchased at each such Closing and the parties purchasing such Notes. Hudson agrees that subject to Section 6(d), it is required to invest up to an additional $15,000,000 in the purchase of additional Notes (with each closing of such additional capital being a “Subsequent Hudson Closing” and each date of such Subsequent Hudson Closing being a “Subsequent Hudson Closing Date”). In the event there is more than one closing, including a Subsequent Hudson Closing, the term “Closing” shall apply to each such closing unless otherwise specified, and the date of any such Closing, including a Subsequent Hudson Closing Date, shall be referred to herein as the “Closing Date” for such Closing.
(c) Delivery; Issuance of Warrants.
(i) At each Closing, the Company will deliver to each Holder participating in such Closing the Note to be purchased by such Holder, against receipt by the Company of the Original Principal Amount via wire transfer in U.S. Dollars.
(ii) On or prior to July 31, 2020, the Company will issue, execute, and deliver to each Holder, and each Holder will execute and deliver to the Company, a Warrant to Purchase Shares of Series E Preferred Stock of MetroMile, Inc. (collectively, the “Warrants”) in the form attached hereto as Exhibit C exercisable for a number of shares of the Company’s Series E Preferred Stock equal to, in the case of a Holder, the product obtained by multiplying (A) 8,536,938 by (B) the quotient obtained by dividing (I) the Original Principal Amount of the Note purchased by a Holder by (II) $50,000,000, as rounded down to the nearest whole share. For the purpose of determining the Warrants to be issued pursuant to this clause (ii) the aggregate Original Principal Amount of the Notes of Hudson shall be deemed to be $35,000,000. Notwithstanding the foregoing, in the event that, following the Closing Deadline, no Notes have been issued or sold to Holders other than Hudson (including any of its affiliates), then the aggregate Original Principal Amount of the Notes of Hudson shall be deemed to be $50,000,000, such that all Warrants will be issued to Hudson (or any of its affiliates who are Holders), and apportioned among any Holders as specified by Hudson..
2. Guaranty
(a) Guaranty. Each Guarantor absolutely, unconditionally and irrevocably guarantees, as primary obligor and not merely as surety, the full and punctual payment and performance of all Obligations.
(b) Guaranty Absolute and Unconditional. Each Guarantor agrees that its Obligations under this Section 2 are irrevocable, continuing, absolute and unconditional and shall not be discharged or impaired or otherwise affected by, and each Guarantor hereby irrevocably waives any defenses to enforcement it may have (now or in the future) by reason of:
(i) Any illegality, invalidity or unenforceability of any Obligation or Note Document or any related agreement or instrument, or any law, regulation, decree or order of any jurisdiction or any other event affecting any term of the Obligations.
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(ii) Any change in the time, place or manner of payment or performance of, or in any other term of the Obligations, or any rescission, waiver, release, assignment, amendment or other modification of any Note Document.
(iii) Any taking, exchange, substitution, release, impairment, amendment, waiver, modification or non-perfection of any collateral or any other guaranty for the Obligations, or any manner of sale, disposition or application of proceeds of any collateral or other assets to all or part of the Obligations.
(iv) Any default, failure or delay, willful or otherwise, in the performance of the Obligations.
(v) Any change, restructuring or termination of the corporate structure, ownership or existence of any other Obligor or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other Obligor or its assets or any resulting restructuring, release or discharge of any Obligations.
(vi) Any failure of any Secured Party to disclose to such Guarantor any information relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of any other Obligor now or hereafter known to any Secured Party, each Guarantor waiving any duty of any Secured Party to disclose such information.
(vii) The failure of any other guarantor or third party to execute or deliver this Section 2 or any other guaranty or agreement, or the release or reduction of liability of any other Obligor or any other guarantor or surety with respect to the Obligations.
(viii) The failure of any Secured Party to assert any claim or demand or to exercise or enforce any right or remedy under the provisions of any Note Document or otherwise.
(ix) The existence of any claim, set-off, counterclaim, recoupment or other rights that any Obligor may have against any Secured Party (other than a defense of payment or performance).
(x) Any other circumstance (including, without limitation, any statute of limitations), act, omission or manner of administering any Note Document or any existence of or reliance on any representation by any Secured Party that might vary the risk of any other Obligor or otherwise operate as a defense available to, or a legal or equitable discharge of, any other Obligor.
(c) Certain Waivers; Acknowledgments. Each Guarantor further acknowledges and agrees as follows:
(i) Each Guarantor hereby unconditionally and irrevocably waives any right to revoke this Section 2 and acknowledges that this Section 2 is continuing in nature and applies to all presently existing and future Obligations, until the complete, irrevocable and indefeasible payment and satisfaction in full of the Obligations.
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(ii) This Section 2 is a guaranty of payment and performance and not of collection. No Secured Party shall be obligated to enforce or exhaust its remedies against the Company or any other Obligor or under any Note Document before proceeding to enforce this Section 2.
(iii) This Section 2 is a direct guaranty and independent of the obligations of the Company or any other Obligor under any Note Document. The Secured Parties may resort to any Guarantor for payment and performance of the Obligations whether or not the Secured Parties shall have resorted to any collateral therefor or shall have proceeded against any Obligor or any other guarantors with respect to the Obligations. The Secured Parties may, at their option, proceed against any Obligor, jointly and severally, or against any Guarantor only without having obtained a judgment against the Company.
(iv) Each Guarantor hereby unconditionally and irrevocably waives promptness, diligence, notice of acceptance, presentment, demand for performance, notice of non- performance, default, acceleration, protest or dishonor and any other notice with respect to any of the Obligations and this Section 2 and any requirement that Agent protect, secure, perfect or insure any Lien or any property subject thereto.
(v) Each Guarantor agrees that its guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time all or part of any payment of any Obligation is voided, rescinded or recovered or must otherwise be returned by any Secured Party upon the insolvency, bankruptcy or reorganization of the Company.
(d) Subrogation. Each Guarantor waives and shall not exercise any rights that it may acquire by way of subrogation, contribution, reimbursement or indemnification for payments made under this Section 2 until all Obligations shall have been indefeasibly paid and discharged in full.
3. Creation of Security Interest
(a) Grant of Security Interest. Each Obligor hereby grants Agent, for the benefit of the Holders, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Agent, for the benefit of the Holders, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. If this Agreement is terminated, Agent’s Lien in the Collateral shall continue until the Obligations (other than contingent indemnification obligations as to which no claim has been asserted or is known to exist) are repaid in full. Upon payment in full of the Obligations (other than contingent indemnification obligations as to which no claim has been asserted or is known to exist), Agent shall, at the Obligors’ sole cost and expense, promptly release its Liens in the Collateral and all rights therein shall thereupon automatically revert to the Obligors, as applicable, and Agent and the Holders shall, upon reasonable request from the Obligors and at the Obligors’ sole cost and expense, promptly deliver to the Obligors written evidence of the termination of such liens and any other documents reasonably necessary to terminate, or evidence the termination, of such liens. Notwithstanding the foregoing, the security interest granted by the Obligors to Agent on behalf of the Holders under this Agreement expressly excludes all of MIC’s rights, title and interest in any and all accounts, claims, licenses, charters, or other assets of MIC.
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(b) Priority of Security Interest. Each Obligor represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a secondfirst priority perfected security interest in the Collateral (subject only to (i) Permitted Liens and (ii) filings by Agent of any necessary or appropriate filings or other continuation documentation, if and as may be needed), subject to the Intercreditor Agreement. If any Obligor shall acquire a commercial tort claim in an amount in excess of $200,000, such Obligor shall promptly notify Agent in a writing signed by such Obligor of the general details thereof and grant to Agent, for the benefit of the Holders, in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Agent. If any Obligor shall acquire any right, title or interest in Negotiable Collateral with a total value in excess of $200,000, the Company shall immediately notify Agent and endorse and deliver to Agent, at the request of Agent, the originals of such Negotiable Collateral; provided that no such action shall be required to be taken by the Company until the Senior Debt (as defined in the Intercreditor Agreement) shall have been paid in full. No Obligor will create any chattel paper with a total in excess of $200,000 without placing a legend on the chattel paper reasonably acceptable to Agent indicating that Agent has a security interest in such chattel paper; provided that no such action shall be required to be taken by an Obligor until the Senior Debt (as defined in the Intercreditor Agreement) shall have been paid in full.
(c) Authorization to File Financing Statements. Each Obligor hereby authorizes Agent to file at any time financing statements, continuation statements and amendments thereto and to take any other action required to perfect Agent’s security interest in the Collateral, without notice to such Obligor, with all appropriate jurisdictions to perfect or protect Agent’s interest or rights hereunder and under the other Note Documents, including a notice that any disposition of the Collateral in contravention of the terms of this Agreement, by any Obligor or any other Person, shall be deemed to violate the rights of Agent and the Holders under the Code. Such financing statements may (i) either specifically describe the Collateral or describe the Collateral as all assets of the Obligors of the kind pledged hereunder, and (ii) contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether such Obligor is an organization, the type of organization and any organizational identification number issued to such Obligor.
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(d) Pledge of Collateral. Subject to the Intercreditor Agreement, eachEach Obligor hereby pledges, assigns and grants to Agent, for the benefit of the Holders, a security interest in all the Equity Interests in which such Obligor has any interest, including the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the performance of the Obligations. To the extent required by the terms and conditions governing the Equity Interests in which an Obligor has an interest, such Obligor shall cause the books of each Person whose Equity Interests are part of the Collateral and any transfer agent to reflect the pledge of the Equity Interests. Subject to the Intercreditor Agreement, uponUpon the occurrence and during the continuance of an Event of Default hereunder, Agent may effect the transfer of any securities included in the Collateral (including but not limited to the Equity Interests) into the name of Agent and cause new certificates representing such securities to be issued in the name of Agent or its transferee. Subject to the Intercreditor Agreement, eachEach Obligor will execute and deliver such documents, and take or cause to be taken such actions, as Agent may reasonably request to perfect or continue the perfection of Agent’s security interest in the Equity Interests. Unless an Event of Default shall have occurred and be continuing and the Obligors shall have received written notice from Agent of its intention to suspend such rights, the Obligors shall be entitled to exercise any voting rights with respect to the Equity Interests in which it has an interest and to give consents, waivers and ratifications in respect thereof; provided that: no such notice shall be required if any Obligor has commenced an Insolvency Proceeding and, in any event, no vote shall be cast or consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms. Subject to the Intercreditor Agreement, allAll such rights to vote and give consents, waivers and ratifications shall terminate upon the occurrence and during the continuance of an Event of Default and following receipt by the Obligors of written notice from Agent of Agent’s intention to suspend such rights (unless an Insolvency Proceeding has been commenced), further provided that all such rights to vote and give consents, waivers and ratifications shall revive in the event that the applicable Event of Default is cured or waived.
(e) Appointment of Agent. Each Holder, by its acceptance of this Agreement, hereby irrevocably appoints and authorizes Agent to perform the duties as collateral agent under this Agreement and the other Note Documents, including: (i) to execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to this Agreement or any other Note Document; (ii) to perform, exercise, and enforce any and all other rights and remedies of the Holders with respect to the Obligors, the Obligations, or otherwise related to any of same to the extent reasonably incidental to the exercise by Agent of the rights and remedies specifically authorized to be exercised by Agent by the terms of this Agreement or any other Note Document; (iii) to incur and pay such fees necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to this Agreement or any other Note Document; and (iv) to take such action as Agent deems appropriate on its behalf to exercise such powers delegated to Agent by the terms hereof or the other Note Documents (including, without limitation, the power to give or to refuse to give notices, waivers, consents, approvals and instructions and the power to make or to refuse to make determinations and calculations) together with such powers as are reasonably incidental thereto to carry out the purposes hereof and thereof and consents and agrees to the terms of Sections 3 and 9 and the Security Documents (including, without limitation, the provisions providing for foreclosure and release of Collateral and authorizing the Agent to enter into the Security Document on its behalf) as the same may be in effect or may be amended or otherwise modified from time to time in accordance with their terms and this Agreement, and authorizes and directs Agent to enter into the Note Documents and to perform its obligations and exercise its rights thereunder in accordance therewith. As to any matters not expressly provided for by this Agreement and the other Note Documents, Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Holders; provided, however, that Agent shall not be required to take any action which, in the reasonable opinion of Agent, exposes Agent to liability or which is contrary to this Agreement or any other Note Document or applicable law.
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4. Representations and Warranties of the Obligors. Each Obligor represents and warrants to Agent and the Holders as follows, subject to the exceptions to the following as set forth in the Exceptions Schedule:
(a) Due Organization, Authorization; Power and Authority; Binding Obligation.
(i) Each Obligor (A) is duly existing and in good standing in its jurisdiction of formation and is qualified and licensed to do business and is in good standing in any other jurisdiction in which the conduct of its business or ownership of property requires that it be so qualified, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; (B) has the exact legal name that is indicated on the signature page hereof; (C) is an organization of the type and is organized in the jurisdiction set forth on Schedule 4(a)(i) hereto; (D) has the organizational identification number set forth on Schedule 4(a)(i) hereto; (E) has the place of business, or, if more than one, chief executive office as well as the mailing address (if different than its chief executive office) set forth on Schedule 4(a)(i) hereto; and (F) has not, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction.
(ii) The execution, delivery and performance of the obligations contained in this Agreement and the Note Documents by each Obligor has been duly authorized, and do not (i) conflict with any of the Obligors’ Operating Documents or other organizational documents, or applicable consents and/or waivers which may have been obtained, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict with or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which such Obligor or any of its property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect) or (v) conflict with, contravene, constitute a default or breach under, or result in or permit the termination or acceleration of, any material agreement by which such Obligor is bound. No Obligor is in default under any agreement to which it is a party or by which it or any of its assets is bound in which the default could reasonably be expected to have a Material Adverse Effect.
(iii) Each Obligor has full legal capacity, power and authority to execute and deliver this Agreement and the other Note Documents and to perform its obligations hereunder and thereunder. This Agreement and the other Note Documents constitute valid and binding obligations of each Obligor, enforceable in accordance with their terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors’ rights generally and general principles of equity.
(b) Collateral. Each Obligor has good title to, rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder and under the other Note Documents, free and clear of any and all Liens except Permitted Liens.
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(c) Collateral Accounts; Accounts. Except for the Collateral Accounts described on Schedule 4(c) or in a notice timely delivered pursuant to Section 6.6, no Obligor has any Collateral Accounts at or with any bank, broker or other financial institution, and, solely with respect Collateral Accounts of the Obligors and subject to the Intercreditor Agreement, the Obligors have taken such actions as are necessary to give Agent a perfected security interest therein as required pursuant to the terms of Section 6.6. The Accounts are bona fide, existing obligations of the Account Debtors.
(d) Collateral. The Collateral is located only at the locations identified on Schedule 4(d) and other Permitted Locations. The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided on Schedule 4(d) or as disclosed in writing pursuant to Section 6(a)(ix).
(e) Intellectual Property. Each Obligor is the sole owner of the Intellectual Property which it owns or purports to own except for (i) non-exclusive licenses granted to its customers in the Ordinary Course of Business or as permitted under Section 6(b)(i), (ii) open- source software, (iii) over-the-counter software that is commercially available to the public, (iv) material Intellectual Property licensed to such Obligor and noted on Schedule 4(e) or as disclosed pursuant to Section 6(a)(vi), and (v) immaterial Intellectual Property licensed to such Obligor. Each Patent (other than patent applications) which such Obligor owns or purports to own and which is material to such Obligor’s business is, to such Obligor’s knowledge, valid and enforceable, and no part of the Intellectual Property which such Obligor owns or purports to own and which is material to such Obligor’s business has been judged invalid or unenforceable, in whole or in part. To the best of the Obligors’ knowledge, no claim has been made in writing that any part of the Intellectual Property violates the rights of any third party except to the extent such claim would not reasonably be expected to have a Material Adverse Effect. Except as noted on Schedule 4(e) or as disclosed pursuant to Section 6(a)(vi), no Obligor is a party to, is bound by, any Restricted License.
(f) Litigation and Proceedings. Except as set forth on Schedule 4(f) or as otherwise disclosed in writing pursuant to Section 6(a)(i), there are no actions, suits, litigations, investigations or proceedings, at law or in equity, pending, or, to the knowledge of any Responsible Officer, threatened in writing, by or against the Obligors (excluding any actions, suits, litigations, investigations or proceedings, at law or in equity, pending, or, to the knowledge of any Responsible Officer threatened in writing against the Obligors arising under an insurance policy issued or serviced by the Obligors in the Ordinary Course of Business) involving (i) more than, individually or in the aggregate Two Hundred Eighty Seven Thousand Five Hundred Dollars ($287,500) or in which any adverse decision has had or could reasonably be expected to have any Material Adverse Effect, or (ii) infringement of any Intellectual Property that is material to the operations of the business of the Company and its Subsidiaries, taken as a whole. Except as set forth on Schedule 4(f), there are no actions, suits, investigations or proceedings pending or, to the knowledge of any Responsible Officer, threatened in writing by or against the Obligors involving challenges to the validity of any Intellectual Property that is material to the Obligors’ business, taken as a whole.
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(g) Financial Statements; Financial Condition. All consolidated financial statements for the Companyany Obligor delivered to the Holders fairly present, in conformity with GAAP, except with respect to such unaudited financial statements, (i) for the absence of footnotes and (ii) that are subject to normal year-end adjustments, in all material respects the Company’ssuch Obligor’s consolidated financial condition and the Company’ssuch Obligor’s consolidated results of operations as of the respective dates thereof and the results of operations of the Companyany Obligor for the respective periods then ended. No event, occurrence or development has occurred at any time on or after December 31, 2019, which has had or could reasonably be expected to have any Material Adverse Effect.
(h) Solvency. The fair salable value of the consolidated assets of the CompanyParent and its Subsidiaries (including goodwill minus disposition costs) exceeds the fair value of the liabilities of the CompanyParent and its Subsidiaries, taken as a whole, as of the date of this Agreement; the CompanyParent and its Subsidiaries, taken as a whole, will not be left with unreasonably small capital after the Closings contemplated hereby; and the Company is able to pay its debts (including trade debts) as they mature.
(i) Regulatory Compliance.
(i) None of the CompanyParent and its Subsidiaries is an “investment company” or a company “controlled” by a Person required to register as an “investment company” under the Investment Company Act of 1940, as amended. None of the CompanyParent and its Subsidiaries is engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). None of the CompanyParent and its Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of 2005. The CompanyParent and its Subsidiaries (a) have complied in all material respects with all Requirements of Law including the Federal Fair Labor Standards Act and all applicable insurance company-related laws and regulations, and (b) have not violated any Requirements of Law the violation of which could reasonably be expected to have Material Adverse Effect. None of the Company’sParent’s or any of its Subsidiaries’ properties or assets have been used by the CompanyParent or such Subsidiaries or, to the best of the Company’sParent’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally, excluding the use and storage of standard office supplies. The CompanyParent and its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Governmental Authorities that are necessary to continue their respective businesses as currently conducted except where failure to do so would not reasonably be expected to result in a Material Adverse Effect.
(ii) None of the CompanyParent, its Subsidiaries or to the knowledge of the CompanyParent, any of the Company’sParent’s or its Subsidiaries’ Affiliates or any of its respective agents acting or benefiting in any capacity in connection with the transactions contemplated by this Agreement is (i) in violation of any Anti-Terrorism Law, (ii) engaging in or conspiring to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law, or (iii) is a Blocked Person. None of the CompanyParent or its Subsidiaries or to the knowledge of the CompanyParent, any of their Affiliates or agents, acting or benefiting in any capacity in connection with the transactions contemplated by this Agreement, (x) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, or (y) deals in, or otherwise engages in any transaction relating to, any property or interest in property blocked pursuant to Executive Order No. 13224, any similar executive order or other Anti-Terrorism Law.
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(j) Capitalization; Subsidiaries; Investments. The Company has delivered to each Holder a capitalization table that is true, correct and complete in all material respects with respect to all issued and outstanding Equity Interests, as of the initial Closing Date. The Obligors do not, and will not at any time, have any Subsidiaries that are not Obligors hereunder, other than MIC. The Obligors do not own any stock, partnership, or other ownership interest or other Equity Interests except for Permitted Investments.
(k) Tax Returns and Payments; Pension Contributions. Each of the Obligors has timely filed all required tax returns and reports (or appropriate extensions therefor), and has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by it, as applicable, except (i) to the extent such taxes are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor, or (ii) if such taxes, assessments, deposits and contributions do not, individually exceed $28,750 or $115,000 in the aggregate (in any 12 month period).
To the extent any Obligor defers payment of any contested taxes in excess of $86,250, such Obligor shall: (i) notify the Holders in writing of the commencement of, and any material development in, the proceedings, and (ii) post bonds or take any other steps required to prevent any Governmental Authority from levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”. No Obligor is aware of any claims or adjustments proposed for any of such Obligor’s prior tax years which could result in additional taxes becoming due and payable by such Obligor. Each Obligor has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and such Obligor has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of such Obligor.
(l) Employee Loans. Other than Permitted Investments, the Obligors have no outstanding loans to any employee, officer or director of the Obligors nor have Obligors guaranteed the payment of any loan made to an employee, officer or director of the Obligors by a third party.
(m) Use of Proceeds. The Company shall use the proceeds of the Notes solely as working capital and to fund itsthe general business expenses of the Parent and its Subsidiaries in accordance with the provisions of this Agreement, including without limitation, for capital expenditures, and not for personal, family, household or agricultural purposes.
(n) Shares. The Obligors have full power and authority to create a lien on the Shares and no disability or contractual obligation exists that would prohibit the Obligors from pledging the Shares pursuant to this Agreement. Except as set forth on Schedule 4(n), to the Obligors’ knowledge, there are no subscriptions, warrants, rights of first refusal or other restrictions on transfer relative to, or options exercisable with respect to the Shares. The Shares have been and will be duly authorized and validly issued, and are fully paid and non-assessable. To the Obligors’ knowledge, the Shares are not the subject of any present or threatened suit, action, arbitration, administrative or other proceeding, and the Obligors know of no reasonable grounds for the institution of any such proceedings.
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(o) Full Disclosure. No written representation, warranty or other statement of the CompanyParent or any of its Subsidiaries in any certificate or written statement given to the Holders, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to such Holders, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading in light of the circumstances under which they were made (it being recognized by each Holder that the projections and forecasts provided by the Parent and the Company in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).
5. Representations and Warranties of Holder. Each Holder represents and warrants to the Company upon the purchase of a Note as follows:
(a) Binding Obligation. Each Holder has full legal capacity, power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement and the Notes constitute valid and binding obligations of each Holder, enforceable in accordance with their terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors’ rights generally and general principles of equity.
(b) Tax Advisors. Each Holder has reviewed with its own tax advisors the U.S. federal, state and local and non-U.S. tax consequences of this investment and the other transactions contemplated by this Agreement and the Note purchased by such Holder. With respect to such matters, each Holder relies solely on any such advisors and not on any statements or representations of the Company or any of its agents, written or oral. Each Holder understands that it (and not the Company) shall be responsible for its own tax liability that may arise as a result of this investment and the transactions contemplated by this Agreement.
(c) Representations by Non-U.S. Person. Each Holder hereby represents that such Holder is satisfied as to the full observance of the laws of its place of incorporation and/or residence (the “Home Jurisdiction”) in connection with any invitation to purchase the Note, including (i) the legal requirements within the Home Jurisdiction for the purchase of the Note, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Note. Each Holder’s subscription and payment for, and each Holder’s continued beneficial ownership of, the Note will not violate any applicable laws of the Home Jurisdiction.
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6. Covenants.
(a) Affirmative Covenants of the Parent and the Company. The Parent and the Company covenantscovenant that so long as any of the Notes are outstanding:
(i) Financial Statements, Reports, Certificates; Notices. The CompanyParent shall provide Agent and each Holder with the following:
(A) Monthly Financial Statements. As soon as available, but no later than forty-five (45) days after the last day of each of the first two months of a quarter, a company prepared consolidated and consolidating balance sheet, income statement and statement of cash flows covering the Company’sParent’s consolidated operations for such month, certified by a Responsible Officer as having been prepared in accordance with GAAP, consistently applied, except (1) for the absence of footnotes, (2) that they are subject to normal year-end adjustments, (3) they do not contain certain non-cash items that are customarily included in quarterly and annual financial statements, and (4) as to the statement of cash flows are presented for management reporting that is not consistent with GAAP (the “Monthly Financial Statements”);
(B) Monthly Compliance Certificate. Within forty-five (45) days after the last day of each month and together with the Monthly Financial Statements, a duly completed Compliance Certificate signed by a Responsible Officer, certifying that as of the end of such month, each Obligor was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Agent may reasonably request;
(C) Quarterly Financial Statements. As soon as available, but no later than forty-five (45) days after the last day of each fiscal quarter, a company prepared consolidated and consolidating balance sheet, income statement and statement of cash flows covering the Company’sParent’s consolidated operations for such fiscal quarter, certified by a Responsible Officer as having been prepared in accordance with GAAP, consistently applied, except (1) for the absence of footnotes, (2) that they are subject to normal year-end adjustments, (3) they do not contain certain non-cash items that are customarily included in quarterly and annual financial statements, and (4) as to the statement of cash flows are presented for management reporting that is not consistent with GAAP (the “Quarterly Financial Statements”);
(D) Annual Operating Budget and Financial Projections. Within thirty (30) days after the end of each fiscal year of the CompanyParent (and promptly and within five (5) Business Days of any material modification thereto), (i) annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of the CompanyParent, and (ii) annual financial projections and financial models for such fiscal year (on a quarterly basis) as approved by the Board, together with any related business forecasts used in the preparation of such annual financial projections;
(E) Annual Audited Financial Statements. As soon as available, but no later than one hundred fifty (150) days after the last day of the Company’sParent’s fiscal year or within five (5) days of filing with the SEC, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion (other than a qualification with respect to a “going-concern” that is typical to the Company’sParent’s stage of development) on the financial statements from an independent certified public accounting firm;
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(F) Regulatory Reports. The CompanyParent shall deliver to Agent and the Holders any material report and supporting documentation relating to the performance of MIC’s or any other Prohibited Subsidiary’s insurance business delivered to an insurance regulatory body, including, but not limited to, ceded net written premiums, general agent’s commissions, paid losses, all quarterly (if prepared) and annual actuarial reports, and loss adjustment expenses (collectively, the “Regulatory Reports”) in the form provided to the applicable regulatory body all within a reasonable time (not to exceed ten (10) days following the delivery of any such Regulatory Reports to such regulatory body; provided, however, to the extent any such Regulatory Reports have been previously delivered to Agent or Holders in connection with this Section 6(a)(ii)(F), the CompanyParent shall not be required to deliver such Regulatory Reports to Agent and Holders again; and, provided further, that Regulatory Reports excludes any rate and fee filings (and supporting documentation), model filings (and supporting documentation), and Ordinary Course of Business statutory tax filings;
(G) Other Statements. Within five (5) Business Days of delivery, copies of all statements, reports and notices generally made available to the Company’sParent’s Equity Interest holders or to any holders of Subordinated Debt, but expressly excluding any Board materials, minutes, actions by written consent, or other similar materials;
(H) SEC Filings. In the event that the CompanyParent becomes subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, within five (5) Business Days of filing, copies of all periodic and other reports, proxy statements and other materials filed by the CompanyParent with the SEC, any Governmental Authority succeeding to any or all of the functions of the SEC or with any national securities exchange, or distributed to its shareholders, as the case may be. Documents required to be delivered pursuant to the terms hereof (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which the CompanyParent posts such documents, or provides a link thereto, on the Company’sParent’s website on the Internet at the Company’sParent’s website address; provided, however, the CompanyParent shall promptly notify Holders in writing (which may be by electronic mail) of the posting of any such documents, which will satisfy the delivery requirement hereunder;
(I) Legal Action Notice. A prompt report of any legal actions pending or threatened in writing against the CompanyParent or any of its Subsidiaries, (excluding any actions, suits, litigations, investigations or proceedings, at law or in equity, pending, or, to the knowledge of any Responsible Officer, threatened in writing against MIC (and not the CompanyParent or other Subsidiary) arising under an insurance policy issued or serviced by MIC in the Ordinary Course of Business) that could result in damages or costs to the CompanyParent or any of its Subsidiaries of, individually or in the aggregate, $402,500 or more;
(J) Intellectual Property Report. Within 45 days of the last day of each fiscal quarter, a report signed by a Responsible Officer, in form reasonably acceptable to Agent, listing any applications or registrations that the Obligors or any of their Subsidiaries have made or filed in respect of any Patents, Copyrights or Trademarks and any changes in the status of any outstanding applications or registrations, as well as any material change in the Obligors or any of their Subsidiaries’ Intellectual Property, including but not limited to any subsequent ownership right acquired in or to any Trademark, Patent or Copyright not specified in an intellectual property security agreement delivered to Agent by such Person in connection with this Agreement; and
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(K) Other Financial Information. Other financial information reasonably requested by Agent.
(ii) Compliance with Laws. The CompanyParent will, and will cause each of its Subsidiaries to, maintain its legal existence and good standing in their respective jurisdictions of formation or organization and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a Material Adverse Effect. The CompanyParent shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject except where a failure to do so could not reasonably be expected to have a Material Adverse Effect. The Parent and the Company will obtain and keep in full force and effect all of the Governmental Approvals necessary for the performance by the Parent and the Company of its obligations under this Agreement and the Notes.
(iii) Insurance. The CompanyParent will, and will cause each of its Subsidiaries to:
(A) Keep its business and the Collateral insured for risks and in amounts standard for companies in the Obligors’ industry and location and as Agent may reasonably request. Insurance policies shall be in a form, with financially sound and reputable insurance companies that are not Affiliates of the Obligors, and in amounts that are reasonably satisfactory to Agent. Specifically, and subject to the Intercreditor Agreement, (i) all property policies shall have a lender’s loss payable endorsement showing Agent as lender loss payee and waive subrogation against Agent, (ii) all liability policies shall show, or have endorsements showing, Agent as an additional insured, and (iii) Agent shall be named as lender loss payee and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral.
(B) Ensure that proceeds payable under any property policy (other than insurance with respect to real property) are, at Agent’s option, payable to Agent on account of the Obligations. Notwithstanding the foregoing, and subject to the Intercreditor Agreement, (a) so long as no Event of Default has occurred and is continuing, the Obligors shall have the option of applying the proceeds of any casualty policy up to Five Hundred Thousand Dollars ($500,000), in the aggregate per calendar year, toward the prompt replacement or repair of destroyed or damaged property; provided that any such replaced or repaired property (i) shall be of equal or similar value as the replaced or repaired Collateral and (ii) shall be deemed Collateral in which Agent has been granted a security interest and (b) after the occurrence and during the continuance of an Event of Default, all such proceeds shall, at the option of Agent, be payable to Agent, for the benefit of the Holders, on account of the Obligations.
(C) At Agent’s written request, the CompanyParent shall deliver copies of insurance policies and evidence of all premium payments. Subject to the Intercreditor Agreement, eachEach provider of any such insurance required under this Section 6(a)(iii) shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to Agent, that it will give Agent twenty (20) days prior written notice before any such policy or policies shall be canceled (or ten (10) days’ notice for cancellation for non-payment of premiums). If the Obligors fail to obtain insurance as required under this Section 6(a)(iii) or to pay any amount or furnish any required proof of payment to third persons and Agent, Agent and/or any Holder may make all or part of such payment or obtain such insurance policies required in this Section 6(a)(iii), and take any action under the policies Agent or such Holders deems prudent.
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(iv) Maintenance of Properties. The CompanyParent will, and will cause each of its Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section 6(a)(iv) shall not prevent the CompanyParent or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the CompanyParent has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(v) Taxes; Pensions. The CompanyParent will timely file (or file timely extensions), and require each of its Subsidiaries to timely file (or file timely extensions), all required tax returns and reports and timely pay, and require each of its Subsidiaries to timely pay (or file timely extensions), all foreign, federal, state and local taxes, assessments, deposits and contributions owed by the CompanyParent and each of its Subsidiaries, except for (i) deferred payment of any taxes contested in good faith by appropriate proceedings promptly instituted and diligently conducted, and (ii) taxes which do not exceed $86,250 at any time, and shall deliver to Agent, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.
(vi) Intellectual Property. The CompanyParent will, and will cause each of its Subsidiaries to:
(A) Use commercially reasonable efforts, consistent with reasonable business practices, to (1) protect, defend and maintain the validity and enforceability of its Intellectual Property that is material to its business; (2) promptly advise the Holders in writing of material infringements or any other event that could reasonably be expected to materially and adversely affect the value of its Intellectual Property that is material to its business; and (3) not allow any Intellectual Property material to the Obligors’ business to be abandoned, forfeited or dedicated to the public without the Majority Holders’ written consent, which consent will not be unreasonably withheld, conditioned, or delayed.
(B) Provide written notice to Agent within thirty (30) days of entering or becoming bound by any Restricted License. The Obligors shall take such commercially reasonable steps as Agent reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for: (1) any Restricted License to be deemed “Collateral” and for Agent to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (2) Agent to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Agent’s rights and remedies under this Agreement and the other Note Documents.
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(C) (1) Provide written notice to Agent not less than fifteen (15) days prior to the filing of any new applications or registrations with the United States Copyright Office, including the title of such intellectual property rights to be registered, as such title will appear on such applications or registrations, and the date such applications or registrations will be filed; (2) prior to the filing of any such applications or registrations, execute such documents as Agent may reasonably request for Agent to maintain its perfection in such intellectual property rights to be registered by the Obligors; (3) upon the request of Agent, either deliver to Agent or file such documents simultaneously with the filing of any such applications or registrations; and (4) upon filing any such applications or registrations, promptly provide Agent with a copy of such applications or registrations together with any exhibits, evidence of the filing of any documents requested by Agent to be filed for Agent to maintain the perfection and priority of its security interest, for the benefit of the Holders, in such intellectual property rights, and the date of such filing.
(vii) Access to Collateral; Books and Records. Upon five Business Days’ prior notice to the CompanyParent, the Majority Holders, on a joint basis, or their agents, may inspect the Collateral and audit and copy the Obligors’ books and records (excluding any Attorney Client Excluded Materials), which inspections shall be at reasonable times and during normal business hours; provided that upon an Event of Default no such prior notice is required and any such inspections may be during normal business hours in the sole and absolute discretion of Agent. Such inspections or audits shall be conducted no more often than once every six (6) months unless an Event of Default has occurred and is continuing in which case such inspections and audits shall occur as often as Agent shall determine is necessary. The foregoing inspections and audits shall be at the Company’sParent’s expense. Further, prior to the occurrence and continuance of an Event of Default and the acceleration of the Obligations hereunder, access to the Obligors’ books and records shall not include access to the Board Materials.
(viii) Insurance Financial Executive. Within 90 days of the Closing Deadline, MIC will have retained an insurance financial executive, mutually and reasonably agreeable to the CompanyParent and Agent.
(ix) Formation or Acquisition of Subsidiaries. Notwithstanding and without limiting the negative covenants contained herein (including Sections 6(b)(iii) and 6(b)(vi) hereof), at the time that the CompanyParent or any Subsidiary forms any direct or indirect Subsidiary or acquires any direct or indirect Subsidiary after the Effective Date: (a) promptly, and in any event within five (5) Business Days of such formation or acquisition, provide written notice to Agent and the Holders together with certified copies of the Operating Documents for such Subsidiary (such notice a “New Subsidiary Notice”), and (b) promptly, and in any event within 15 days of such formation or creation: (1) take all such action as may be reasonably required by Agent to (x) cause each such new Subsidiary (other than Prohibited Subsidiary (as defined under the Senior Loan Agreement)) to provide to Agent a joinder to this Agreement pursuant to which such Subsidiary becomes a Guarantor hereunder, and (y) grant a continuing pledge and security interest in and to the property of such Subsidiary constituting Collateral (substantially as described on Annex I), in each case together with such appropriate financing statements, Account Control Agreements (to the extent required and subject to the Intercreditor Agreement) and other documents, instruments and agreements reasonably requested by Agent, all in form and substance reasonably satisfactory to Agent (including being sufficient to grant Agent, for the benefit of the Holders, a second priority Lien (subject to Permitted Liens) in and to the property constituting Collateral of such newly formed or acquired Subsidiary), (2) subject to the Intercreditor Agreement, provide to Agent appropriate certificates and powers and financing statements, pledging all of the direct or beneficial Equity Interests in such new Subsidiary, in form and substance satisfactory to Agent, and (3) provide to Agent all other documentation in form and substance satisfactory to Agent, including one or more opinions of counsel satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above. Any document, agreement, or instrument executed or issued pursuant to this Section 5(a)(ix) shall be a Note Document.
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(x) Property Locations. The Obligors will:
(A) Provide to Agent and the Holders at least ten (10) days’ prior written notice before adding any new offices or business or Collateral locations, including warehouses (unless such new offices or business or Collateral locations qualify as Excluded Locations).
(B) Subject to the Intercreditor Agreement and uponUpon the request of Agent, with respect to any property or assets of the Obligors located with a third party, including a bailee, datacenter or warehouse (other than Excluded Locations), the Obligors shall use commercially reasonable efforts to cause such third party to execute and deliver a Collateral Access Agreement for such location, including an acknowledgment from each of the third parties that it is holding or will hold such property for Agent’s benefit. Subject to the Intercreditor Agreement and uponUpon the request of Agent, the Obligors shall deliver to Agent each warehouse receipt, where negotiable, covering any such property.
(C) Subject to the Intercreditor Agreement, withWith respect to any property or assets of the Obligors located on leased premises (other than Excluded Locations), the Obligors shall use commercially reasonable efforts to cause such third party to execute and deliver a Collateral Access Agreement for such location.
(xi) Inventory; Returns. The CompanyParent will, and will cause each of its Subsidiaries to, keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between the Obligors and its users shall follow the Obligors’ customary practices as they exist on the initial Closing Date. The Obligors must promptly notify Agent of all returns, recoveries, disputes and claims (other than claims that relate to ordinary insurance claims) that involve more than One Hundred Thousand Dollars ($100,000).
(xii) Deposit and Securities Accounts. The CompanyParent will, and will cause each of its Subsidiaries to:
(A) Maintain its, and cause each of its Subsidiaries to maintain their respective, operating and other deposit accounts and securities accounts only at the banks and other financial institutions identified on Schedule 4(c) or as disclosed pursuant to a notice timely delivered pursuant to Section 6(a)(xii)(B). The Obligors shall further maintain, at all times, an ACH payment structure in favor of Agent reasonably satisfactory to Agent.
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(B) Provide Agent five (5) Business Days prior written notice before establishing any Collateral Account of the CompanyParent or any Subsidiary at or with any bank, broker or other financial institution, and upon opening such account, provide Agent with a written notice identifying the name, address and telephone number of each bank or other institution, the name in which the account is held, a description of the purpose of the account, and the complete account number therefor. Subject to the Intercreditor Agreement, forFor each Collateral Account that the CompanyParent or any Subsidiary at any time maintain, the CompanyParent shall cause the applicable bank, broker or financial institution at or with which any Collateral Account is maintained to execute and deliver an Account Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Agent’s Lien in such Collateral Account in accordance with the terms hereunder which Account Control Agreement may not be terminated without the prior written consent of Agent. The provisions of the previous sentence shall not apply to (i) deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of the Company’sParent’s or its Subsidiaries’ employees and identified to Agent by the CompanyParent as such and (ii) deposit accounts holding Cash exclusively securing obligations permitted under clause (g) of the definition of Permitted Indebtedness in an amount not to exceed the amounts set forth in such clause (g), provided that at any time that any of the Cash in the deposit accounts referenced in the foregoing clause (ii) is no longer being used to secure the obligations permitted under clause (g) of the definition of Permitted Indebtedness then any such Cash shall be transferred to a Collateral Account that shall be subject to provisions of the foregoing sentence.
(xiii) Minimum Cash. The Obligors shall, at all times, maintain aggregate unrestricted cash in one or more Deposit Accounts of the Obligors that are subject to the first priority security interest of Senior Agent and are covered by Account Control Agreements in favor of Senior Agent that have already been fully executed and delivered as of April 10, 2020, of at least the following amounts (the “Minimum Cash Requirement”): (A) Seventeen Million Five Hundred Thousand Dollars ($17,500,000) until and including December 31, 2020 and (B) Ten Million Dollars ($10,000,000) on and after January 1, 2021. Borrowers shall, at all times, maintain Ten Million Dollars ($10,000,000) of the Minimum Cash Requirement with Western Alliance Bank (for so long as Western Alliance Bank remains a Lender (as defined in the Senior Loan Agreement) under the Senior Loan Agreement, and thereafter, at a financial institution satisfactory to the Required Lenders (as defined in the Senior Loan Agreement) and Senior Agent)Holders. The Obligors shall, within 45 days after the last day of each fiscal quarter and together with the Quarterly Financial Statements, provide Agent and each Holder with such information as Agent shall reasonably request in order to confirm the Obligors’ compliance with the Minimum Cash Requirement.
(xiv) Litigation Cooperation. From the Effective Date and continuing through the termination of this Agreement, make available to Agent and the Holders, without expense to Agent or the Holders, the Obligors and their officers, employees and agents and the Obligors’ books and records, to the extent that Agent or any Holder may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Agent or any Holder with respect to any Collateral or relating to the Obligors in connection with the Note Documents, provided, however, the foregoing may be subject to such exclusions and redactions as the Obligors deem reasonably necessary, in the exercise of its good faith judgment and advice of counsel, in order to (A) prevent impairment of the attorney client privilege, or (B) avoid violating enforceable obligations to third parties with respect to the confidentiality or non-disclosure of confidential information provided by such third parties (collectively, the “Attorney Client Excluded Materials”). Unless otherwise deemed specifically necessary by Agent in connection with the foregoing, as reasonably determined by Agent, prior to the occurrence and continuance of an Event of Default and the acceleration of the Obligations hereunder, access to the Obligors’ books and records shall not include access to the Board Materials.
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(xv) Further Assurances. From time to time, the CompanyParent will, and will cause each of its Subsidiaries to, execute, endorse and deliver any further documents, instruments and agreements, in form reasonably satisfactory to Agent, and take any further action, as Agent reasonably requests to perfect or continue Agent’s Lien in the Collateral or to effect the purposes of this Agreement.
(b) Negative Covenants of the Parent and the Company. The Parent and the Company covenantscovenant that so long as any of the Notes are outstanding:
(i) Dispositions. The CompanyParent will not, and will not permit any Subsidiary to convey, sell, lease, transfer, assign, or otherwise dispose of (collectively, “Transfer”), or permit any of their Subsidiaries to Transfer, all or any part of its business or property, except for Permitted Transfers.
(ii) Changes in Business, Management, Ownership, or Business Locations. The CompanyParent will not, and will not permit any Subsidiary to (A) engage in any business other than the businesses currently engaged in by the CompanyParent and its Subsidiaries, as applicable, or reasonably related thereto; (B) except as otherwise permitted under Sections 6(b)(i) or 6(b)(iii), liquidate or dissolve, or discontinue all or any material portion of its business activities or affairs, or take any Board action in furtherance of any of the foregoing; (C) fail to provide notice to Agent and the Holders of any Key Person departing from or ceasing to be employed by the CompanyParent within five (5) Business Days after departure from the CompanyParent; (D) have a Change of Control; (E) without at least ten (10) days prior written notice to Agent and the Holders add any new offices or business locations, including warehouses (unless such new offices or business locations already qualifies as a Permitted Location), or (F) except in connection with the Metromile Acquisition, without at least thirty (30) days prior written notice to Agent and the Holders (1) change its jurisdiction of organization, (2) change its organizational structure or type, (3) change its legal name, or (4) change any organizational number (if any) assigned by its jurisdiction of organization.
(iii) Mergers, Consolidation, Etc. The CompanyParent will not merge, divide or consolidate, or permit any of its Subsidiaries to merge, divide or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock, Equity Interests or property of another Person (including, without limitation, by the formation of any Subsidiary) or enter into any agreement to do any of the same; provided that (x) any Person may merge, divide or consolidate with (or into) the CompanyParent in a transaction in which the surviving legal entity is the CompanyParent, or (y) any Person may merge, divide or consolidate with (or into) any Subsidiary of Parent in a transaction in which the surviving legal entity is a Subsidiary (provided that any such merger, division or consolidation involving a Guarantor must result in the surviving entity becoming a Subsidiary Guarantor), and, in each case, as long as no Event of Default has occurred and is continuing prior thereto or arises as a result therefrom.
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(iv) Indebtedness. The CompanyParent will not, and will not permit any Subsidiary to create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness or issue any Disqualified Stock.
(v) Encumbrance. Except for Permitted Liens, the CompanyParent will not, and will not permit any Subsidiary to create, incur, allow, or suffer any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of their Subsidiaries to do so, permit any Collateral not to be subject to the security interest granted herein, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Agent, for the benefit of the Holders) with any Person which directly or indirectly prohibits or has the effect of prohibiting the CompanyParent or any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of the Company’sParent’s or any Subsidiary’s Intellectual Property, except as is otherwise permitted in Section 6(b)(i) hereof and the definition of “Permitted Liens” herein.
(vi) Distributions; Investments. The CompanyParent will not, and will not permit any Subsidiary to (a) pay any dividends or make any distribution or payment in respect of, or redeem, retire or purchase, any Equity Interests provided that (i) the Companyan Obligor may convert any of its convertible Equity Interests (including warrants) into other Equity Interests issued by the Companysuch Obligor (other than Disqualified Stock) pursuant to the terms of such convertible securities or otherwise in exchange thereof, (ii) the Companyan Obligor may convert Subordinated Debt issued by the Companysuch Obligor into Equity Interests issued by the Companysuch Obligor (other than Disqualified Stock) pursuant to the terms of such Subordinated Debt and to the extent permitted under the terms of the applicable subordination or intercreditor agreement with Agent; (iii) the Companyan Obligor may pay dividends solely in Equity Interests of the Companysuch Obligor (other than Disqualified Stock); (iv) Tax Distributions to the Companyan Obligor or Affiliates; and (v) the Companyan Obligor may repurchase the Equity Interests issued by the Companysuch Obligor from former employees or consultants pursuant to stock repurchase agreements approved by the Company’ssuch Obligor’s Board so long as an Event of Default does not exist at the time of such repurchase and would not exist after giving effect to such repurchase, provided that the aggregate amount of all such repurchases does not exceed Two Hundred Thirty Thousand Dollars ($230,000) in any 12-Month Period and the aggregate repurchase price does not exceed the original consideration paid for such Equity Interests; and (vi) any Subsidiary may pay dividends or make distributions to the CompanyParent or another Subsidiary that is its direct parent entity; and (vii) the Companyan Obligor may pay cash in lieu of issuing fractional shares (not to exceed an aggregate of Twenty-Eight Thousand Seven Hundred Fifty Dollars ($28,750) per fiscal year per the Companysuch Obligor); or (b) directly or indirectly make any Investment (including, without limitation, by the formation of any Subsidiary) other than Permitted Investments, or permit any of their Subsidiaries to do so. Notwithstanding the foregoing, the CompanyParent and its Subsidiaries shall be permitted to make the repurchases, payments or distributions expressly permitted above only if, at such time, and immediately after giving effect thereto: (i) no Default or Event of Default, exists or could reasonably be expected to occur, (ii) each of the CompanyParent and its Subsidiaries is solvent, and (iii) such payment or distribution is permitted under and is made in compliance with all applicable laws, including Sections 170 and 173 of the Delaware General Corporation Law and all other applicable law.
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(vii) Transactions with Affiliates. The CompanyParent will not, and will not permit any Subsidiary to directly or indirectly enter into or permit to exist any material transaction with any Affiliate of the CompanyParent, except for (A) transactions that are in the Ordinary Course of Business of the CompanyParent or such Subsidiary, upon fair and reasonable terms that are no less favorable to the CompanyParent or such Subsidiary than would be obtained in an arm’s length transaction with a non-affiliated Person; (B) bona fide rounds of indebtedness or equity financing by investors in the Parent or the Company for capital raising purposes, including in respect of the Notes, (C) reasonable and customary director, officer and employee compensation and other customary benefits (including retirement, health, stock option and other benefit plans and indemnification arrangements approved by the relevant board of directors, board of managers or equivalent corporate body), (D) transactions by and between or among the CompanyParent and its Subsidiaries pursuant to services and other inter-company agreements between and among such entities, (E) transactions with MIC that are required to satisfy regulatory requirements for the continued operation of MIC’s business; provided that the Obligors may not transfer cash or property for such purposes more than once per fiscal quarter, and in such case such a transfer may only occur (1) with the specific approval of the Board relating to such proposed specific transfer, including, without limitation, as to reason for, the timing and the amount of any such transfer, and (2) the CompanyParent provides written notice to the Holders of such proposed transfer no less than the date that is the earlier of (x) seven (7) days prior to the date of the contemplated transfer or (y) concurrently with the notice to the Board with respect to such proposed transfer and (F) the Metromile Acquisition.
(viii) Subordinated Debt. The CompanyParent will not, and will not permit any Subsidiary to (a) make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof, provide for earlier or greater principal, interest, or other payments thereon, or adversely affect the subordination thereof to Obligations owed to Agent or any Holder, except as expressly permitted under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject.
(ix) Compliance. The CompanyParent will not, and will not permit any Subsidiary to become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Note for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if, in each case as to the foregoing, the failure to comply or violation could reasonably be expected to have a Material Adverse Effect, or permit any of their Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of any Obligor, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other Governmental Authority.
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(x) Economic Sanctions, Etc. Neither the CompanyParent nor any of its Subsidiaries shall, nor shall the CompanyParent or any of its Subsidiaries permit any Affiliate who owns at least 25% of the voting shares of the CompanyParent to, directly or indirectly, knowingly enter into any documents, instruments, agreements or contracts with any Person listed on the OFAC Lists. Neither the CompanyParent nor any of their Subsidiaries shall, nor shall the CompanyParent or any of its Subsidiaries permit any Affiliate who owns at least 25% of the voting shares of the CompanyParent to, directly or indirectly, (i) conduct any business or engage in any transaction or dealing with any Blocked Person, including, without limitation, the making or receiving of any contribution of funds, goods or services to or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224 or any similar executive order or other Anti-Terrorism Law, or (iii) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in Executive Order No. 13224 or other Anti-Terrorism Law.
(c) Covenants of the Holder. Each Holder further agrees and covenants that at any time and from time to time it will promptly execute and deliver to the Company such further instruments and documents and take such further action as the Company may reasonably require in order to carry out the full intent and purpose of this Agreement, to comply with the terms of the Company’s existing Charter, as amended, and any other agreements referenced herein (including the Investor Agreements), each as may be amended, and to comply with state or federal laws and all other regulatory approvals.
(d) Covenant of Hudson. Within 10 Business Days of a receipt of settlement of proceeds pursuant to the reinsurance agreements by and between Horseshoe Re Metromile Insurance HS0009, Horseshoe Re HS0035 - Metromile, or Horseshoe Re HS0060 - Metromile (each “Horseshoe”) and MIC by the respective Horseshoe entity (such settled amounts in the aggregate the “Settlement Amount”), Hudson will deliver to Company an amount equal to the Settlement Amount in exchange for a Note at a Subsequent Hudson Closing. In no event will the aggregate Settlement Amounts delivered to the Company hereunder exceed $15,000,000 in the aggregate.
(e) Hudson Protection/Purchase Obligation. For so long as the Note(s) held by Hudson remain outstanding:
(i) Hudson will receive a veto right with respect to the Company’s ability to have MIC stop renewing all or a material portion of policies (a “Voluntary Run Off”). The Company covenants it may not institute a Voluntary Run Off in the first 12 months following the initial Closing Date.
(ii) Upon Hudson’s exercise of its veto right, the Company may then (A) sell MIC to a third-party and use the proceeds thereof to repay up to $25.0 million of the Hudson Notes (the “Third Party Sale”) or (B) if the foregoing is not successful or the Company opts not to undertake such action, force a purchase and sale of 100% of the equity in MIC to Hudson in exchange for the cancellation, setoff or other prepayment of $25.0 million of the Hudson Notes (the “Hudson Sale” and together with the Third Party Sale, collectively, the “Sale”); provided that, for the avoidance of doubt, no prepayment premium shall apply in connection with the Hudson Sale.
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(iii) If (A) the Hudson Sale does not close (other than as a result of regulatory matters (assuming full and reasonable cooperation by the parties)) or (B) the Third Party Sale is consummated, in each case, within 90 days of such veto by Hudson, Hudson will lose any further veto right to a Voluntary Run Off.
(f) Regulatory Covenant. Hudson and the Company agree to cooperate, reasonably and in good faith, in obtaining any regulatory approvals necessary to affect the terms of the transactions contemplated hereby, including the Sale. If documents have been agreed to, but regulatory and other approvals/consents have not been received (if needed), any Subsequent Hudson Closing that has not occurred solely because such approval has not been received will occur promptly (and no later than five (5) Business Days) following such approval being received, subject to the satisfaction of any other conditions for such Closing specified herein.
7. Conditions to Closing of the Holder. Each Holder’s obligation to purchase a Note at the applicable Closing is subject to the fulfillment, on or prior to such Closing Date, of all of the following conditions, any of which may be waived in whole or in part by the written consent of the Majority Holders:
(a) Representations and Warranties; no Default. The representations and warranties made by the Companyeach Obligor in Section 4 hereof shall have been true and correct when made, and shall be true and correct on the initial Closing Date and no Default or Event of Default shall have occurred or be continuing.
(b) Legal Requirements. At such Closing, the sale and issuance by the Company, and the purchase by the Holders of the Notes shall be legally permitted by all laws and regulations to which each Holder is subject.
(c) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at such Closing and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Holders participating in such Closing.
(d) Initial Note Documents. Prior to the initial Closing, the Company shall have duly executed and delivered to Agent and each Holder the following documents:
(i) this Agreement;
(ii) a form of Note issued hereunder, completed to correspond to such Holder’s purchase; and
(iii) an intellectual property security agreement(s) and any other Security Documents required by Agent.
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(e) Subsequent Note Documents. Prior to each Closing after the initial Closing, the Company shall have duly executed and delivered to Agent and each Holder a form of Note issued hereunder, completed to correspond to such Holder’s purchase.
8. Conditions to Obligations of the Company. The Company’s obligation to issue and sell the Notes at each Closing is subject to the fulfillment, on or prior to such Closing Date, of the following conditions, any of which may be waived in whole or in part by the Company:
(a) Representations and Warranties. The representations and warranties made by the Holders in Section 5 hereof shall be true and correct when made, and shall be true and correct on such Closing Date.
(b) Governmental Approvals and Filings. Except for any notices required or permitted to be filed after such Closing Date with certain federal and state regulatory bodies, the Company shall have obtained all Governmental Approvals required in connection with the lawful sale and issuance of the Notes sold and issued in such Closing.
(c) Legal Requirements. (i) The sale and issuance by the Company, and the purchase by each participating Holder of Notes at such Closing and (ii) the sale and issuance by the Company, and the purchase by each participating Holder of Warrants following the Closing Deadline, shall be legally permitted by all laws and regulations to which each Holder or the Company are subject.
(d) Consideration. Each Holder participating in such Closing shall have delivered to the Company the Original Principal Amount for the Note purchased by such Holder.
9. Additional Collateral and Agency Provisions.
(a) Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default and subject to the Intercreditor Agreement, Agent may, and at the written direction of the Majority Holders shall, without notice or demand, do any or all of the following:
(i) (x) deliver notice of the Event of Default to the Company and (y) declare all Obligations immediately due and payable (but if an Event of Default described in Sections 3(a)(iii) or 3(a)(iv) of the Note occurs all Obligations shall be immediately due and payable without any action by Agent or Holders);
(ii) verify the amount of, demand payment of and performance under, and collect any Accounts and General Intangibles, settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Agent considers advisable, and notify any Person owing any Obligor money of Agent’s security interest, for the benefit of the Holders, in such funds;
(iii) make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. The Obligors shall assemble the Collateral if Agent requests and make it available as Agent designates. Agent may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Each Obligor grants Agent a license to enter and occupy any of its premises, without charge, to exercise any of Agent’s rights or remedies;
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(iv) apply to the Obligations any amount held by Agent or any Holder owing to or for the credit or the account of the Obligors;
(v) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Agent is hereby granted a non-exclusive, royalty- free license or other right to use, without charge, any Obligor’s labels, Patents, Copyrights, mask works, rights of use of any name, trade secrets, trade names, Trademarks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Agent’s exercise of its rights under this Section, any Obligors’ rights under all licenses and all franchise agreements inure to Agent’s benefit;
(vi) deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Account Control Agreement or similar agreements providing control of any Collateral;
(vii) demand and receive possession of the Obligors’ books and records; and
(viii) exercise all rights and remedies available to Agent or Holders under the Notes Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).
(b) Power of Attorney. Each Obligor hereby irrevocably appoints Agent (and any of Agent’s partners, managers, officers, agents or employees) as its lawful attorney-in-fact, with full power of substitution, exercisable upon the occurrence and during the continuance of an Event of Default, to, subject to the Intercreditor Agreement: (a) send requests for verification of Accounts or notify Account Debtors of Agent’s security interest and Liens, for the benefit of the Holders, in the Collateral; (b) endorse any Obligor’s name on any checks or other forms of payment or security; (c) sign any Obligor’s name on any invoice or bill of lading for any Account or drafts against Account Debtors schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Agent determines reasonable; (e) make, settle, and adjust all claims under any Obligor’s insurance policies; (f) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) transfer the Collateral into the name of Agent, any Holder or a third party as the Code permits; and (h) dispose of the Collateral. Each Obligor further hereby appoints Agent (and any of Agent’s partners, managers, officers, agents or employees) as its lawful attorney-in-fact, with full power of substitution, regardless of whether or not an Event of Default has occurred or is continuing to, subject to the Intercreditor Agreement: (i) sign any Obligor’s name on any documents and other security instruments necessary to perfect or continue the perfection of, or maintain the priority of, Agent’s security interest, for the benefit of the Holders, in the Collateral; and (ii) execute and do all such assurances, acts and things which any Obligor is required, but fails to do under the covenants and provisions of the Note Documents; and (iii) take any and all such actions as Agent may reasonably determine to be necessary or advisable for the purpose of maintaining, preserving or protecting the Collateral or any of the rights, remedies, powers or privileges of the Holders under this Agreement or the other Note Documents. Agent’s foregoing appointment as each Obligor’s attorney in fact, and all of Agent’s rights and powers, coupled with an interest, are irrevocable until all Obligations (other than contingent indemnification obligations as to which no claim has been asserted or is known to exist) have been fully repaid, in cash, and otherwise fully performed.
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(c) Protective Payments. Subject to the Intercreditor Agreement, ifIf any Obligor fails to obtain the insurance called for by Section 6(a)(iii) or fails to pay any premium thereon or fails to pay any other amount which any Obligor is obligated to pay under this Agreement or any other Note Document or which may be required to preserve the Collateral, Agent may obtain such insurance or make such payment, and all amounts so paid by Agent are Holders’ expenses and immediately due and payable, bearing interest at the then highest rate applicable to the Obligations, and secured by the Collateral. Agent will make reasonable efforts to provide the Company with notice of Agent obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Agent are deemed an agreement to make similar payments in the future or Agent’s waiver of any Event of Default.
(d) Holder’s Liability for Collateral. So long as Agent and Holders comply with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Agent or Holders, Agent and Holders shall not be liable or responsible for: (i) the safekeeping of the Collateral; (ii) any loss or damage to the Collateral; (iii) any diminution in the value of the Collateral; or (iv) any act or default of any carrier, warehouseman, bailee, or other Person. The Obligors bear all risk of loss, damage or destruction of the Collateral.
(e) No Waiver; Remedies Cumulative. Failure by Agent or any Holder, at any time or times, to require strict performance by any Obligor of any provision of this Agreement or any other Note Document shall not waive, affect, or diminish any right of Agent or any Holder thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Agent and Majority Holders and then is only effective for the specific instance and purpose for which it is given. The rights and remedies of Agent and Holders under this Agreement and the other Note Documents are cumulative. Agent and Holders have all rights and remedies provided under the Code, by law, or in equity. The exercise by Agent or any Holder of one right or remedy is not an election and shall not preclude Agent or any Holder from exercising any other remedy under this Agreement or other remedy available at law or in equity, and Agent’s or any Holder’s waiver of any Event of Default is not a continuing waiver. Agent’s or any Holder’s delay in exercising any remedy is not a waiver, election, or acquiescence.
(f) Demand Waiver. Each Obligor waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Agent or any Holder on which Obligor is liable.
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(g) Termination of Security Interest; Release of Collateral. Collateral will be released automatically from the liens securing the Obligations of the Obligors under this Agreement and the other Note Documents without the consent or further action of any Person in any of the following circumstances: (i) in whole or in part, as applicable, upon the sale, transfer, exclusive license, agreement or other disposition of such property or assets (including a disposition resulting from eminent domain, condemnation or similar circumstances) by any Obligor, solely to the extent such sale, transfer, exclusive license, agreement or other disposition is permitted hereunder, (ii) with the consent of the Majority Holders, (iii) upon full repayment of all Obligations (other than contingent indemnification obligations as to which no claim has been asserted or is known to exist), (iv) such Collateral is released by the Senior Agent or otherwise no longer secures the Senior Indebtedness (other than in the case that the Senior Indebtedness but not the Obligations hereof is paid off or discharged), or (iv) in accordance with the applicable provisions of the Security Documents.
(h) Nature of Duties. Agent shall have no duties or responsibilities except those expressly set forth in this Agreement or in the other Note Documents. The duties of Agent shall be mechanical and administrative in nature. Agent shall not have by reason of this Agreement or any other Note Document a fiduciary relationship in respect of any Holder. Nothing in this Agreement or any other Note Document, express or implied, is intended to or shall be construed to impose upon Agent any obligations in respect of this Agreement or any other Note Document except as expressly set forth herein or therein. Each Holder shall make its own independent investigation of the financial condition and affairs of the Obligors in connection with the purchase of the Notes hereunder and shall make its own appraisal of the creditworthiness of the Obligors and the value of the Collateral, and Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Holder with any credit or other information with respect thereto, whether coming into its possession before the Effective Date or at any time or times thereafter; provided that, upon the reasonable request of a Holder, Agent shall provide to such Holder any documents or reports delivered to Agent by the Obligors pursuant to the terms of this Agreement or any other Note Document. If Agent seeks the consent or approval of the Holders to the taking or refraining from taking any action hereunder, Agent shall send notice thereof to each Holder.
(i) Rights, Exculpation, Etc. Agent and its directors, officers, agents or employees shall not be liable for any action taken or omitted to be taken by them under or in connection with this Agreement or the other Note Documents, except for their own gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. Without limiting the generality of the foregoing, Agent (i) may consult with legal counsel (including, without limitation, counsel to Agent or counsel to the Obligors), independent public accountants, and other experts selected by any of them and shall not be liable for any action taken or omitted to be taken in good faith by any of them in accordance with the advice of such counsel or experts; (ii) makes no warranty or representation to any Obligor and shall not be responsible to any Obligor for any statements, certificates, warranties or representations made in or in connection with this Agreement or the other Note Documents; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Note Documents on the part of any Person, the existence or possible existence of any Default or Event of Default, or to inspect the Collateral or other property (including, without limitation, the books and records) of any Person; (iv) shall not be responsible to any Holder for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Note Documents or any other instrument or document furnished pursuant hereto or thereto; and (v) shall not be deemed to have made any representation or warranty regarding the existence, value or collectability of the Collateral, the existence, priority or perfection of Agent’s Lien thereon, or any certificate prepared by any Obligor in connection therewith, nor shall Agent be responsible or liable to the Obligors for any failure to monitor or maintain any portion of the Collateral. Agent shall not be liable for any apportionment or distribution of payments made in good faith pursuant to this Agreement, and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Holder to whom payment was due but not made, shall be to recover from other Holders any payment in excess of the amount which they are determined to be entitled. Agent may at any time request instructions from the Holders with respect to any actions or approvals which by the terms of this Agreement or of any of the other Note Documents Agent is permitted or required to take or to grant, and if such instructions are promptly requested, Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval under any of the Note Documents until it shall have received such instructions from the Holders.
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(j) Reliance. Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the other Note Documents and its duties hereunder or thereunder, upon advice of counsel selected by it.
(k) Indemnification. To the extent that Agent is not reimbursed and indemnified by any Obligor, the Holders will reimburse and indemnify Agent from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Agent in any way relating to or arising out of this Agreement or any of the other Note Documents or any action taken or omitted by Agent under this Agreement or any of the other Note Documents, in proportion to each Holder’s pro rata share; provided, however, that no Holder shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements for which there has been a final judicial determination that such liability resulted from Agent’s gross negligence or willful misconduct. The obligations of the Holders under this Section 9(k) shall survive the payment in full of the Obligations under this Agreement and the cancellation of this Agreement.
(l) Agent Individually. With respect to its Notes, Agent shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Holder. The term “Holders” or any similar term shall, unless the context clearly otherwise indicates, include Agent in its individual capacity as a Holder (as applicable). Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with any Obligor as if it were not acting as Agent pursuant hereto without any duty to account to the other Holders.
(m) Collateral Matters. The Holders hereby irrevocably authorize Agent, at its option and in its discretion, to release any Lien granted to or held by Agent upon any Collateral upon cancellation of this Agreement and indefeasible payment and satisfaction of the Notes and all other Obligations which have matured and which Agent has been notified in writing are then due and payable. Upon request by Agent at any time, the Holders will confirm in writing Agent’s authority to release particular types or items of Collateral pursuant to this Section 9(m).
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(n) Agency for Perfection. Each Holder hereby appoints Agent and each other Holder as agent and bailee for the purpose of perfecting the security interests in and liens upon the Collateral in assets which, in accordance with Article 9 of the Code, can be perfected only by possession or control (or where the security interest of a secured party with possession or control has priority over the security interest of another secured party) and Agent and each Holder hereby acknowledges that it holds possession of or otherwise controls any such Collateral for the benefit of Agent and the Holders as secured party. Should any Holder obtain possession or control of any such Collateral, such Holder shall notify Agent thereof, and, promptly upon Agent’s request therefor shall deliver such Collateral to Agent or in accordance with Agent’s instructions. Each Obligor by its execution and delivery of this Agreement hereby consents to the foregoing.
(o) No Reliance on Agent’s Customer Identification Program. Each Holder acknowledges and agrees that neither such Holder, nor any of its Affiliates, participants or assignees, may rely on Agent to carry out such Holder’s, Affiliate’s, participant’s or assignee’s customer identification program, or other requirements imposed by the USA PATRIOT Act or the regulations issued thereunder, including the regulations set forth in 31 C.F.R. §§ 1010.100(yy), (iii), 1020.100, and 1020.220 (formerly 31 C.F.R. § 103.121), as hereafter amended or replaced (“CIP Regulations”), or any other anti-terrorism Laws, including any programs involving any of the following items relating to or in connection with any of the Loan Parties, their Affiliates or their agents, the Note Documents or the transactions hereunder or contemplated hereby: (1) any identity verification procedures, (2) any recordkeeping, (3) comparisons with government lists, (4) customer notices or (5) other procedures required under the CIP Regulations or other regulations issued under the USA PATRIOT Act. Each Holder, Affiliate, participant or assignee subject to Section 326 of the USA PATRIOT Act will perform the measures necessary to satisfy its own responsibilities under the CIP Regulations.
(p) No Third Party Beneficiaries. The provisions of this Article are solely for the benefit of the Secured Parties, and no Obligor shall have rights as a third-party beneficiary of any of such provisions.
(q) No Fiduciary Relationship. It is understood and agreed that the use of the term “agent” herein or in any other Note Document (or any other similar term) with reference to Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead such term is used as a matter of market custom, and is intended to create or reflect only an administrative relationship between contracting parties.
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(r) Agent May File Proofs of Claim. Subject to the Intercreditor Agreement, inIn case of the pendency of any proceeding under any insolvency proceeding or any other judicial proceeding relative to any Obligor, Agent (irrespective of whether the principal of any Note shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether Agent shall have made any demand on the Company) shall be entitled and empowered (but not obligated) by intervention in such proceeding or otherwise:
(i) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Notes and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Secured Parties (including any claim for the compensation, expenses, disbursements and advances of the Secured Parties and their respective agents and counsel and all other amounts due the Secured Parties hereunder and under the other Note Documents) allowed in such judicial proceeding; and
(ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Secured Party to make such payments to Agent and, in the event that Agent shall consent to the making of such payments directly to the Secured Parties, to pay to Agent any amount due for the reasonable compensation, expenses, disbursements and advances of Agent and its agents and counsel, and any other amounts due to Agent hereunder and under the other Note Documents.
(s)
10. Definitions; Accounting.
(a) Definitions. As used herein, the following terms have the respective meanings set forth below:
“12 Month Period” means, in respect of a date as of which any determination is being calculated, the twelve (12) consecutive calendar months ending on or immediately preceding the date as of which the determination is being calculated (i.e., a rolling 12-month (or four fiscal quarter) period).
“Account” means any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to any Obligor.
“Account Control Agreement” means any control agreement entered into among the depository institution at which any Obligor maintains a Deposit Account or the securities intermediary or commodity intermediary at which any Obligor maintains a Securities Account or a Commodity Account, the applicable Obligor, and Agent pursuant to which Agent obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.
“Account Debtor” means any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.
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“Affiliate” means, with respect to any Person, each other Person that owns or controls, directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.
“Agent” is defined in the preamble hereof.
“Agreement” is defined in the preamble.
“Anti-Terrorism Laws” means any laws relating to terrorism or money laundering, including Executive Order No. 13224 (effective September 24, 2001), the USA PATRIOT Act, the laws comprising or implementing the Bank Secrecy Act, and the laws administered by OFAC.
“Attorney Client Excluded Materials” is defined in Section 6(a)(xiv).
“Blocked Person” means any Person: (a) listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (b) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (c) a Person with which any Holder is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law, (d) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in Executive Order No. 13224, or (e) a Person that is named a “specially designated national” or “blocked person” on the most current list published by OFAC or other similar list.
“Board” means, with respect to any Person, the board of directors, board of managers, managers or other similar bodies or authorities performing similar governing functions for such Person.
“Board Materials” means Board minutes and associated deck, stockholder consents and like items, excluding Attorney Client Excluded Materials.
“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized or obligated by law or executive order to close or be closed, or are in fact closed, in the state of New York.
“CARES Act” means the U.S. Small Business Administration, Coronavirus Aid, Relief, and Economic Security Act.
“Cash” means all unencumbered and unrestricted cash and Cash Equivalents.
“Cash Equivalents” means cash equivalents in accordance with GAAP.
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“Change of Control” means (i) a consolidation or merger of the CompanyParent with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the CompanyParent immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the CompanyParent is a party in which in excess of 50% of the Company’sParent’s voting power immediately prior to the closing of such transaction is transferred in the transaction or series of related transactions to new stockholders; or (iii) the sale or transfer of all or substantially all of the Company’sParent’s assets (excluding any license); or (iv) the Parent shall cease to directly or indirectly own and control legally and beneficially 100% of the Equity Interests of the Company; provided that a Change of Control shall not include (a) any transaction or series of transactions principally for bona fide capital raising purposes in which cash is received by the CompanyParent or any successor, indebtedness of the CompanyParent is cancelled or converted or a combination thereof or (b) the Metromile Acquisition.
“Claims” is defined in Section 12(k).
“Closing” is defined in Section 1(b).
“Closing Date” is defined in Section 1(b).
“Closing Deadline” is defined in Section 1(b).
“Code” means the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of New York; provided, that, to the extent that the Code is used to define any term herein or in any Note Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Agent’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of New York, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.
“Collateral” means any and all properties, rights and assets of each Obligor described on Annex I.
“Collateral Account” means any Deposit Account, Securities Account, or Commodity Account.
“Commodity Account” means any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.
“Company” is defined in the preamble.
“Compliance Certificate” means that certain certificate in the form attached hereto as Exhibit D.
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“Contingent Obligation” means, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation, in each case, directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the Ordinary Course of Business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.
“Copyrights” means all of the following: (i) all copyrights, copyright rights, and like protections in each work of authorship and derivative work thereof, in each case, whether registered or unregistered, published or unpublished (and whether or not the same also constitutes a trade secret), held pursuant to the laws of the United States, any State thereof, or of any other country or jurisdiction, or pursuant to any convention or treaty; (ii) all registrations of, applications for registration. and recordings of any copyright rights in the United States Copyright Office or in any similar office or agency of the United States, any State thereof or any other country; (iii) all continuations, renewals or extensions of any copyrights and any registrations thereof; (iv) all copyright registrations to be issued under any pending applications; and (v) all licenses and other agreements granting any rights with respect to any copyright or copyright registration, whether as a licensor or licensee.
“Default” means any circumstance, event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default.
“Deposit Account” means any “deposit account” as defined in the Code with such additions to such term as may hereafter be made, and includes any checking account, savings account or certificate of deposit.
“Disqualified Stock” means any Equity Interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, (a) matures (excluding any maturity exclusively as the result of an optional redemption by the issuer thereof) or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable or subject to repurchase at the option of the holder thereof, in whole or in part, or requires the payment of any cash dividend or any other scheduled payment, in each case constituting a return of capital, in each case at any time on or prior to the date that is 180 days after the Maturity Date, or (b) is convertible into or exchangeable (unless at the sole option of the issuer thereof) for (i) Indebtedness or other debt securities (other than Permitted Indebtedness), or (ii) any Equity Interest referred to in clause (a) above, in each case at any time prior to the date that is 180 days after the Maturity Date. Notwithstanding the preceding sentence, any Equity Interest that would constitute Disqualified Stock solely because the holders thereof have the right to require the issuer to repurchase such Equity Interest upon the occurrence of a Change of Control will not constitute Disqualified Stock if the terms of such Equity Interest provide that such repurchase or redemption cannot be consummated until the Obligations have been paid in full (subject to the contingent obligations which are not then due and payable and which survive the termination of this Agreement).
“Effective Date” means the date hereof.
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“Equipment” means all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.
“Equity Interests” means, with respect to any Person, any of the shares of capital stock of (or other ownership, membership or profit interests in) such Person, any of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership, membership or profit interests in) such Person, any of the securities convertible into or exchangeable for shares of capital stock of (or other ownership, membership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and any of the other ownership, membership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.
“ERISA” means the Employee Retirement Income Security Act of 1974, and its regulations.
“Event of Default” has the meaning set forth in the form of Note, attached hereto as Exhibit A.
“Exceptions Schedule” means those items set forth on the “Exceptions Schedule” attached hereto.
“Excluded Locations” means the following locations where Collateral may be located from time to time: (a) locations where mobile office equipment (e.g. laptops, mobile phones and the like) may be located with employees in the ordinary course of business, or (b) other locations where, in the aggregate for all such locations, less than Two Hundred Eighty-Seven Thousand Five Hundred Dollars ($287,500) of assets and property of the CompanyParent and its Subsidiaries is located.
“GAAP” means (a) generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination and (b) for purposes of Section 6(a)(v), with respect to any Subsidiary, generally accepted accounting principles (including International Financial Reporting Standards, as applicable) as in effect from time to time in the jurisdiction of organization of such Subsidiary.
“General Intangibles” means all “general intangibles” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation, all Intellectual Property, claims, income and other tax refunds, security and other deposits, payment intangibles, contract rights, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.
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“Governmental Approval” means any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.
“Governmental Authority” means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.
“Guarantors” means Parent, Metromile Insurance Services LLC and Metromile Enterprise Solutions, LLC.
“Holders” and “Holder” is defined in the preamble.
“Holder Transfer” is defined in Section 12(c).
“Home Jurisdiction” is defined in Section 5(c).
“Horseshoe” is defined in Section 6(d).
“Hudson” is defined in Section 1(b).
“Hudson Sale” is defined in Section 6(e)(ii).
“Intercreditor Agreement” means that certain Subordination Agreement (Debt and Security Interest), dated as of April 14, 2020, by and among Agent, the Holders, the Senior Agent and the Obligors.
“Indebtedness” means (a) indebtedness, liabilities and obligations for borrowed money or the deferred price of property or services (including deferred royalty payment obligations), and reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.
“Indemnified Person” is defined in Section 12(k).
“Insolvency Proceeding” means any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.
“Insurance Laws” means any insurance laws, regulations or orders applicable to Companythe Parent or its Subsidiaries or any Insurance License held or controlled by the CompanyParent or its Subsidiaries.
“Insurance License” means any license, permission, authorization, accreditation, certification or other formal status granted by an Insurance Regulatory Agency.
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“Insurance Regulatory Agency” shall have the meaning ascribed in Section 11(c).
“Intellectual Property” means, with respect to any Person, all of such Person’s right, title, and interest in and to the following:
(a) any and all Copyrights, Trademarks and Patents;
(b) any and all trade secrets and trade secret rights, including, without limitation, any rights to unpatented inventions, know-how and operating manuals;
(c) any and all source code;
(d) any and all design rights which may be available to such Person;
(e) any and all claims for damages by way of past, present and future infringement of any of the foregoing, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the Intellectual Property rights identified above; and
(f) all amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents.
“Inventory” means all “inventory” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of any Obligor’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.
“Investment” means any beneficial ownership interest in any Person (including stock, partnership interest or other securities or Equity Interests), and any loan, advance or capital contribution to any Person, or the acquisition of all or substantially all of the assets or properties of another Person.
“IRC” means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder.
“Key Person” means each of Chief Executive Officer and Chief Financial Officer of the CompanyParent, who are, respectively,is Dan Preston and Carrie Dolan as of the EffectiveSecond Amendment Date.
“Lien” means a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.
“Majority Holders” is defined in Section 1(a).
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“Material Adverse Effect” means (i) a material impairment in the perfection or priority of Agent’s Lien in the Collateral or in the value of the Collateral or (ii) a material adverse effect on (a) the business, operations, properties, assets or condition (financial or otherwise) of the CompanyParent and its Subsidiaries taken as a whole, (b) the ability of the Obligors, taken as a whole, to perform their obligations under this Agreement and the Notes, (c) the validity or enforceability of this Agreement or the Note Documents, or (d) the ability of Agent and the Holders to enforce any of their rights or remedies with respect to any Obligations.
“Metromile Acquisition” means the SPAC Transaction consummated pursuant to the Merger Agreement, upon which the Company shall be a direct wholly-owned subsidiary of the Parent.
“Merger Agreement” means that certain Agreement and Plan of Merger and Reorganization dated as of November 24, 2020, as amended, by and among Parent, INSU II Merger Sub Corp., and the Company.
“MIC” means Metromile Insurance Company, a Delaware corporation.
“Minimum Cash Requirement” is defined in Section 6(a)(xiii).
“Monthly Financial Statements” is defined in Section 6(a)(i)(A).
“Negotiable Collateral” means, with respect to any Person, all of such Person’s present and future letters of credit of which it is a beneficiary, drafts, instruments (including promissory notes), securities, documents of title, and chattel paper, and such Person’s books and records relating to any of the foregoing.
“New Subsidiary Notice” is defined in Section 6(a)(ix).
“Note” and “Notes” is defined in the preamble.
“Note Documents” are, collectively, this Agreement, the Notes, the Security Documents, the Warrants and any schedules, exhibits, certificates, and notices related to this Note, and any other present or future agreement by the CompanyParent or its Subsidiaries with or for the benefit of the Holder in connection with this Note, all as amended, restated, or otherwise modified.
“Obligations” means all of the Company’s obligations to pay when due any principal (including Outstanding Principal Balance), interest (including Cash Interest, PIK Interest and Default Interest (as defined in the form of Note)), fees, the Prepayment Amount (as defined in the form of Note) and other amounts the Company owes to Agent or any Holder now or later, whether under this Agreement, the Notes, or the other Note Documents (other than the Warrants) including, without limitation, interest accruing after Insolvency Proceedings begin (whether or not allowed).
“Obligors” means the Company and the Guarantors.
“OFAC” means the U.S. Department of Treasury Office of Foreign Assets Control.
“OFAC Lists” means, collectively, the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or other restricted Persons maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders.
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“Operating Documents” means, for any Person, such Person’s formation documents, as certified by the Secretary of State (or equivalent agency) of such Person’s jurisdiction of formation, organization or incorporation on a date that is no earlier than thirty (30) days prior to the Effective Date (or with respect to a New Subsidiary Notice, a date that is no earlier than thirty (30) days prior to such notice, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement or operating agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments, restatements and modifications thereto.
“Ordinary Course of Business” means, in respect of any transaction involving any Person, the ordinary course of such Person’s business as conducted by any such Person in accordance with (a) the usual and customary customs and practices similarly situated in the kind of business in which such Person is engaged, and (b) the past practice and operations of such Person, and in each case, undertaken by such Person in good faith and not for purposes of evading any covenant or restriction in any Note Document.
“Original Principal Amount” is defined in Section 1(a).
“Parent” has the meaning specified in the preamble to this Agreement.
“Patents” means all of the following: (i) all patents, all rights corresponding thereto and all like protections, issued, published or unpublished or registered or unregistered, in the United States or any other county or jurisdiction, or pursuant to any convention or treaty, (ii) all registrations of, applications for registration and recordings of patents, or rights corresponding thereto in, the United States or any other country or jurisdiction, or pursuant to any convention or treaty, including without limitation with the United States Patent and Trademark Office or in any similar office or agency; (iii) all improvements, divisions, continuations, renewals, reissues, reexaminations, extensions and continuations-in-part of all patents and/or applications; (iv) all patents to be issued under any of pending application; (v) all foreign counterparts of the foregoing patents and/or applications; and (vi) all licenses and other agreements granting any rights with respect to any patent or patent registration, whether as a licensor or licensee.
“Permitted Indebtedness” means:
(a) each Obligor’s Indebtedness to Holders under this Agreement and the other Note Documents;
(b) Indebtedness existing on the Effective Date including, without limitation, the Senior Indebtedness;
(c) Subordinated Debt;
(d) unsecured Indebtedness to trade creditors incurred in the Ordinary Course of Business;
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(e) Indebtedness incurred as a result of endorsing negotiable instruments received in the Ordinary Course of Business;
(f) Indebtedness secured by Liens permitted under clauses (a) and (c) of the definition of “Permitted Liens” hereunder;
(g) Indebtedness consisting of contingent reimbursement obligations in connection with letters of credit that are secured by cash or Cash Equivalents and issued on behalf of the CompanyParent or any of its Subsidiaries (i) in an aggregate amount not to exceed Five Million Seven Hundred Fifty Thousand Dollars ($5,750,000) at any time outstanding in connection with the Company’sParent’s or such Subsidiary’s real property leases and (ii) in an aggregate amount not to exceed Five Hundred Seventy-Five Thousand Dollars ($575,000) at any time outstanding in connection with the Company’sParent’s or such Subsidiary’s credit card obligations;
(h) Indebtedness constituting Permitted Investments;
(i) Indebtedness secured by deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases (other than real estate leases), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the Ordinary Course of Business not to exceed Two Hundred Eighty-Seven Thousand Five Hundred Dollars ($287,500) at any time outstanding;
(j) unsecured Indebtedness not otherwise permitted hereunder in an amount not to exceed Four Hundred Two Thousand Five Hundred Dollars ($402,500) at any time outstanding; and
(k) Indebtedness constituting the PPP Loan; provided, however, (i) the Borrowers agree to request forgiveness of the PPP Loan up to the maximum amount permitted under the CARES Act prior to any interest or principal payment becoming due and at least 75% of the PPP Loan is timely forgiven, (ii) the Borrowers are in material compliance with all applicable SBA regulations and loan eligibility requirements and the guarantee provided by the SBA in connection with such PPP Loan remains in full force and effect while the PPP Loan remains outstanding, and (iii) no payment shall be made under the PPP Loan other than regularly scheduled principal and interest payments so long as no Default or Event of Default has occurred and is continuing after giving effect to such payment; and
(k) (l) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (kj) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon the CompanyParent or its Subsidiaries, as the case may be.
“Permitted Investments” means:
(a) Investments (including, without limitation, Subsidiaries) existing on the Effective Date and set forth on Schedule 10(a);
(b) (i) Investments consisting of Cash Equivalents, and (ii) any Investments permitted by the Company’sParent’s investment policy, as amended from time to time, provided that such investment policy (and any such amendment thereto) has been approved in writing by Agent and the Majority Holders;
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(c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the Ordinary Course of Business;
(d) Investments consisting of deposit accounts in which Agent has a perfected security interest, subject to the Intercreditor Agreement;
(e) Investments accepted in connection with Transfers permitted by Section 6(b)(i);
(f) Investments (i) by an Obligor in other Obligors, and (ii) Investments by an Obligor in Subsidiaries that are not Obligors, provided that such Investment does not exceed Two Hundred Eighty-Seven Thousand Five Hundred Dollars ($287,500) in the aggregate in any 12 Month Period, subject to Section 6(b)(vi) and (iiiii) by Subsidiaries that are not Obligors in an Obligor;
(g) Investments consisting of (i) repurchases of the Company’san Obligor’s Equity Interests from former employees, officers and directors of the Companysuch Obligor to the extent expressly permitted under Section 6(b)(vvi), and (ii) loans not involving the net transfer of cash proceeds to employees, officers or directors relating to the purchase of Equity Interests of the Companyan Obligor pursuant to employee stock purchase plans or other similar agreements approved by the Parent’s Board or the Company’s Board;
(h) Investments, (i) in an aggregate amount not to exceed Two Hundred Eighty-Seven Thousand Five Hundred Dollars ($287,500) in any 12 Month Period, consisting of travel advances and employee relocation loans and other employee loans and advances in the Ordinary Course of Business and (ii) a loan in the original principal amount of $349,870 made to the Chief Executive Officer of the CompanyParent;
(i) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the Ordinary Course of Business;
(j) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the Ordinary Course of Business; provided that this paragraph (j) shall not apply to Investments of the Parent or the Company in any Subsidiaryof their respective Subsidiaries;
(k) Investments accepted by an Obligor in consideration for Permitted Transfers;
(l) joint ventures or strategic alliances in the Ordinary Course Business of the Obligors consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by the Obligors and their Subsidiaries do not exceed Two Hundred Eighty-Seven Thousand Five Hundred Dollars ($287,500) in the aggregate in any 12 month period; and
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(m) Investments not otherwise permitted hereunder in an aggregate amount not to exceed Four Hundred Two Thousand Five Hundred Dollars ($402,500) in the aggregate in any 12 Month Period.
“Permitted Liens” means:
(a) (x) Senior Priority Liens, (y) other Liens existing on the Effective Date, and (zy) Liens arising under this Agreement and the other Note Documents;
(b) Liens for taxes, fees, assessments or other government charges or levies, either (i) not yet delinquent or (ii) being contested in good faith and for which the CompanyParent or its Subsidiary, as applicable, maintains adequate reserves on its books and records, provided that no notice of any such Lien has been filed or recorded under the IRC;
(c) purchase money Liens (i) on Equipment and software acquired or held by the Obligors or any Subsidiary incurred for financing the acquisition of the Equipment and Software securing no more than Two Hundred Eighty-Seven Thousand Five Hundred Dollars ($287,500) in any 12 Month Period in the aggregate amount outstanding, or (ii) existing on Equipment and software when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment;
(d) Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the Ordinary Course of Business so long as such Liens attach only to Inventory, securing liabilities in the aggregate amount not to exceed Eighty-Six Thousand Two Hundred Fifty Dollars ($86,250) and which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;
(e) Liens to secure payment of workers’ compensation, employment insurance, old- age pensions, social security and other like obligations incurred in the Ordinary Course of Business (other than Liens imposed by ERISA);
(f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in the proceeding clauses (a) through (d), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase;
(g) leases or subleases of real property granted in the Ordinary Course of Business of the Obligors (or, if referring to another Person, in the Ordinary Course of Business of such Person), and leases, subleases, non-exclusive licenses or sublicenses of personal property (other than Intellectual Property) granted in the Ordinary Course of Business of the Obligors (or, if referring to another Person, in the Ordinary Course of Business of such Person), if the leases, subleases, licenses and sublicenses do not prohibit granting Agent a security interest therein;
(h) non-exclusive licenses for the use of Intellectual Property granted to customers in the Ordinary Course of Business, and other licenses granted to customers in the Ordinary Course of Business that could not result in a legal transfer of title of the licensed property but that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discrete geographical areas outside of the United States, in each case that do not interfere in any material respect with the business of the CompanyParent or any of its Subsidiaries;
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(i) Liens arising from attachments or judgments, orders, or decrees in circumstances not constituting an Event of Default;
(j) Liens in favor of other financial institutions arising in connection with any Obligor’s deposit accounts and/or securities accounts held at such institutions;
(k) Liens on Cash securing obligations permitted under clause (g)(i) of the definition of “Permitted Indebtedness” in an amount not to exceed Five Million Seven Hundred Fifty Thousand Dollars ($5,750,000) at any time and (ii) Liens on Cash securing obligations permitted under clause (g)(ii) of the definition of “Permitted Indebtedness” in an amount not to exceed Five Hundred Seventy-Five Thousand Dollars ($575,000) at any time; and
(l) judgment Liens that do not constitute an Event of Default under Sections 3(a)(ix), 3(a)(x) and 3(a)(xii) of the Note.
“Permitted Locations” means, collectively, the following locations where Collateral may be located from time to time: (a) locations set forth on Schedule 4(a), (b) locations previously disclosed in a written notice to Agent and the Holders, and (c) the Excluded Locations.
“Permitted Transfers” means (i) sales or delivery of Inventory in the Ordinary Course of Business, (ii) dispositions of worn-out, obsolete or surplus Equipment in the Ordinary Course of Business that is, in the reasonable judgment of Obligors, no longer economically practicable to maintain or useful, (iii) Transfers consisting of the granting of Permitted Liens and the making of Permitted Investments, (iv) the use or transfer of money or Cash Equivalents in the Ordinary Course of Business for the payment of Ordinary Course Business expenses in a manner that is not prohibited by the terms of this Agreement or the other Note Documents, (v) other Transfers of assets having a fair market value of not more than Two Hundred Eighty-Seven Thousand Five Hundred Dollars ($287,500) in the aggregate in any 12 Month Period, (vi) consisting of non- exclusive licenses for the use of the property of the CompanyParent or its Subsidiaries in the Ordinary Course of Business, and licenses that do not result in a transfer of a material portion of the value of the licensed property, and (vii) any Sale.
“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.
“PPP Loan” means the Indebtedness incurred by the Obligors from Western Alliance Bank in connection with a Paycheck Protection Program loan under the CARES Act.
“Prohibited Subsidiary” means any Subsidiary designated as such in writing by the Majority Holders that is an insurance company, insurance carrier, insurance producer, insurance broker or otherwise holds a license issued by an insurance regulator if and to the extent that a guaranty of the Obligations by such Subsidiary, or such Subsidiary becoming a Guarantor hereunder, would cause such Subsidiary to fail to maintain the liquidity or leverage requirements of its regulators and would have a Material Adverse Effect.
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“Quarterly Financial Statements” is defined in Section 6(a)(i)(C).
“Register” is defined in Section 12(c).
“Regulatory Reports” is defined in Section 6(a)(i)(F).
“Requirement of Law” means as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
“Responsible Officer” means with respect to any Person, any of the Chief Executive Officer, President, Chief Financial Officer, Secretary, Treasurer and Controller of such Person. Unless the context otherwise requires, each reference to a Responsible Officer herein shall be a reference to a Responsible Officer of the CompanyParent.
“Restricted License” means any material license or other material agreement (other than ordinary course customer contracts that individually are not material, over-the-counter software licenses that are commercially available to the public, and open source licenses) with respect to which the CompanyParent or a Subsidiary of the CompanyParent is the licensee (a) that prohibits or otherwise restricts the CompanyParent or such Subsidiary from granting a security interest in the Company’s orParent’s or such Subsidiary’s interest in such license or agreement or any other property, or (b) for which a default under or termination of such license or agreement could reasonably be expected to interfere with Agent’s or any Holder’s right to sell any Collateral.
“SEC” means the Securities and Exchange Commission, any successor thereto, and any analogous Governmental Authority.
“Second Amendment Date” means February 9, 2021.
“Secured Parties” means Agent and the Holders.
“Securities Account” means any “securities account” as defined in the Code with such additions to such term as may hereafter be made.
“Security Documents” means, collectively, this Agreement, the Intercreditor Agreement, any intellectual property security agreement and all other agreements, instruments and documents executed in connection with this Agreement and the Notes that are intended to create, perfect or evidence liens to secure the Obligor’s obligation to pay any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under this Agreement and the Notes, and shall also include, without limitation, all other security agreements, pledge agreements, mortgages, deeds of trust, intercreditor agreements, pledges, collateral assignments, and financing statements, now, or hereafter executed by the CompanyParent or other Obligors and delivered to Agent.
“Senior Agent” means Multiplier Capital II, LP, a Delaware limited partnership, in its capacity as administrative agent for the lenders under the Senior Loan Agreement.
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“Senior Indebtedness” means the indebtedness and other obligations of the Company under the Senior Loan Agreement and the other Loan Documents (as defined in the Senior Loan Agreement) and any refinancing(s) thereof.
“Senior Loan Agreement” means that certain Loan and Security Agreement, dated as of December 5, 2019 (as may be amended, restated, supplemented or otherwise modified from time to time), by and among the Company and certain subsidiaries of the Company as borrowers, the lenders from time to time party thereto and Multiplier Capital II, LP, a Delaware limited partnership as administrative agent for the lenders.
“Senior Priority Liens” means the security interests granted by the Company to the Senior Agent pursuant to the Senior Loan Agreement and the other Loan Documents (as defined in the Senior Loan Agreement).
“Settlement Amount” is defined in Section 6(d).
“Shares” means all of the issued and outstanding Equity Interests owned or held of record by the Parent and the Company in each of its Subsidiaries, including without limitation MIC.
“SPAC” means, a Special Purpose Acquisition Company (also known as a blank check company) formed for the purpose of effecting a SPAC Transaction.
“SPAC Transaction” means, a business combination of the Company with a SPAC (or a Subsidiary thereof) pursuant to which all or substantially all of the outstanding shares of capital stock of the Company and all or substantially all other securities of the Company issuable or convertible into such capital stock are converted into cash and/or shares of such SPAC or the surviving corporation in such transaction.
“Subordinated Debt” means Indebtedness incurred by any Obligor that is subordinated in writing to all of the Obligations owing by the CompanyParent or any of its Subsidiaries to Agent and the Holders, pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Agent and the Holders entered into between Agent and the other creditor, on terms acceptable to Agent and the Majority Holders, including without limiting the generality of the foregoing, subordination of such Indebtedness in right of payment to the prior payment in full of the Obligations, the subordination of the priority of any Lien at any time securing such Indebtedness to Agent’s Lien, and prohibitions on the exercise of any rights or remedies of the holder of such Indebtedness, including acceleration, against the Obligors or any of their Subsidiaries or any of the Obligors’ or their Subsidiaries’ respective property or assets.
“Subsequent Hudson Closing” is defined in Section 1(b).
“Subsequent Hudson Closing Date” is defined in Section 1(b).
“Subsidiary” means, with respect to any Person, any corporation, partnership, limited liability company or joint venture in which (i) any general partnership interest or (ii) more than fifty percent (50%) of the stock, limited liability company interest, joint venture interest or other Equity Interest of which by the terms thereof has the ordinary voting power to elect the Board of that Person, at the time as of which any determination is being made, is owned or controlled by such Person, either directly or through an Affiliate. Unless the context otherwise requires, each reference to a Subsidiary herein shall be a reference to a Subsidiary of the CompanyParent.
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“Third Party Sale” is defined in Section 6(e)(ii).
“Trademarks” means all of the following: (i) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, whether or not published or unpublished or registered or unregistered; (ii) all registrations and recordings thereof, and any applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state thereof or any other country, jurisdiction or any political subdivision thereof or pursuant to any convention or treaty; (iii) all continuations, renewals, reissues, and extensions thereof; (iv) all trademarks to be issued under any pending application; (v) all foreign counterparts of the foregoing trademarks and/or applications; (vi) all licenses and other agreements granting any rights with respect to any trademark or trademark registration, whether as a licensor or licensee; and (vii) the entire goodwill of the business of each Obligor connected with and symbolized by any of the foregoing.
“Transfer” is defined in Section 6(b)(i).
“Voluntary Run Off” is defined in Section 6(e)(i).
“Warrants” is defined in Section 1(c)(iii).
(b) Accounting. Accounting terms not defined in this Agreement shall be construed in accordance with GAAP, and calculations and determinations shall be made following GAAP, consistently applied. All terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein. The term “financial statements” shall include the accompanying notes and schedules, unless stated otherwise. Notwithstanding anything to the contrary contained herein all financial determinations made herein with respect to operating and capital leases shall be made without giving effect to ASC 842, but instead shall be made consistent with ASC 840. As used in the Note Documents, the word “shall” is mandatory, the word “may” is permissive, the word “or” is not exclusive, the words “includes” and “including” are not limiting, the singular includes the plural, and numbers denoting amounts that are set off in brackets are negative. Unless otherwise specified, all references in this Agreement or any Annex or Schedule hereto to a “Section,” “subsection,” “Exhibit,” “Annex,” “Addendum” or “Schedule” shall refer to the corresponding Section, subsection, Exhibit, Annex, Addendum or Schedule in or to this Agreement. For purposes of the Note Documents, whenever a representation or warranty is made to a Person’s knowledge or awareness, to the “best of” such Person’s knowledge, or with a similar qualification, knowledge or awareness means the actual knowledge, after reasonable investigation, of any Responsible Officer of such Person.
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11. Compliance with Insurance Laws.
(a) Agent, each Holder and each Obligor acknowledge and agree that Agent’s and Holders’ exercise of specific remedies available under this Agreement may be restricted pursuant to applicable insurance laws, including laws requiring Agent or Holders to obtain prior approval of a change in control of an insurance company before foreclosing or transferring ownership of the stock thereof, the Shares or other provisions of any insurance holding company act.
(b) This Agreement and the other Note Documents and the transactions contemplated hereby and thereby (i) do not and will not constitute, create, or have the effect of constituting or creating, directly or indirectly, actual or practical ownership of MIC by Agent or any Holder, individually or collectively, or Control, affirmative or negative, direct or indirect, by Agent or any Holder, individually or collectively or any other person or entity over the management or any other aspect of the operation of MIC, in each case in any way that could be deemed to violate the Insurance Laws and (ii) do not and will not constitute the transfer, assignment or disposition in any manner, voluntarily or involuntarily, directly or indirectly, of any Insurance License by MIC in any way that could be deemed to violate the Insurance Laws.
(c) Notwithstanding any other provision of this Agreement, any foreclosure, sale, transfer, assignment or other disposition of, or the exercise of any right to vote or consent with respect to, any of the Collateral as provided herein which would effect an assignment or a transfer of Control of any insurance company, shall be made pursuant to and in compliance in all material respects with all Insurance Laws applicable thereto and, if and to the extent required thereby, subject to the prior approval of any domiciliary insurance regulator with jurisdiction thereover (an “Insurance Regulatory Agency”).
(d) Subject to Section 11(c) hereof and the Intercreditor Agreement, if an Event of Default shall have occurred and be continuing, each Obligor shall take any action which Agent may request in order to transfer Control or assign to Agent or any Holder, or to such one or more third Persons as Agent may designate, or to a combination of the foregoing, any Collateral in a manner that complies with applicable Insurance Laws or to otherwise exercise any remedy otherwise available hereunder in compliance therewith. Agent and Holders may seek to take any action permitted by applicable law, this Agreement and the other Note Documents, including, without limitation, to request the appointment of a receiver by the Insurance Regulatory Agency and any court of competent jurisdiction. Subject to the Intercreditor Agreement, Agent and Holder may request the Insurance Regulatory Agency to approve an involuntary transfer of Control of MIC for the purpose of seeking a bona fide purchaser to whom Control will ultimately be transferred. Each Obligor hereby agrees to authorize such an involuntary transfer of Control upon the approval of the Insurance Regulatory Agency and at the request of the receiver so appointed and, if any Obligor shall refuse to authorize the transfer, its approval may be required by the court. Each Obligor shall further use its best efforts to assist in obtaining approval of the Insurance Regulatory Agency, if required, for any action or transactions contemplated by this Agreement, including, without limitation, the preparation, execution and filing with the Insurance Regulatory Agency of the assignor's or transferor's portion of any application or applications for consent to any transfer of Control necessary or appropriate under the Insurance Regulatory Agency's rules and regulations for approval of the transfer or assignment of any portion of the Collateral, together with any Insurance License associated with the Collateral from time to time. In furtherance of the foregoing, to the extent permitted by law, each Obligor hereby irrevocably appoints Agent as its attorney-in-fact with full power of substitution to, subject to the Intercreditor Agreement, execute such applications and documents and take such action on behalf of each Obligor. Each Obligor acknowledges that the appointment of Agent as such attorney-in-fact is coupled with an interest and is irrevocable.
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(e) Each Obligor acknowledges that the assignment or transfer of the Collateral with all associated Insurance Licenses, when required under this Agreement is integral to Agent’s and each Holder's realization of the value of the Collateral, that there is no adequate remedy at law for failure by any Obligor to comply with the provisions of this Section 11, and that such failure would not be adequately compensable in damages and, therefore, agrees that the agreements contained in this Section 11 may be specifically enforced without posting of any bond or similar requirement.
(f) In the event that Agent or any Holder is required to acquire title to any Collateral for any reason, or take any managerial action of any kind in regard thereto, in order to carry out any fiduciary or trust obligation for the benefit of another, which in Agent’s or any Holder’s sole discretion may cause Agent or any Holder to be deemed to constitute, create, or have the effect of constituting or creating, directly or indirectly, actual or practical ownership or Control of MIC or otherwise cause Agent or any Holder to incur, or be exposed to, any liability under any Insurance Laws or subject to regulation or liability under any Insurance Regulatory Agency, Agent and each Holder reserve the right, instead of taking the action, to arrange for the transfer of the title or Control of the asset to a receiver appointed by a court of competent jurisdiction, subject to the consent of the applicable Insurance Regulatory Agency. Neither Agent nor any Holder will be liable to any Obligor or any Affiliate or Related Party for any breach of Insurance Laws or any insurance liabilities or contribution actions under any federal, state or local law, rule or regulation by reason of Holder’s actions and conduct as authorized, empowered and directed hereunder.
12. Miscellaneous.
(a) Waivers and Amendments. Any term of this Agreement or the Notes may be amended, waived or modified only upon the written consent of the Company and the Majority Holders.
(b) Governing Law. This Agreement and all actions arising out of or in connection with this Agreement shall be governed by and construed under the laws of the State of New York, as applied to agreements among New York residents, made and to be performed entirely within the State of New York. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of the state of New York and to the jurisdiction of the United States District Court for the Southern District of New York for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of New York or the United States District Court for the Southern District of New York, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above- named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.
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WAIVER OF JURY TRIAL: EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE NOTES, OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
(c) Successors and Assigns. No Obligor may transfer, pledge or assign this Agreement or any rights or obligations under it without Agent’s and each Holder’s prior written consent (which may be granted or withheld in Agent’s and each Holder’s discretion). Holders have the right, without the consent of or notice to any Obligor (but with notice to Agent), to sell, transfer, assign, pledge, negotiate, or grant participation in (any such sale, transfer, assignment, negotiation, or grant of a participation, a “Holder Transfer”) all or any part of, or any interest in, Holder’s obligations, rights, and benefits under this Agreement and the other Note Documents (other than the Warrants, as to which assignment, transfer and other such actions are governed by the terms thereof). In the case of an assignment by any Holder to another Person of the Notes or any rights or participations therein, such Person shall agree in writing to the provisions hereof applicable to Holders. Any assignee or successor to a Holder shall become a “Holder” under this Agreement at the time such Person’s ownership interest in a Note is recorded in the register and such Person shall be subject to the obligations set forth in this Agreement. Notwithstanding the foregoing, or anything to the contrary herein, if no Default or Event of Default has occurred which is continuing, no Holder nor Agent shall enter into any Holder Transfer of all or any part of, or any interest in, Holders’ obligations, rights, and benefits under this Agreement and the other Note Documents to any entity which, in Holder’s Good Faith Business Judgment is a “vulture fund” or similar entity, or any entity known to such Holder as a competitor of any Obligor.
(d) Expenses. At the initial Closing, the Company shall pay the expenses and legal fees of Hudson incurred with respect to the negotiation, execution and delivery of this Agreement, the Notes, and the transactions contemplated herein or therein, in an amount not to exceed, in the aggregate, $50,000.
(e) No Agent or Holder GuidanceReserved.
(i) The Obligors hereby acknowledge and agree that neither the Agent nor any Holder has provided any Obligor with any guidance or advice regarding the CARES Act, the PPP Loan (including without limitation the authority of the Obligors to qualify for the PPP Loan, and the conditions for forgiveness of the PPP Loan) or any related matters.
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(ii) The Obligors hereby acknowledge and agree that any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of the incurrence of the PPP Loan and all related matters shall be subject to Section 12(k).
(f) Entire Agreement. This Agreement together with the Notes constitutes and contains the entire agreement among the Company and the Holders and supersedes any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof.
(g) Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail if sent during normal business hours of the recipient, if not, then on the next business say, (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications to a party shall be sent to the party’s address set forth in the signature page of such Holder or at such other address(es) as such party may designate by 10 days’ advance written notice to the other party hereto. A copy of any notice to the Company shall be sent to Cooley LLP, 101 California Street, 5th Floor, San Francisco, CA 94111-5800, Attn: Rachel Proffitt; Jason Savich, e-mails: rproffitt@cooley.com; jsavich@cooley.com.
(h) Severability of this Agreement. If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
(i) Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. Facsimile copies of signed signature pages will be deemed binding originals.
(j) Survival. All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than contingent indemnification obligations as to which no claim has been asserted or is known to exist and any other obligations which, by their terms, are to survive the termination of this Agreement) have been paid in full in cash.
(k) Indemnification. Each Obligor agrees to indemnify, defend and hold Agent, Holders and their respective directors, officers, employees, consultants, agents, attorneys, or any other Person affiliated with or representing Agent or Holders (each, an “Indemnified Person”) harmless against: (i) all obligations, demands, claims, and liabilities (including such claims, costs, expenses, damages and liabilities based on liability in tort, including strict liability in tort) (collectively, “Claims”) claimed or asserted by any other party in connection with the transactions contemplated by the Note Documents; and (ii) all losses or expenses in any way suffered, incurred, or paid by such Indemnified Person as a result of, following from, consequential to, or arising from transactions between Holders and the Obligors (including reasonable attorneys’ fees and expenses), except for Claims and/or losses to the extent directly caused by such Indemnified Person’s gross negligence or willful misconduct. Each Obligor agrees to pay, and to save Holders and Agent harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes (excluding taxes imposed on or measured by the net income of such Persons) that may be payable or determined to be payable with respect to any of the Collateral or this Agreement. This Section 12(k) shall survive until all statutes of limitation with respect to the Claims, losses, and expenses for which indemnity is given shall have run.
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(l) Confidentiality. In handling any confidential information, Holders and Agent shall exercise the same degree of care that such Person exercises for its own proprietary and confidential information, but disclosure of information may be made: (a) to Holders’ and/or Agent’s Subsidiaries or Affiliates (such Subsidiaries and Affiliates, together with Agent and Holders, collectively, “Holders Entities”) provided that such Subsidiaries or Affiliates shall be bound by the confidentiality provisions set forth in this Section 12(l) or a provision substantially similar hereto; (b) to prospective transferees (provided, however, Holders and Agent shall use their commercially reasonable efforts to obtain any prospective transferee’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order, provided any information so disclosed will remain confidential information hereunder as to the Holders and Agent unless such information as a direct result of the foregoing becomes public information; (d) to the Holders’ or Agent’s regulators or as otherwise required in connection with an examination or audit; (e) as Agent or the Holders consider appropriate in exercising remedies under the Note Documents; and (f) to third-party service providers of the Holders and/or Agent so long as such service providers are in a relationship of confidentiality or have executed a confidentiality agreement with the applicable Holder and/or Agent with terms no less restrictive than those contained herein. Confidential information does not include information that is either: (i) in the public domain or in the Holders’ and/or Agent’s possession when disclosed to the Holders and/or Agent, or becomes part of the public domain (other than as a result of its disclosure by the Holders and/or Agent or any party to whom such party disclosed such information as set forth above in violation of this Agreement) after disclosure to the Holders and Agent; or (ii) disclosed to the Holders and/or Agent by a third party, if the Holders and/or Agent do not know that the third party is prohibited from disclosing the information.
(Signature Page Follows)
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The parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date and year first written above.
Signature page to Note Purchase and Security Agreement
The parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date and year first written above.
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AGENT AND HOLDER: |
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HSCM BERMUDA FUND LTD. |
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By: Hudson Structured Capital Management Ltd., its Manager |
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By: |
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Name: |
Edouard Von Herberstein |
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Partner |
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E-mail: |
ajay.mehra@hscm.com |
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Address: |
c/o Hudson Structured Capital Management Ltd. |
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Attention: Ajay Mehra, Partner & General Counsel 2187 Atlantic Street |
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Stamford, CT 06902 |
Signature page to Note Purchase and Security Agreement
The parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date and year first written above.
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HOLDER: |
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HS SANTANONI LP |
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By: Hudson Structured Capital Management Ltd., its Manager |
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By: |
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Edouard Von Herberstein |
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Partner |
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ajay.mehra@hscm.com |
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Address: |
c/o Hudson Structured Capital Management Ltd. |
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Attention: Ajay Mehra, Partner & General Counsel 2187 Atlantic Street |
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Stamford, CT 06902 |
Signature page to Note Purchase and Security Agreement
ANNEX I
COLLATERAL DESCRIPTION
The Collateral consists of all of each Obligor’s right, title and interest in and to the following personal property wherever located, whether now owned or existing or hereafter acquired, created or arising:
All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles (including Intellectual Property), commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, Deposit Accounts, Securities Accounts, Commodity Accounts, all certificates of deposit,, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and all the Obligors’ books and records relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds (both cash and non-cash) and insurance proceeds of any or all of the foregoing.
Notwithstanding the foregoing, the Collateral does not include any (i) any license or contract that is nonassignable by its terms without the consent of the licensor thereof or another party (but only to the extent such prohibition on transfer is enforceable under applicable law, including, without limitation, Sections 9406 and 9408 of the Code), provided in each case that upon the cessation of any such restriction or prohibition, such license or contract shall automatically become part of the Collateral, (ii) cash collateral accounts described in clause (g) of the definition of Permitted Indebtedness if the granting of a security interest therein is specifically prohibited by, would constitute an event of default under, or would grant a party a termination right under the contract or agreement with respect to such cash collateral accounts (unless such prohibition is not enforceable under applicable law), provided that at any such time any of the foregoing prohibitions or restrictions no longer apply then, as of such date, the Collateral shall automatically be deemed to include any such cash collateral accounts and/or the proceeds thereof, (iii) equipment subject to a lien described in clause (c) of the definition of Permitted Liens in connection with purchase money indebtedness incurred by the Obligor if the underlying agreement with respect to such purchase money indebtedness does not permit the Obligor to grant a lien with respect to such equipment in favor of Agent, or (iv) any “intent-to-use” trademark at any time prior to the first use thereof, whether by the actual use thereof in commerce, the recording of a statement of use with the United States Patent and Trademark Office or otherwise, but only to the extent the granting of a security interest in such “intent-to-use” trademark would be contrary to applicable law.
Exhibit 10.6
METROMILE, INC.
2011 EQUITY INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Plan are:
● | to attract and retain the best available personnel for positions of substantial responsibility, |
● | to provide additional incentive to Employees, Directors and Consultants, and |
● | to promote the success of the Company’s business. |
The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units.
2. Definitions. As used herein, the following definitions will apply:
(a) “Administrator” means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.
(b) “Applicable Laws” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.
(c) “Award” means, individually or collectively, a grant under the Plan of Options, Stock Appreciation Rights, Restricted Stock, or Restricted Stock Units.
(d) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.
(e) “Board” means the Board of Directors of the Company.
(f) “Change in Control” means the occurrence of any of the following events:
(i) Change in Ownership of the Company. A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than 50% of the total voting power of the stock of the Company, except that any change in the ownership of the stock of the Company as a result of a private financing of the Company that is approved by the Board will not be considered a Change in Control; or
(ii) Change in Effective Control of the Company. If the Company has a class of securities registered pursuant to Section 12 of the Exchange Act, a change in the effective control of the Company which occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purposes of this clause (ii), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control; or
(iii) Change in Ownership of a Substantial Portion of the Company’s Assets. A change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For purposes of this subsection (iii), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
For purposes of this Section 2(f), persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company.
Notwithstanding the foregoing, a transaction will not be deemed a Change in Control unless the transaction qualifies as a change in control event within the meaning of Code Section 409A, as it has been and may be amended from time to time, and any proposed or final Treasury Regulations and Internal Revenue Service guidance that has been promulgated or may be promulgated thereunder from time to time.
Further and for the avoidance of doubt, a transaction will not constitute a Change in Control if: (i) its sole purpose is to change the jurisdiction of the Company’s incorporation, or (ii) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.
(g) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to any successor or amended section of the Code.
(h) “Committee” means a committee of Directors or of other individuals satisfying Applicable Laws appointed by the Board, or by the compensation committee of the Board, in accordance with Section 4 hereof.
(i) “Common Stock” means the common stock of the Company.
(j) “Company” means MetroMile, Inc., a Delaware corporation, or any successor thereto.
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(k) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.
(l) “Director” means a member of the Board.
(m) “Disability” means total and permanent disability as defined in Code Section 22(e)(3), provided that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Administrator from time to time.
(n) “Employee” means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.
(o) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(p) “Exchange Program” means a program under which (i) outstanding Awards are surrendered or cancelled in exchange for Awards of the same type (which may have higher or lower exercise prices and different terms), Awards of a different type, and/or cash, (ii) Participants would have the opportunity to transfer any outstanding Awards to a financial institution or other person or entity selected by the Administrator, and/or (iii) the exercise price of an outstanding Award is reduced or increased. The Administrator will determine the terms and conditions of any Exchange Program in its sole discretion.
(q) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share will be the mean between the high bid and low asked prices for the Common Stock on the day of determination (or, if no bids and asks were reported on that date, as applicable, on the last trading date such bids and asks were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.
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(r) “Incentive Stock Option” means an Option that by its terms qualifies and is otherwise intended to qualify as an incentive stock option within the meaning of Code Section 422 and the regulations promulgated thereunder.
(s) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.
(t) “Option” means a stock option granted pursuant to the Plan.
(u) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Code Section 424(e).
(v) “Participant” means the holder of an outstanding Award.
(w) “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator.
(x) “Plan” means this 2011 Equity Incentive Plan.
(y) “Restricted Stock” means Shares issued pursuant to an Award of Restricted Stock under Section 8 of the Plan, or issued pursuant to the early exercise of an Option.
(z) “Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 9. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.
(aa) “Service Provider” means an Employee, Director or Consultant.
(bb) “Share” means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan.
(cc) “Stock Appreciation Right” means an Award, granted alone or in connection with an Option, that pursuant to Section 7 is designated as a Stock Appreciation Right.
(dd) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Code Section 424(f).
3. Stock Subject to the Plan.
(a) Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be subject to Awards and sold under the Plan is 14,177,581 Shares. The Shares may be authorized but unissued, or reacquired Common Stock.
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(b) Lapsed Awards. If an Award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an Exchange Program, or, with respect to Restricted Stock or Restricted Stock Units, is forfeited to or repurchased by the Company due to the failure to vest, the unpurchased Shares (or for Awards other than Options or Stock Appreciation Rights the forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to Stock Appreciation Rights, only Shares actually issued pursuant to a Stock Appreciation Right will cease to be available under the Plan; all remaining Shares under Stock Appreciation Rights will remain available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan under any Award will not be returned to the Plan and will not become available for future distribution under the Plan; provided, however, that if Shares issued pursuant to Awards of Restricted Stock or Restricted Stock Units are repurchased by the Company or are forfeited to the Company due to the failure to vest, such Shares will become available for future grant under the Plan. Shares used to pay the exercise price of an Award or to satisfy the tax withholding obligations related to an Award will become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding the foregoing and, subject to adjustment as provided in Section 13, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 3(a), plus, to the extent allowable under Code Section 422 and the Treasury Regulations promulgated thereunder, any Shares that become available for issuance under the Plan pursuant to Section 3(b).
(c) Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.
(ii) Other Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, which Committee will be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Awards may be granted hereunder;
(iii) to determine the number of Shares to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the Plan;
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(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;
(vi) to institute and determine the terms and conditions of an Exchange Program;
(vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws or for qualifying for favorable tax treatment under applicable foreign laws;
(ix) to modify or amend each Award (subject to Section 18(c) of the Plan), including but not limited to the discretionary authority to extend the post-termination exercisability period of Awards and to extend the maximum term of an Option (subject to Section 6(d));
(x) to allow Participants to satisfy withholding tax obligations in a manner prescribed in Section 14;
(xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;
(xii) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that otherwise would be due to such Participant under an Award; and
(xiii) to make all other determinations deemed necessary or advisable for administering the Plan.
(c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards.
5. Eligibility. Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, and Restricted Stock Units may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.
6. Stock Options.
(a) Grant of Options. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Options in such amounts as the Administrator, in its sole discretion, will determine.
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(b) Option Agreement. Each Award of an Option will be evidenced by an Award Agreement that will specify the exercise price, the term of the Option, the number of Shares subject to the Option, the exercise restrictions, if any, applicable to the Option, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
(c) Limitations. Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. Notwithstanding such designation, however, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(c), Incentive Stock Options will be taken into account in the order in which they were granted, the Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted, and calculation will be performed in accordance with Code Section 422 and Treasury Regulations promulgated thereunder.
(d) Term of Option. The term of each Option will be stated in the Award Agreement; provided, however, that the term will be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.
(e) Option Exercise Price and Consideration.
(i) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to the exercise of an Option will be determined by the Administrator, but will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. In addition, in the case of an Incentive Stock Option granted to an Employee who owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant. Notwithstanding the foregoing provisions of this Section 6(e)(i), Options may be granted with a per Share exercise price of less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Code Section 424(a).
(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised.
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(iii) Form of Consideration. The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (1) cash; (2) check; (3) promissory note, to the extent permitted by Applicable Laws, (4) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option will be exercised and provided further that accepting such Shares will not result in any adverse accounting consequences to the Company, as the Administrator determines in its sole discretion; (5) consideration received by the Company under cashless exercise program (whether through a broker or otherwise) implemented by the Company in connection with the Plan; (6) by net exercise, (7) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws, or (8) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator will consider if acceptance of such consideration may be reasonably expected to benefit the Company.
(f) Exercise of Option.
(i) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.
An Option will be deemed exercised when the Company receives: (i) notice of exercise (in such form as the Administrator may specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with applicable tax withholding). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.
(ii) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s termination as the result of the Participant’s death or Disability, the Participant may exercise his or her Option within thirty (30) days of termination, or such longer period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement) to the extent that the Option is vested on the date of termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
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(iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within six (6) months of termination, or such longer period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement) to the extent the Option is vested on the date of termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
(iv) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised within six (6) months following the Participant’s death, or within such longer period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement) to the extent that the Option is vested on the date of death, by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to the Participant’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
7. Stock Appreciation Rights.
(a) Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, a Stock Appreciation Right may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.
(b) Number of Shares. The Administrator will have complete discretion to determine the number of Shares subject to any Award of Stock Appreciation Rights.
(c) Exercise Price and Other Terms. The per Share exercise price for the Shares that will determine the amount of the payment to be received upon exercise of a Stock Appreciation Right as set forth in Section 7(f) will be determined by the Administrator and will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. Otherwise, the Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of Stock Appreciation Rights granted under the Plan.
(d) Stock Appreciation Right Agreement. Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
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(e) Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6(d) relating to the maximum term and Section 6(f) relating to exercise also will apply to Stock Appreciation Rights.
(f) Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:
(i) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times
(ii) The number of Shares with respect to which the Stock Appreciation Right is exercised.
At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
8. Restricted Stock.
(a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine.
(b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines otherwise, the Company as escrow agent will hold Shares of Restricted Stock until the restrictions on such Shares have lapsed.
(c) Transferability. Except as provided in this Section 8 or as the Administrator determines, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.
(d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
(e) Removal of Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction or at such other time as the Administrator may determine. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.
(f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.
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(g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares, unless the Administrator provides otherwise. If any such dividends or distributions are paid in Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.
(h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the Plan.
9. Restricted Stock Units.
(a) Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. After the Administrator determines that it will grant Restricted Stock Units, it will advise the Participant in an Award Agreement of the terms, conditions, and restrictions related to the grant, including the number of Restricted Stock Units.
(b) Vesting Criteria and Other Terms. The Administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued employment or service), or any other basis determined by the Administrator in its discretion.
(c) Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as determined by the Administrator. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
(d) Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) determined by the Administrator and set forth in the Award Agreement. The Administrator, in its sole discretion, may settle earned Restricted Stock Units in cash, Shares, or a combination of both.
(e) Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.
10. Compliance With Code Section 409A. Awards will be designed and operated in such a manner that they are either exempt from the application of, or comply with, the requirements of Code Section 409A, except as otherwise determined in the sole discretion of the Administrator. The Plan and each Award Agreement under the Plan is intended to meet the requirements of Code Section 409A and will be construed and interpreted in accordance with such intent, except as otherwise determined in the sole discretion of the Administrator. To the extent that an Award or payment, or the settlement or deferral thereof, is subject to Code Section 409A the Award will be granted, paid, settled or deferred in a manner that will meet the requirements of Code Section 409A, such that the grant, payment, settlement or deferral will not be subject to the additional tax or interest applicable under Code Section 409A.
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11. Leaves of Absence/Transfer Between Locations. Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence. A Participant will not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then six (6) months following the first (1st) day of such leave, any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.
12. Limited Transferability of Awards.
(a) Unless determined otherwise by the Administrator, Awards may not be sold, pledged, assigned, hypothecated, or otherwise transferred in any manner other than by will or by the laws of descent and distribution, and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award may only be transferred (i) by will, (ii) by the laws of descent and distribution, or (iii) as permitted by Rule 701 of the Securities Act of 1933, as amended (the “Securities Act”).
(b) Further, until the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, or after the Administrator determines that it is, will, or may no longer be relying upon the exemption from registration under the Exchange Act as set forth in Rule 12h-1(f) promulgated under the Exchange Act, an Option, or prior to exercise, the Shares subject to the Option, may not be pledged, hypothecated or otherwise transferred or disposed of, in any manner, including by entering into any short position, any “put equivalent position” or any “call equivalent position” (as defined in Rule 16a-1(h) and Rule 16a-1(b) of the Exchange Act, respectively), other than to (i) persons who are “family members” (as defined in Rule 701(c)(3) of the Securities Act) through gifts or domestic relations orders, or (ii) to an executor or guardian of the Participant upon the death or disability of the Participant. Notwithstanding the foregoing sentence, the Administrator, in its sole discretion, may determine to permit transfers to the Company or in connection with a Change in Control or other acquisition transactions involving the Company to the extent permitted by Rule 12h-1(f).
13. Adjustments; Dissolution or Liquidation; Merger or Change in Control.
(a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, will adjust the number and class of Shares that may be delivered under the Plan and/or the number, class, and price of Shares covered by each outstanding Award; provided, however, that the Administrator will make such adjustments to an Award required by Section 25102(o) of the California Corporations Code to the extent the Company is relying upon the exemption afforded thereby with respect to the Award.
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(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.
(c) Merger or Change in Control. In the event of a merger or Change in Control, each outstanding Award will be treated as the Administrator determines (subject to the provisions of the following paragraph) without a Participant’s consent, including, without limitation, that (i) Awards will be assumed, or substantially equivalent Awards will be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) with appropriate adjustments as to the number and kind of shares and prices; (ii) upon written notice to a Participant, that the Participant’s Awards will terminate upon or immediately prior to the consummation of such merger or Change in Control; (iii) outstanding Awards will vest and become exercisable, realizable, or payable, or restrictions applicable to an Award will lapse, in whole or in part prior to or upon consummation of such merger or Change in Control, and, to the extent the Administrator determines, terminate upon or immediately prior to the effectiveness of such merger or Change in Control; (iv) (A) the termination of an Award in exchange for an amount of cash and/or property, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights as of the date of the occurrence of the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the Administrator determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment), or (B) the replacement of such Award with other rights or property selected by the Administrator in its sole discretion; or (v) any combination of the foregoing. In taking any of the actions permitted under this subsection 13(c), the Administrator will not be obligated to treat all Awards, all Awards held by a Participant, or all Awards of the same type, similarly.
In the event that the successor corporation does not assume or substitute for the Award (or portion thereof), the Participant will fully vest in and have the right to exercise all of his or her outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units will lapse, and, with respect to Awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met. In addition, if an Option or Stock Appreciation Right is not assumed or substituted in the event of a merger or Change in Control, the Administrator will notify the Participant in writing or electronically that the Option or Stock Appreciation Right will be exercisable for a period of time determined by the Administrator in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.
For the purposes of this subsection 13(c), an Award will be considered assumed if, following the merger or Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the merger or Change in Control, the consideration (whether stock, cash, or other securities or property) received in the merger or Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, for each Share subject to such Award, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or Change in Control.
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Notwithstanding anything in this Section 13(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more performance goals will not be considered assumed if the Company or its successor modifies any of such performance goals without the Participant’s consent; provided, however, a modification to such performance goals only to reflect the successor corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.
Notwithstanding anything in this Section 13(c) to the contrary, if a payment under an Award Agreement is subject to Code Section 409A and if the change in control definition contained in the Award Agreement does not comply with the definition of “change of control” for purposes of a distribution under Code Section 409A, then any payment of an amount that is otherwise accelerated under this Section will be delayed until the earliest time that such payment would be permissible under Code Section 409A without triggering any penalties applicable under Code Section 409A.
14. Tax Withholding.
(a) Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes (including the Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof).
(b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have the Company withhold otherwise deliverable Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld, (iii) delivering to the Company already-owned Shares having a Fair Market Value equal to the statutory amount required to be withheld, provided the delivery of such Shares will not result in any adverse accounting consequences, as the Administrator determines in its sole discretion, or (iv) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld. The amount of the withholding requirement will be deemed to include any amount which the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.
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15. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing the Participant’s relationship as a Service Provider with the Company, nor will they interfere in any way with the Participant’s right or the Company’s right to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.
16. Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.
17. Term of Plan. Subject to Section 21 of the Plan, the Plan will become effective upon its adoption by the Board. Unless sooner terminated under Section 18, it will continue in effect for a term of ten (10) years from the later of (a) the effective date of the Plan, or (b) the earlier of the most recent Board or stockholder approval of an increase in the number of Shares reserved for issuance under the Plan.
18. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan will not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.
19. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.
20. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority will not have been obtained.
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21. Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted by the Board. Such stockholder approval will be obtained in the manner and to the degree required under Applicable Laws.
22. Information to Participants. Beginning on the earlier of (i) the date that the aggregate number of Participants under this Plan is five hundred (500) or more and the Company is relying on the exemption provided by Rule 12h-1(f)(1) under the Exchange Act and (ii) the date that the Company is required to deliver information to Participants pursuant to Rule 701 under the Securities Act, and until such time as the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, is no longer relying on the exemption provided by Rule 12h-1(f)(1) under the Exchange Act or is no longer required to deliver information to Participants pursuant to Rule 701 under the Securities Act, the Company shall provide to each Participant the information described in paragraphs (e)(3), (4), and (5) of Rule 701 under the Securities Act not less frequently than every six (6) months with the financial statements being not more than 180 days old and with such information provided either by physical or electronic delivery to the Participants or by written notice to the Participants of the availability of the information on an Internet site that may be password-protected and of any password needed to access the information. The Company may request that Participants agree to keep the information to be provided pursuant to this section confidential. If a Participant does not agree to keep the information to be provided pursuant to this section confidential, then the Company will not be required to provide the information unless otherwise required pursuant to Rule 12h-1(f)(1) under the Exchange Act or Rule 701 of the Securities Act.
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Exhibit 10.7
METROMILE, INC.
2011 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT — EARLY EXERCISE
Unless otherwise defined herein, the terms defined in the 2011 Equity Incentive Plan (the “Plan”) shall have the same defined meanings in this Stock Option Agreement – Early Exercise (the “Option Agreement”).
I. NOTICE OF STOCK OPTION GRANT
Name:
Address:
The undersigned Participant has been granted an Option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
Vesting Schedule:
This Option shall be exercisable, in whole or in part, according to the following vesting schedule:
Twenty-five percent (25%) of the Shares subject to the Option shall vest on the one (1) year anniversary of the Vesting Commencement Date, and one forty-eighth (1/48th) of the Shares subject to the Option shall vest each month thereafter on the same day of the month as the Vesting Commencement Date (and if there is no corresponding day, on the last day of the month), subject to Participant continuing to be a Service Provider through each such date.
Termination Period:
This Option shall be exercisable for three (3) months after Participant ceases to be a Service Provider, unless such termination is due to Participant’s death or Disability, in which case this Option shall be exercisable for twelve (12) months after Participant ceases to be a Service Provider. Notwithstanding the foregoing sentence, in no event may this Option be exercised after the Term/Expiration Date as provided above and this Option may be subject to earlier termination as provided in Section 13 of the Plan.
II. AGREEMENT
1. Grant of Option. The Administrator of the Company hereby grants to the Participant named in the Notice of Stock Option Grant in Part I of this Agreement (“Participant”), an option (the “Option”) to purchase the number of Shares set forth in the Notice of Stock Option Grant, at the exercise price per Share set forth in the Notice of Stock Option Grant (the “Exercise Price”), and subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 18 of the Plan, in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Stock Option Grant as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option (“NSO”). Further, if for any reason this Option (or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such Option (or portion thereof) shall be regarded as a NSO granted under the Plan. In no event shall the Administrator, the Company or any Parent or Subsidiary or any of their respective employees or directors have any liability to Participant (or any other person) due to the failure of the Option to qualify for any reason as an ISO.
2. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 6 of the Plan as follows:
(a) Right to Exercise.
(i) Subject to subsections 2(a)(ii) and 2(a)(iii) below, this Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Stock Option Grant. Alternatively, at the election of Participant, this Option may be exercised in whole or in part at any time as to Shares that have not yet vested. Vested Shares shall not be subject to the Company’s repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1).
(ii) As a condition to exercising this Option for unvested Shares, Participant shall execute the Restricted Stock Purchase Agreement.
(iii) This Option may not be exercised for a fraction of a Share.
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(b) Method of Exercise. This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “Exercise Notice”) or in a manner and pursuant to such procedures as the Administrator may determine, which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares, together with any applicable tax withholding, an executed joinder agreement to that certain Amended and Restated Voting Agreement, by and among the Company and certain stockholders dated April 16, 2013, as may be amended from time to time, in substantially the form attached hereto as Exhibit D, and, to the extent that the Participant holds at least 2% of the outstanding common stock of the Company, an executed joinder agreement to that certain Amended and Restated Right of First Refusal and Co-Sale Agreement, by and among the Company and certain stockholders dated April 16, 2013 and as may be amended from time to time, in substantially the form attached hereto as Exhibit E. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price, together with any applicable tax withholding.
No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise comply with Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to Participant on the date on which the Option is exercised with respect to such Shares.
3. Participant’s Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), at the time this Option is exercised, Participant shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B.
4. Lock-Up Period. Participant hereby agrees that Participant shall not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Common Stock (or other securities) of the Company or enter into any swap, hedging or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Common Stock (or other securities) of the Company held by Participant (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not to exceed one hundred and eighty (180) days following the effective date of any registration statement of the Company filed under the Securities Act (or such other period as may be requested by the Company or the underwriters to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in NASD Rule 2711(f)(4) or NYSE Rule 472(f)(4), or any successor provisions or amendments thereto).
Participant agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, Participant shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act. The obligations described in this Section 4 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred and eighty (180) day (or other) period. Participant agrees that any transferee of the Option or shares acquired pursuant to the Option shall be bound by this Section 4.
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5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Participant:
(a) cash;
(b) check;
(c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) shall be valued at its Fair Market Value on the date of exercise, and (ii) must be owned free and clear of any liens, claims, encumbrances or security interests, if accepting such Shares, in the sole discretion of the Administrator, shall not result in any adverse accounting consequences to the Company.
6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law.
7. Non-Transferability of Option.
(a) This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Participant only by Participant. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of Participant.
(b) Further, until the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, or after the Administrator determines that it is, will, or may no longer be relying upon the exemption from registration of Options under the Exchange Act as set forth in Rule 12h-1(f) promulgated under the Exchange Act (the “Reliance End Date”), Participant shall not transfer this Option or, prior to exercise, the Shares subject to this Option, in any manner other than (i) to persons who are “family members” (as defined in Rule 701(c)(3) of the Securities Act) through gifts or domestic relations orders, or (ii) to an executor or guardian of Participant upon the death or disability of Participant. Until the Reliance End Date, the Options and, prior to exercise, the Shares subject to this Option, may not be pledged, hypothecated or otherwise transferred or disposed of, including by entering into any short position, any “put equivalent position” or any “call equivalent position” (as defined in Rule 16a-1(h) and Rule 16a-1(b) of the Exchange Act, respectively), other than as permitted in clauses (i) and (ii) of this paragraph.
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8. Term of Option. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.
9. Tax Obligations.
(a) Tax Withholding. Participant agrees to make appropriate arrangements with the Company (or the Parent or Subsidiary employing or retaining Participant) for the satisfaction of all Federal, state, local and foreign income and employment tax withholding requirements applicable to the Option exercise. Participant acknowledges and agrees that the Company may refuse to honor the exercise and refuse to deliver the Shares if such withholding amounts are not delivered at the time of exercise.
(b) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Participant herein is an ISO, and if Participant sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two (2) years after the Date of Grant, or (ii) the date one (1) year after the date of exercise, Participant shall immediately notify the Company in writing of such disposition. Participant agrees that Participant may be subject to income tax withholding by the Company on the compensation income recognized by Participant.
(c) Code Section 409A. Under Code Section 409A, an Option that vests after December 31, 2004 (or that vested on or prior to such date but which was materially modified after October 3, 2004) that was granted with a per Share exercise price that is determined by the Internal Revenue Service (the “IRS”) to be less than the Fair Market Value of a Share on the date of grant (a “discount option”) may be considered “deferred compensation.” An Option that is a “discount option” may result in (i) income recognition by Participant prior to the exercise of the Option, (ii) an additional twenty percent (20%) federal income tax, and (iii) potential penalty and interest charges. The “discount option” may also result in additional state income, penalty and interest tax to the Participant. Participant acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share exercise price of this Option equals or exceeds the Fair Market Value of a Share on the date of grant in a later examination. Participant agrees that if the IRS determines that the Option was granted with a per Share exercise price that was less than the Fair Market Value of a Share on the date of grant, Participant shall be solely responsible for Participant’s costs related to such a determination.
10. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and Participant. This Option Agreement is governed by the internal substantive laws but not the choice of law rules of California.
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11. No Guarantee of Continued Service. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (OR THE PARENT OR SUBSIDIARY EMPLOYING OR RETAINING PARTICIPANT) AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER. PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH PARTICIPANT’S RIGHT OR THE RIGHT OF THE COMPANY (OR THE PARENT OR SUBSIDIARY EMPLOYING OR RETAINING PARTICIPANT) TO TERMINATE PARTICIPANT’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Participant has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Participant further agrees to notify the Company upon any change in the residence address indicated below.
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METROMILE, INC. |
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Dan R. Preston |
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Chief Executive Officer |
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EXHIBIT A
2011 EQUITY INCENTIVE PLAN
EXERCISE NOTICE
MetroMile, Inc.
690 Folsom St, Suite 200
San Francisco, CA 94107
Attention: Chief Financial Officer
1. Exercise of Option. Effective as of today, ________________, ____, the undersigned (“Participant”) hereby elects to exercise Participant’s option (the “Option”) to purchase ________________ shares of the Common Stock (the “Shares”) of MetroMile, Inc. (the “Company”) under and pursuant to the 2011 Equity Incentive Plan (the “Plan”) and the Stock Option Agreement – Early Exercise dated ________(the “Option Agreement”).
2. Delivery of Payment. Participant herewith delivers to the Company the full purchase price of the Shares, as set forth in the Option Agreement, and any and all withholding taxes due in connection with the exercise of the Option.
3. Representations of Participant. Participant acknowledges that Participant has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Common Stock subject to an Award, notwithstanding the exercise of the Option. The Shares shall be issued to Participant as soon as practicable after the Option is exercised in accordance with the Option Agreement. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance except as provided in Section 13 of the Plan.
5. Company’s Right of First Refusal. Before any Shares held by Participant or any transferee (either being sometimes referred to herein as the “Holder”) may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 5 (the “Right of First Refusal”).
(a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the “Notice”) stating: (i) the Holder’s bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee (“Proposed Transferee”); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the “Offered Price”), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below.
(c) Purchase Price. The purchase price (“Purchase Price”) for the Shares purchased by the Company or its assignee(s) under this Section 5 shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within thirty (30) days after receipt of the Notice or in the manner and at the times set forth in the Notice.
(e) Holder’s Right to Transfer. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section 5, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within one hundred and twenty (120) days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section 5 shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary contained in this Section 5 notwithstanding, the transfer of any or all of the Shares during the Participant’s lifetime or on the Participant’s death by will or intestacy to the Participant’s immediate family or a trust for the benefit of the Participant’s immediate family shall be exempt from the provisions of this Section 5. “Immediate Family” as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section 5, and there shall be no further transfer of such Shares except in accordance with the terms of this Section 5.
(g) Termination of Right of First Refusal. The Right of First Refusal shall terminate as to any Shares upon the earlier of (i) the first sale of Common Stock of the Company to the general public, or (ii) a Change in Control in which the successor corporation has equity securities that are publicly traded.
6. Tax Consultation. Participant understands that Participant may suffer adverse tax consequences as a result of Participant’s purchase or disposition of the Shares. Participant represents that Participant has consulted with any tax consultants Participant deems advisable in connection with the purchase or disposition of the Shares and that Participant is not relying on the Company for any tax advice.
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7. Restrictive Legends and Stop-Transfer Orders.
(a) Legends. Participant understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER FOR A PERIOD OF TIME FOLLOWING THE EFFECTIVE DATE OF THE UNDERWRITTEN PUBLIC OFFERING OF THE COMPANY’S SECURITIES SET FORTH IN AN AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF BY THE HOLDER PRIOR TO THE EXPIRATION OF SUCH PERIOD WITHOUT THE CONSENT OF THE COMPANY OR THE MANAGING UNDERWRITER.
(b) Stop-Transfer Notices. Participant agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Notice or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Participant and his or her heirs, executors, administrators, successors and assigns.
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9. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Participant or by the Company forthwith to the Administrator, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties.
10. Governing Law; Severability. This Exercise Notice is governed by the internal substantive laws, but not the choice of law rules, of California. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Exercise Notice shall continue in full force and effect.
11. Entire Agreement. The Plan and Option Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Restricted Stock Purchase Agreement, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and Participant.
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EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
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In connection with the purchase of the above-listed Securities, the undersigned Participant represents to the Company the following:
(a) Participant is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Participant is acquiring these Securities for investment for Participant’s own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).
(b) Participant acknowledges and understands that the Securities constitute “restricted securities” under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Participant’s investment intent as expressed herein. In this connection, Participant understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Participant’s representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one (1) year or any other fixed period in the future. Participant further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Participant further acknowledges and understands that the Company is under no obligation to register the Securities. Participant understands that the certificate evidencing the Securities shall be imprinted with any legend required under applicable state securities laws.
(c) Participant is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of “restricted securities” acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to Participant, the exercise shall be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of the applicable conditions specified by Rule 144, including in the case of affiliates (1) the availability of certain public information about the Company, (2) the amount of Securities being sold during any three (3) month period not exceeding specified limitations, (3) the resale being made in an unsolicited “broker’s transaction”, transactions directly with a “market maker” or “riskless principal transactions” (as those terms are defined under the Securities Exchange Act of 1934) and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which may require (i) the availability of current public information about the Company; (ii) the resale to occur more than a specified period after the purchase and full payment (within the meaning of Rule 144) for the Securities; and (iii) in the case of the sale of Securities by an affiliate, the satisfaction of the conditions set forth in sections (2), (3) and (4) of the paragraph immediately above.
(d) Participant further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption shall be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 shall have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Participant understands that no assurances can be given that any such other registration exemption shall be available in such event.
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EXHIBIT C-1
METROMILE, INC.
2011 EQUITY INCENTIVE PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
THIS RESTRICTED STOCK PURCHASE AGREEMENT (the “Agreement”) is made between ______________ (the “Purchaser”) and MetroMile, Inc. (the “Company”) or its assignees of rights hereunder as of __________________, ____.
Unless otherwise defined herein, the terms defined in the 2011 Equity Incentive Plan shall have the same defined meanings in this Agreement.
RECITALS
A. Pursuant to the exercise of the option granted to Purchaser under the Plan and pursuant to the Stock Option Agreement – Early Exercise (the “Option Agreement”) dated __________ by and between the Company and Purchaser with respect to such grant (the “Option”), which Plan and Option Agreement are hereby incorporated by reference, Purchaser has elected to purchase _________ of those shares of Common Stock which have not become vested under the vesting schedule set forth in the Option Agreement (“Unvested Shares”). The Unvested Shares and the shares subject to the Option Agreement, which have become vested are sometimes collectively referred to herein as the “Shares.”
B. As required by the Option Agreement, as a condition to Purchaser’s election to exercise the option, Purchaser must execute this Agreement, which sets forth the rights and obligations of the parties with respect to Shares acquired upon exercise of the Option.
1. Repurchase Option.
(a) If Purchaser’s status as a Service Provider is terminated for any reason, including for death and Disability, the Company shall have the right and option for ninety (90) days from such date to purchase from Purchaser, or Purchaser’s personal representative, as the case may be, all of the Purchaser’s Unvested Shares as of the date of such termination at the price paid by the Purchaser for such Shares (the “Repurchase Option”).
(b) Upon the occurrence of such termination, the Company may exercise its Repurchase Option by delivering personally or by registered mail, to Purchaser (or his or her transferee or legal representative, as the case may be) with a copy to the escrow agent described in Section 2 below, a notice in writing indicating the Company’s intention to exercise the Repurchase Option AND, at the Company’s option, (i) by delivering to the Purchaser (or the Purchaser’s transferee or legal representative) a check in the amount of the aggregate repurchase price, or (ii) by the Company canceling an amount of the Purchaser’s indebtedness to the Company equal to the aggregate repurchase price, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such aggregate repurchase price. Upon delivery of such notice and payment of the aggregate repurchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Unvested Shares being repurchased and the rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Unvested Shares being repurchased by the Company.
(c) Whenever the Company shall have the right to repurchase Unvested Shares hereunder, the Company may designate and assign one or more employees, officers, directors or stockholders of the Company or other persons or organizations to exercise all or a part of the Company’s Repurchase Option under this Agreement and purchase all or a part of such Unvested Shares.
(d) If the Company does not elect to exercise the Repurchase Option conferred above by giving the requisite notice within ninety (90) days following the termination, the Repurchase Option shall terminate.
(e) The Repurchase Option shall terminate in accordance with the vesting schedule contained in Purchaser’s Option Agreement.
2. Transferability of the Shares; Escrow.
(a) Purchaser hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the Unvested Shares as to which the Repurchase Option has been exercised from Purchaser to the Company.
(b) To insure the availability for delivery of Purchaser’s Unvested Shares upon repurchase by the Company pursuant to the Repurchase Option under Section 1, Purchaser hereby appoints the Secretary, or any other person designated by the Company as escrow agent (the “Escrow Agent”), as its attorney-in-fact to sell, assign and transfer unto the Company, such Unvested Shares, if any, repurchased by the Company pursuant to the Repurchase Option and shall, upon execution of this Agreement, deliver and deposit with the Escrow Agent, the share certificates representing the Unvested Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall be held by the Escrow Agent in escrow, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as Exhibit C-3 hereto, until the Company exercises its Repurchase Option, until such Unvested Shares are vested, or until such time as this Agreement no longer is in effect. Upon vesting of the Unvested Shares, the Escrow Agent shall promptly deliver to the Purchaser the certificate or certificates representing such Shares in the Escrow Agent’s possession belonging to the Purchaser, and the Escrow Agent shall be discharged of all further obligations hereunder; provided, however, that the Escrow Agent shall nevertheless retain such certificate or certificates as Escrow Agent if so required pursuant to other restrictions imposed pursuant to this Agreement.
(c) Neither the Company nor the Escrow Agent shall be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment.
(d) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and the Exercise Notice executed by the Purchaser with respect to any Unvested Shares purchased by Purchaser and shall acknowledge the same by signing a copy of this Agreement.
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3. Ownership, Voting Rights, Duties. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein.
4. Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable federal and state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
5. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares, which may be made by the Company pursuant to Section 13 of the Plan after the date of this Agreement.
6. Notices. Notices required hereunder shall be given in person or by registered mail to the address of Purchaser shown on the records of the Company, and to the Company at their respective principal executive offices.
7. Survival of Terms. This Agreement shall apply to and bind Purchaser and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors.
8. Section 83(b) Election. Purchaser hereby acknowledges that he or she has been informed that, with respect to the exercise of an Option for Unvested Shares, an election (the “Election”) may be filed by the Purchaser with the Internal Revenue Service, within thirty (30) days of the purchase of the exercised Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the exercised Shares and their Fair Market Value on the date of purchase. In the case of a Nonstatutory Stock Option, this will result in the recognition of taxable income to the Purchaser on the date of exercise, measured by the excess, if any, of the Fair Market Value of the exercised Shares, at the time the Option is exercised over the purchase price for the exercised Shares. Absent such an Election, taxable income will be measured and recognized by Purchaser at the time or times on which the Company’s Repurchase Option lapses. In the case of an Incentive Stock Option, such an Election will result in a recognition of income to the Purchaser for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the exercised Shares, at the time the option is exercised, over the purchase price for the exercised Shares. Absent such an Election, alternative minimum taxable income will be measured and recognized by Purchaser at the time or times on which the Company’s Repurchase Option lapses.
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This discussion is intended only as a summary of the general United States income tax laws that apply to exercising Options as to Shares that have not yet vested and is accurate only as of the date this form Agreement was approved by the Board. The federal, state and local tax consequences to any particular taxpayer will depend upon his or her individual circumstances. Purchaser is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as Exhibit C-4 for reference.
PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER’S BEHALF.
9. Representations. Purchaser has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Purchaser understands that he or she (and not the Company) shall be responsible for his or her own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.
10. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. The Plan, the Option Agreement, the Exercise Notice, this Agreement, and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser. This Agreement is governed by the internal substantive laws but not the choice of law rules of California.
Purchaser represents that he or she has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement.
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IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above.
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EXHIBIT C-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________, hereby sell, assign and transfer unto MetroMile, Inc. _____________ shares of the Common Stock of MetroMile, Inc. standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint __________________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement between MetroMile, Inc. and the undersigned dated ______________, _____ (the “Agreement”).
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INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its “repurchase option,” as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser.
EXHIBIT C-3
JOINT ESCROW INSTRUCTIONS
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Corporate Secretary
MetroMile, Inc.
690 Folsom St, Suite 200
San Francisco, CA 94107
Dear Corporate Secretary:
As Escrow Agent for both MetroMile, Inc. (the “Company”), and the undersigned purchaser of stock of the Company (the “Purchaser”), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (the “Agreement”) between the Company and the undersigned, in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the “Company”) exercises the Company’s repurchase option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver the stock assignments, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company’s repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser’s attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you.
4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company’s repurchase option has been exercised, you shall deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company’s repurchase option. Within one hundred and twenty (120) days after cessation of Purchaser’s continuous employment by or services to the Company, or any parent or subsidiary of the Company, you shall deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company’s repurchase option.
5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder.
10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.
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14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten (10) days’ advance written notice to each of the other parties hereto.
16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by the internal substantive laws, but not the choice of law rules, of California.
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EXHIBIT C-4
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer’s gross income or alternative minimum taxable income, as the case may be, for the current taxable year the amount of any compensation taxable to taxpayer in connection with taxpayer’s receipt of the property described below.
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The name, address, taxpayer identification number and taxable year of the undersigned are as follows: |
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The property with respect to which the election is made is described as follows: __________ shares (the “Shares”) of the Common Stock of MetroMile, Inc. (the “Company”). |
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The date on which the property was transferred is:___________________ ,______. |
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The property is subject to the following restrictions: |
The Shares may not be transferred and are subject to forfeiture under the terms of an agreement between the taxpayer and the Company. These restrictions lapse upon the satisfaction of certain conditions contained in such agreement.
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The Fair Market Value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms shall never lapse, of such property is: $_________________. |
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The amount (if any) paid for such property is: $_________________. |
The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned’s receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner.
Dated: ______________________, _____ |
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The undersigned spouse of taxpayer joins in this election.
Dated: ______________________, _____ |
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EXHIBIT D
JOINDER AGREEMENT
TO
AMENDED AND RESTATED VOTING AGREEMENT
By executing this counterpart signature page, the undersigned hereby becomes a Common Holder (as defined in the Voting Agreement) under that certain Amended and Restated Voting Agreement dated as of April 16, 2013, as may be amended from time to time, by and among MetroMile, Inc. and certain of its stockholders (the “Voting Agreement”). The undersigned acknowledges that s/he has received and reviewed a copy of the Voting Agreement.
For all purposes under the Voting Agreement, the execution and delivery of this Joinder Agreement by the undersigned shall constitute the execution and delivery of a counterpart signature page to the Voting Agreement, and the undersigned shall have all rights and be subject to the obligations thereunder effective as of the date hereof.
IN WITNESS WHEREOF, the Voting Agreement has been executed by the undersigned as of the date set forth below.
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EXHIBIT E
JOINDER AGREEMENT
TO
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
By executing this counterpart signature page, the undersigned hereby becomes a Common Holder (as defined in the ROFR Agreement) under that certain Amended and Restated Right of First Refusal and Co-Sale Agreement dated as of April 16, 2013, as may be amended from time to time, by and among MetroMile, Inc. and certain of its stockholders (the “ROFR Agreement”). The undersigned acknowledges that s/he has received and reviewed a copy of the ROFR Agreement.
For all purposes under the ROFR Agreement, the execution and delivery of this Joinder Agreement by the undersigned shall constitute the execution and delivery of a counterpart signature page to the ROFR Agreement, and the undersigned shall have all rights and be subject to the obligations thereunder effective as of the date hereof.
IN WITNESS WHEREOF, the ROFR Agreement has been executed by the undersigned as of the date set forth below.
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Exhibit 10.8
METROMILE, INC.
February 11, 2021
Dan Preston
via email: dan@metromile.com
Re: Employment Terms
Dear Dan:
On behalf of Metromile, Inc. (the “Company”), I am pleased to offer you continued employment at the Company on the terms set forth in this offer letter agreement (the “Agreement”). This Agreement shall become effective on the date that it is signed by you (the “Effective Date”) and shall amend and restate any prior offer letter or employment agreement between you and the Company, including your offer letter dated January 30, 2013.
1. Employment by the Company.
(a) Position. You will serve as the Company’s Chief Executive Officer. During the term of your employment with the Company, you will devote your best efforts and substantially all of your business time and attention to the business of the Company, except for approved vacation periods and reasonable periods of illness or other incapacities permitted by the Company’s general employment policies.
(b) Duties and Location. You will perform those duties and responsibilities as are customary for the position of Chief Executive Officer and as may be directed by the Company’s Board of Directors (the “Board”), to whom you will report. You will initially continue to work remotely; at such time as the Company reopens its offices in San Francisco, California, that will be your primary office location. Notwithstanding the foregoing, the Company reserves the right to reasonably require you to perform your duties at places other than your primary office location from time to time, and to require reasonable business travel. The Company may modify your job title and duties as it deems necessary and appropriate in light of the Company’s needs and interests from time to time.
2. Base Salary and Employee Benefits.
(a) Salary. You will be paid a base salary at the rate of $450,000 per year, less applicable payroll deductions and withholdings. Your base salary will be paid on the Company’s ordinary payroll cycle. As an exempt salaried employee, you will be required to work the Company’s normal business hours, and such additional time as appropriate for your work assignments and position, and you will not be entitled to overtime compensation.
(b) Employee Benefits. As a regular full-time employee, you will continue to be eligible to participate in the Company’s standard employee benefits offered to executive level employees, as in effect from time to time and subject to the terms and conditions of the benefit plans and applicable Company policies. A full description of these benefits is available upon request. The Company may change your compensation and benefits from time to time in its discretion.
3. Expenses. The Company will reimburse you for reasonable travel, entertainment or other expenses incurred by you in furtherance of or in connection with the performance of your duties hereunder, in accordance with the Company’s expense reimbursement policies and practices as in effect from time to time.
Dan Preston
February 11, 2021
Page 2
4. Equity Awards. The Board will recommend to the Board of Directors of INSU Acquisition Corp II, a Delaware corporation (“Parent” and the “Parent Board”) that you be granted, as soon as practicable following completion of the transactions contemplated by the Agreement and Plan of Merger and Reorganization by and among Parent, INSU II Merger Sub Corp., a Delaware corporation, and the Company, dated as of November 24, 2020 (“Closing”), the following Parent equity awards:
(a) Time-Based Restricted Stock Units. A restricted stock unit award covering 1,750,000 shares of Parent common stock (“Time-Based RSUs”) under the Metromile, Inc. 2021 Equity Incentive Plan (the “Plan”). Subject to approval by the Parent Board, the Time-Based RSUs shall be subject to a time-based vesting, with a vesting commencement date of February 9, 2021 (the “Vesting Commencement Date”), and shall be satisfied quarterly over three (3) years following the Vesting Commencement Date, with 145,833 of the shares vesting on each of the first eight completed calendar quarters following the Vesting Commencement Date and 145,834 of the shares vesting on the ninth through twelfth completed calendar quarters following the Vesting Commencement Date, in all cases subject to your continued employment with the Company or Parent on each such vesting date.
(b) Performance-Based Restricted Stock Units. A restricted stock unit award covering 1,750,000 shares of the Parent common stock (as adjusted as set forth on Exhibit A to this Agreement) (the “Performance-Based RSUs”). Subject to approval by the Parent Board, the Performance-Based RSUs shall be granted under the Plan, shall vest as set forth on Exhibit A, and shall have a term of five years (from the grant date of such Performance- Based RSUs).
The Time-Based RSUs and Performance-Based RSUs shall provide for an automatic sell-to-cover arrangement in respect of applicable withholding taxes following the first release of shares from the Lockup (as defined on Exhibit A). Shares in respect of any vested portion of the Time-Based RSUs and Performance-Based RSUs shall be delivered to you as soon as reasonably practicable following the applicable vesting date but in no event later than two and one-half months after the end of the calendar year following the calendar year in which such Time- Based RSUs or Performance-Based RSUs, as applicable, vest. The Time-Based RSUs and Performance-Based RSUs shall also be subject to the provisions of the Plan and the applicable award agreement, provided, however, that the Company’s standard forms shall be revised to provide that any clawbacks for RSUs adopted by the Company shall be limited to those required to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law.
In addition, outstanding options to purchase 150,000 shares, granted on August 14, 2017, shall be deemed to have vested in full as of the Closing.
5. Compliance with Confidentiality Information Agreement and Company Policies. You acknowledge and agree that your signed At-will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement that you entered into with the Company (the “Confidentiality Agreement”) remains in full force and effect and binding upon you. In addition, you are required to continue to abide by the Company’s policies and procedures (including but not limited to the Company’s employee Handbook), as adopted or modified from time to time within the Company’s discretion, and acknowledge in writing that you have read and will comply with such policies and procedures (and provide additional such acknowledgements as such policies and procedures may be modified from time to time); provided, however, that in the event the terms of this Agreement differ from or are in conflict with the Company’s general employment policies or practices, this Agreement shall control.
6. Protection of Third Party Information. By signing this Agreement, you are representing that you have full authority to accept this position and perform the duties of the position without conflict with any other obligations and that you are not involved in any situation that might create, or appear to create, a conflict of interest with respect to your loyalty to or duties for the Company. You specifically warrant that you are not subject to an employment agreement or restrictive covenant preventing full performance of your duties to the Company. In addition, you agree not to bring to the Company or use in the performance of your responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless you have obtained express written authorization from the former employer for their possession and use. You also agree to honor all obligations to former employers during your employment with the Company.
Dan Preston
February 11, 2021
Page 3
7. At-Will Employment Relationship. Your employment relationship with the Company will continue to be at will. Accordingly, you may terminate your employment with the Company at any time and for any reason whatsoever simply by notifying the Company; and the Company may terminate your employment at any time, with or without Cause or advance notice.
8. Severance in the Event of Qualifying Termination Absent a Change of Control. If, at any time, the Company terminates your employment without Cause (other than as a result of your death or disability) or you resign for Good Reason (either such termination referred to as a “Qualifying Termination”), provided such termination or resignation constitutes a Separation from Service (as defined under Treasury Regulation Section 1.409A-1(h), without regard to any alternative definition thereunder, a “Separation from Service”), then subject to Sections 10 (“Limitation on Severance Benefits / Clawback and Recovery”), 11 (“Conditions to Receipt of Severance Benefits and Accelerated Vesting”) and 12 (“Return of Company Property”) below and your continued compliance with the terms of this Agreement (including without limitation the Confidentiality Agreement), the Company will provide you with the following severance benefits (the “Non-CIC Severance Benefits”):
(a) Cash Severance. The Company will pay you, as cash severance, twelve (12) months of your base salary in effect as of your Separation from Service date, less standard payroll deductions and tax withholdings (the “Severance”). The Severance will be paid in installments in the form of continuation of your base salary payments, paid on the Company’s ordinary payroll dates, commencing on the Company’s first regular payroll date that is more than sixty (60) days following your Separation from Service date, and shall be for any accrued base salary for the sixty (60)-day period plus the period from the sixtieth (60th) day until the regular payroll date, if applicable, and all salary continuation payments thereafter, if any, shall be made on the Company’s regular payroll dates.
(b) COBRA Severance. The Company will continue to pay the cost of your health care coverage in effect at the time of your Separation from Service for a maximum of twelve (12) months, either by reimbursing you for or paying directly (at the Company’s discretion) your COBRA premiums to continue such coverage (the “COBRA Severance”). The Company's obligation to pay the COBRA Severance on your behalf will cease if you obtain health care coverage from another source (e.g., a new employer or spouse’s benefit plan), unless otherwise prohibited by applicable law. You must notify the Company within two (2) weeks if you obtain coverage from a new source. This payment of COBRA Severance by the Company would not expand or extend the maximum period of COBRA coverage to which you would otherwise be entitled under applicable law. Notwithstanding the above, if the Company determines in its sole discretion that it cannot provide the foregoing COBRA Severance without potentially violating applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the Company shall in lieu thereof provide to you a taxable monthly payment in an amount equal to the monthly COBRA premium that you would be required to pay to continue your group health coverage in effect on the date of your termination (which amount shall be based on the premium for the first month of COBRA coverage), which payments shall be made on the last day of each month regardless of whether you elect COBRA continuation coverage and shall end on the earlier of (x) the date upon which you obtain other coverage or (y) the last day of the twelfth (12th) calendar month following your Separation from Service date.
9. Severance in the Event of Qualifying Termination in Connection with a Change of Control. In the event of a Qualifying Termination that occurs within three (3) months prior to or within twelve (12) months following the closing of a Change of Control (as defined below), provided such Qualifying Termination constitutes a Separation from Service, then subject to Sections 10 (“Limitation on Severance Benefits / Clawback and Recovery”), 11 (“Conditions to Receipt of Severance Benefits and Accelerated Vesting”) and 12 (“Return of Company Property”) below and your continued compliance with the terms of this Agreement (including without limitation the Confidentiality Agreement), then the Company will provide you with the following severance benefits (the “CIC Severance Benefits”): (i) the Severance in the form and as set forth in Section 8(a) above, except that such Severance will be extended from twelve (12) months to eighteen (18) months; (ii) the COBRA Severance, in the form and as set forth in Section 8(b) above, except that such COBRA Severance will be extended from twelve (12) months to eighteen (18) months; and (iii) the Company shall accelerate the vesting of any then-unvested Time-Based RSUs such that one hundred percent (100%) of such shares shall be deemed satisfied as of your Separation from Service date (the “Accelerated Vesting”).
Dan Preston
February 11, 2021
Page 4
10. Limitation on Severance Benefits / Clawback and Recovery. Under no circumstances will you be able to receive both the Non-CIC Severance Benefits and the CIC Severance Benefits. Any and all Non-CIC Severance Benefits and CIC Severance Benefits provided under this Agreement will be subject to recoupment in accordance with any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. In addition, the Board may impose such other clawback, recovery or recoupment provisions as the Board determines necessary to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law, including but not limited to a reacquisition right in respect of previously acquired shares of common stock of the Company or other cash or property upon the occurrence of a termination of employment for Cause.
11. Resignation Without Good Reason; Termination for Cause; Death or Disability. If, at any time, you resign your employment without Good Reason, or the Company terminates your employment for Cause, or if either party terminates your employment as a result of your death or disability, you will receive your base salary accrued through your last day of employment, as well as any unused vacation (if applicable) accrued through your last day of employment. Under these circumstances, you will not be entitled to any other form of compensation from the Company, including any Non-CIC Severance Benefits, CIC Severance Benefits, or Accelerated Vesting, as applicable, , other than your rights to the vested portion of your Option and any other rights to which you are entitled under the Company’s benefit programs.
12. Conditions to Receipt of Severance Benefits and Accelerated Vesting. Prior to and as a condition to your receipt of the Non-CIC Severance Benefits, the CIC Severance Benefits, or the Accelerated Vesting, you shall execute and deliver to the Company an effective release of claims in favor of and in a form acceptable to the Company (the “Release”) within the timeframe set forth therein, but not later than forty-five (45) days following your Separation from Service date, and allow the Release to become effective according to its terms (by not invoking any legal right to revoke it) within any applicable time period set forth therein (such latest permitted effective date, the “Release Deadline”).
13. Return of Company Property. Upon the termination of your employment for any reason, as a precondition to your receipt of the Non-CIC Severance Benefits, the CIC Severance Benefits, and the Accelerated Vesting, as applicable (if and as applicable), within five (5) days after your Separation from Service Date (or earlier if requested by the Company), you must return to the Company all Company documents (and all copies thereof) and other Company property in your possession, custody or control, including, but not limited to, Company files, notes, financial and operational information, password and account information, customer lists and contact information, prospect information, product and services information, research and development information, drawings, records, plans, forecasts, pipeline reports, sales reports or other reports, payroll information, spreadsheets, studies, analyses, compilations of data, proposals, agreements, sales and marketing information, personnel information, specifications, code, software, databases, computer-recorded information, tangible property and equipment (including, but not limited to, computers, facsimile machines, mobile telephones, tablets, handheld devices, and servers), credit cards, entry cards, identification badges and keys, and any materials of any kind which contain or embody any proprietary or confidential information of the Company, and all reproductions thereof in whole or in part and in any medium. You further agree that you will make a diligent search to locate any such documents, property and information and return them to the Company within the timeframe provided above. You also must provide the Company all passwords, log-ins, administrative access, and any other information or access for and relating to any Company computer or other device that you have used to access or use the Company’s network, as well as any Company database or Company accounts with third parties which you established, administered, or to which you had access, and must terminate your access to such network and accounts and otherwise comply with any Company requests regarding all such access and accounts. In addition, if you have used any personal computer, server, or email system to receive, store, review, prepare or transmit any confidential or proprietary data, materials or information of the Company, then within five (5) days after your Separation from Service date (or earlier if requested by the Company) you must provide the Company with a computer-useable copy of such information and permanently delete and expunge such confidential or proprietary information from those systems without retaining any reproductions (in whole or in part); and you agree to provide the Company access to your system, as requested, to verify that the necessary copying and deletion is done. If requested, you shall deliver to the Company a signed statement certifying compliance with this Section prior to the receipt of the Non-CIC Severance Benefits, the CIC Severance Benefits, or the Accelerated Vesting, as applicable.
Dan Preston
February 11, 2021
Page 5
14. Outside Activities. Throughout your employment with the Company, you may engage in civic and not- for-profit activities so long as such activities do not interfere with the performance of your duties hereunder or present a conflict of interest with the Company. During your employment by the Company, except on behalf of the Company, you will not directly or indirectly serve as an officer, director, stockholder, employee, partner, proprietor, investor, joint venturer, associate, representative or consultant of any other person, corporation, firm, partnership or other entity whatsoever known by you to compete with the Company (or is planning or preparing to compete with the Company), anywhere in the world, in any line of business engaged in (or planned to be engaged in) by the Company; provided, however, that you may purchase or otherwise acquire up to (but not more than) one percent (1%) of any class of securities of any enterprise (but without participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange.
15. Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
“Cause” for termination will mean your: (a) commission or conviction (including a guilty plea or plea of nolo contendere) of any felony or any other crime involving fraud, dishonesty or moral turpitude; (b) commission or attempted commission of or participation in a fraud or act of dishonesty or misrepresentation against the Company; (c) material breach of your duties to the Company; (d) intentional damage to any property of the Company causing material harm to the Company; (e) gross misconduct, or other material violation of Company policy that causes, or reasonably could be anticipated to cause, harm; (f) material violation of any written and fully executed contract or agreement between you and the Company, including without limitation, material breach of your Confidentiality Agreement, or of any Company policy, or of any statutory duty you owe to the Company; or (g) conduct which in the good faith and reasonable determination of the Company demonstrates gross unfitness to serve. The determination that a termination is for Cause shall be made by the Company in its sole discretion.
You shall have “Good Reason” for resigning from employment with the Company if any of the following actions are taken by the Company without your prior written consent: (a) a material reduction in your base salary, which the parties agree is a reduction of at least 25% of your base salary (unless pursuant to a salary reduction program applicable generally to the Company’s similarly situated employees); (b) a material reduction in your duties (including responsibilities and/or authorities), provided, however, that a change in job position (including a change in title) shall not be deemed a “material reduction” in and of itself unless your new duties are materially reduced from the prior duties; or (c) relocation of your principal place of employment to a place that increases your one-way commute by more than fifty (50) miles as compared to your then-current principal place of employment immediately prior to such relocation. In order to resign for Good Reason, you must provide written notice to the Board within 30 days after the first occurrence of the event giving rise to Good Reason setting forth the basis for your resignation, allow the Company at least 30 days from receipt of such written notice to cure such event, and if such event is not reasonably cured within such period, you must resign from all positions you then hold with the Company not later than 30 days after the expiration of the cure period.
“Change of Control” shall have the meaning set forth in the Plan.
Dan Preston
February 11, 2021
Page 6
16. Compliance with Section 409A. It is intended that the Non-CIC Severance Benefits, the CIC Severance Benefits, and the Accelerated Vesting, as applicable, satisfy, to the greatest extent possible, the exemptions from the application of Section 409A of the Internal Revenue Code of 1986, as amended, (the “Code”) (Section 409A, together with any state law of similar effect, “Section 409A”) provided under Treasury Regulations 1.409A- 1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9). For purposes of Section 409A (including, without limitation, for purposes of Treasury Regulations 1.409A-2(b)(2)(iii)), your right to receive any installment payments under this Agreement (whether severance payments, reimbursements or otherwise) shall be treated as a right to receive a series of separate payments and, accordingly, each installment payment hereunder shall at all times be considered a separate and distinct payment. Notwithstanding any provision to the contrary in this Agreement, if the Company (or, if applicable, the successor entity thereto) determines that the Non-CIC Severance Benefits, the CIC Severance Benefits, and the Accelerated Vesting, as applicable, constitute “deferred compensation” under Section 409A and you are, on the date of your Separation from Service, a “specified employee” of the Company or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code (a “Specified Employee”), then, solely to the extent necessary to avoid the incurrence of adverse personal tax consequences under Section 409A, the timing of the Non-CIC Severance Benefits, the CIC Severance Benefits, and the Accelerated Vesting, as applicable, shall be delayed until the earliest of: (i) the date that is six (6) months and one (1) day after your Separation from Service date, (ii) the date of your death, or (iii) such earlier date as permitted under Section 409A without the imposition of adverse taxation. Upon the first business day following the expiration of such applicable Code Section 409A(a)(2)(B)(i) period, all payments or benefits deferred pursuant to this Section shall be paid in a lump sum or provided in full by the Company (or the successor entity thereto, as applicable), and any remaining payments due shall be paid as otherwise provided herein. No interest shall be due on any amounts so deferred. If the Non-CIC Severance Benefits, the CIC Severance Benefits, or the Accelerated Vesting, as applicable, are not covered by one or more exemptions from the application of Section 409A and the Release could become effective in the calendar year following the calendar year in which you have a Separation from Service, the Release will not be deemed effective any earlier than the Release Deadline. The Non-CIC Severance Benefits, the CIC Severance Benefits, and the Accelerated Vesting, as applicable, Non-CIC Severance Benefits, the CIC Severance Benefits, and the Accelerated Vesting, as applicable, are intended to qualify for an exemption from application of Section 409A or comply with its requirements to the extent necessary to avoid adverse personal tax consequences under Section 409A, and any ambiguities herein shall be interpreted accordingly. Notwithstanding anything to the contrary herein, to the extent required to comply with Section 409A, a termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of amounts or benefits upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A. With respect to reimbursements or in-kind benefits provided to you hereunder (or otherwise) that are not exempt from Section 409A, the following rules shall apply: (i) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during any one of your taxable years shall not affect the expenses eligible for reimbursement, or in-kind benefit to be provided in any other taxable year, (ii) in the case of any reimbursements of eligible expenses, reimbursement shall be made on or before the last day of your taxable year following the taxable year in which the expense was incurred, (iii) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.
Dan Preston
February 11, 2021
Page 7
17. Section 280G; Parachute Payments.
(a) If any payment or benefit you will or may receive from the Company or otherwise (a “280G Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then any such 280G Payment provided pursuant to this Agreement (a “Payment”) shall be equal to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment (after reduction) being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount (i.e., the amount determined by clause (x) or by clause (y)), after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an after-tax basis, of the greater economic benefit notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in a Payment is required pursuant to the preceding sentence and the Reduced Amount is determined pursuant to clause (x) of the preceding sentence, the reduction shall occur in the manner (the “Reduction Method”) that results in the greatest economic benefit for you. If more than one method of reduction will result in the same economic benefit, the items so reduced will be reduced pro rata (the “Pro Rata Reduction Method”).
(b) Notwithstanding any provision of subsection (a) above to the contrary, if the Reduction Method or the Pro Rata Reduction Method would result in any portion of the Payment being subject to taxes pursuant to Section 409A that would not otherwise be subject to taxes pursuant to Section 409A, then the Reduction Method and/or the Pro Rata Reduction Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A as follows: (A) as a first priority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for you as determined on an after-tax basis; (B) as a second priority, Payments that are contingent on future events (e.g., being terminated without Cause), shall be reduced (or eliminated) before Payments that are not contingent on future events; and (C) as a third priority, Payments that are “deferred compensation” within the meaning of Section 409A shall be reduced (or eliminated) before Payments that are not deferred compensation within the meaning of Section 409A.
(c) Unless you and the Company agree on an alternative accounting firm or law firm, the accounting firm engaged by the Company for general tax compliance purposes as of the day prior to the effective date of the Change of Control transaction shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the change of control transaction, the Company shall appoint a nationally recognized accounting or law firm to make the determinations required by this Section 17 (“Section 280G; Parachute Payments”). The Company shall bear all expenses with respect to the determinations by such accounting or law firm required to be made hereunder. The Company shall use commercially reasonable efforts to cause the accounting or law firm engaged to make the determinations hereunder to provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a 280G Payment becomes reasonably likely to occur (if requested at that time by you or the Company) or such other time as requested by you or the Company.
(d) If you receive a Payment for which the Reduced Amount was determined pursuant to clause (x) of Section 17(a) and the Internal Revenue Service determines thereafter that some portion of the Payment is subject to the Excise Tax, you agree to promptly return to the Company a sufficient amount of the Payment (after reduction pursuant to clause (x) of Section 17(a)) so that no portion of the remaining Payment is subject to the Excise Tax. For the avoidance of doubt, if the Reduced Amount was determined pursuant to clause (y) of Section 17(a), you shall have no obligation to return any portion of the Payment pursuant to the preceding sentence.
Dan Preston
February 11, 2021
Page 8
18. Dispute Resolution. To ensure the rapid and economical resolution of disputes that may arise in connection with your employment with the Company, you and the Company agree that any and all disputes, claims, or causes of action, in law or equity, including but not limited to statutory claims, arising from or relating to the enforcement, breach, performance, or interpretation of this Agreement, your employment with the Company, or the termination of your employment, shall be resolved pursuant to the Federal Arbitration Act, 9 U.S.C. § 1-16, to the fullest extent permitted by law, by final, binding and confidential arbitration conducted by JAMS, Inc. or its successor (“JAMS”), under JAMS’ then applicable rules and procedures for employment disputes before a single arbitrator (available upon request and also currently available at http://www.jamsadr.com/rules-employment-arbitration/). You acknowledge that by agreeing to this arbitration procedure, both you and the Company waive the right to resolve any such dispute through a trial by jury or judge or administrative proceeding. In addition, all claims, disputes, or causes of action under this section, whether by you or the Company, must be brought in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any purported class or representative proceeding, nor joined or consolidated with the claims of any other person or entity. The arbitrator may not consolidate the claims of more than one person or entity, and may not preside over any form of representative or class proceeding. To the extent that the preceding sentences regarding class claims or proceedings are found to violate applicable law or are otherwise found unenforceable, any claim(s) alleged or brought on behalf of a class shall proceed in a court of law rather than by arbitration. This paragraph shall not apply to any action or claim that cannot be subject to mandatory arbitration as a matter of law, including, without limitation, claims brought pursuant to the California Private Attorneys General Act of 2004, as amended, the California Fair Employment and Housing Act, as amended, and the California Labor Code, as amended, to the extent such claims are not permitted by applicable law to be submitted to mandatory arbitration and such applicable law(s) are not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the “Excluded Claims”). In the event you intend to bring multiple claims, including one of the Excluded Claims listed above, the Excluded Claims may be publicly filed with a court, while any other claims will remain subject to mandatory arbitration. You will have the right to be represented by legal counsel at any arbitration proceeding. Questions of whether a claim is subject to arbitration under this agreement shall be decided by the arbitrator. Likewise, procedural questions which grow out of the dispute and bear on the final disposition are also matters for the arbitrator. The arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (b) issue a written statement signed by the arbitrator regarding the disposition of each claim and the relief, if any, awarded as to each claim, the reasons for the award, and the arbitrator’s essential findings and conclusions on which the award is based. The arbitrator shall be authorized to award all relief that you or the Company would be entitled to seek in a court of law. The Company shall pay all JAMS arbitration fees in excess of the administrative fees that you would be required to pay if the dispute were decided in a court of law. Nothing in this letter agreement is intended to prevent either you or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Any awards or orders in such arbitrations may be entered and enforced as judgments in the federal and state courts of any competent jurisdiction.
19. Miscellaneous. This Agreement, together with your Confidentiality Agreement, forms the complete and exclusive statement of your employment agreement with the Company. It supersedes any other agreements or promises made to you by anyone, whether oral or written. Changes in your employment terms, other than those changes expressly reserved to the Company’s or the Board’s discretion in this Agreement, require a written modification approved by the Company and signed by a duly authorized officer of the Company (other than you). This Agreement will bind the heirs, personal representatives, successors and assigns of both you and the Company, and inure to the benefit of both you and the Company, their heirs, successors and assigns. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination shall not affect any other provision of this Agreement and the provision in question shall be modified so as to be rendered enforceable in a manner consistent with the intent of the parties insofar as possible under applicable law. This Agreement shall be construed and enforced in accordance with the laws of the State of California without regard to conflicts of law principles. Any ambiguity in this Agreement shall not be construed against either party as the drafter. Any waiver of a breach of this Agreement, or rights hereunder, shall be in writing and shall not be deemed to be a waiver of any successive breach or rights hereunder. This Agreement may be delivered and executed via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, Uniform Electronic Transactions Act or other applicable law) or other transmission method and shall be deemed to have been duly and validly delivered and executed and be valid and effective for all purposes.
Dan Preston
February 11, 2021
Page 9
Please sign and date this Agreement and return it to me on or before February 12, 2021 if you wish to accept continued employment at the Company under the terms described above. The offer of continued employment herein will expire if I do not receive this signed letter by that date. I would be happy to discuss any questions that you may have about these terms.
Sincerely,
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/s/ Dave Friedberg |
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Dave Friedberg, Founder & Executive Chairman |
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Reviewed, Understood, and Accepted: |
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/s/ Dan Preston |
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February 11, 2021 |
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Dan Preston |
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Exhibit A: Performance-Based RSU Terms
EXHIBIT A PERFORMANCE-BASED RSU TERMS
The terms below shall apply to your Performance-Based RSUs subject to your Continuous Service (as defined in the Plan) through the applicable vesting date:
1) 291,667 of the Performance-Based RSUs shall vest upon the date on which the Company first achieves an active number of “policies in force” greater than or equal to 250,000, as determined by the Board in its sole discretion.
2) 291,667 of the Performance-Based RSUs shall vest upon the date on which the Company first achieves an active number of “policies in force” greater than or equal to 500,000, as determined by the Board in its sole discretion.
3) 583,333 of the Performance-Based RSUs shall vest upon the date on which the Company first achieves a positive operating cashflow (excluding marketing expenses, device expenses, new business underwriting expenses and reinsurance expenses) for a period of at least one financial quarter, as determined by the Board in its sole discretion.
4) 583,333 of the Performance-Based RSUs shall vest upon the achievement of a $25 per share price of the Parent Common Stock over any twenty (20) Trading Days within any thirty (30) Trading Day (the “Share-Based Milestone”). Notwithstanding the foregoing, the Share-Based Milestone shall be deemed satisfied as set forth in the table below in connection with a Change of Control (as defined in the Plan) that occurs prior to February 15, 2025. Price per share shall be the value paid for all of the shares of each class of Parent common stock or any successor entity in connection with a Change of Control. In the event of a stock-for-stock acquisition, the value of the acquiror’s shares shall be valued based on the volume weighted average closing price over the 60-day period ending on and including the trading day occurring on the day prior to consummation of such Change of Control.
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Price per share |
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Percentage of Performance-Based RSUs Subject to
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At least $25 but less than $30 |
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33% |
At least $30 but less than $35 |
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66% |
At least $35 |
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100% |
If the Share-Based Milestone is not met on or before February 15, 2025, all Performance-Based RSUs that are subject to the Share-Based Milestone will be forfeited. In the event of a Change of Control, the vesting conditions for all Performance-Based RSUs, other than the Performance-Based RSUs subject to the Share-Based Milestone (which shall vest in accordance with (4) above), shall be deemed to have been achieved as of the closing of such Change of Control in the proportion set forth in the table above (e.g. if the price per share is less than $25, none of the Performance-Based RSUs shall be deemed to have been achieved, if the price per share is $35 or more, all of the Performance-Based RSUs shall be deemed to have been achieved etc.).
Notwithstanding anything in this Exhibit A to the contrary, if vesting conditions for Performance-Based RSUs are otherwise met prior to the first release of shares from any lockup agreement restricting shares following Closing (the “Lockup”), the Performance-Based RSUs will not vest until following the first release of shares from the Lockup.
Any of the share amounts and share prices for Performance-Based RSUs shall be automatically adjusted in the event of stock splits, any extraordinary dividend or other extraordinary distribution, combinations and the like occurring prior to the date of grant.
A-1
Exhibit 10.9
January 18, 2019
Paw Andersen,
I am pleased to offer you a full-time position with Metromile, Inc. (the “Company”) in San Francisco, as a Chief Technology Officer, commencing on or before March 12, 2019.
Duties and Responsibilities. You will initially report to Dan Preston, CEO. You shall have such job duties and responsibilities commensurate with your position, which duties may change from time-to-time as the Company’s business needs and market conditions change.
Compensation. You will be paid a starting salary of $275,000 per year (less required deductions and withholdings), which will be paid semi-monthly in accordance with the Company’s normal payroll procedures.
Benefits. You will be eligible to participate in the Company’s Flexible Time Away policy as outlined in the employee handbook. In addition, as a regular, full-time employee of the Company, you will be eligible to participate in the employee benefit plans and programs currently and hereafter maintained by the Company and generally available to similarly situated employees of the Company. Your participation in such plans and programs is subject in each case to the terms and conditions of the plan or program in question, including any eligibility requirements for the plan or program.
At-Will Employment. Your employment with the Company is at will. This means that either you or the Company may terminate your employment at any time, for any reason. Should you choose to resign, the Company appreciates you providing two weeks’ notice of your resignation. The Company reserves the right to modify job titles, salaries, and benefits from time-to-time, as it deems necessary or appropriate.
Stock Options. If you decide to join the Company, it will be recommended to the Company’s Board of Directors that the Company grant you an option to purchase 350,000 shares of the Company’s Common Stock at a price per share equal to the fair market value per share of the Common Stock on the date of grant, as determined by the Company’s Board of Directors. 25% of the shares subject to the option shall vest 12 months after the date your vesting begins subject to your continuing employment with the Company, and no shares shall vest before such date. The remaining shares shall vest monthly over the next 36 months in equal monthly amounts subject to your continued employment with the Company. This option grant shall be subject to the terms and conditions of the Company’s Equity Incentive Plan and Stock Option Agreement, including vesting requirements. No right to any stock is earned or accrued until such time that vesting occurs, and the grant does not confer any right to continued vesting or employment.
Background Check and Form I-9. The Company reserves the right to conduct background checks on all of its potential employees. Your job offer, therefore, is contingent on your consent to such background check and your clearance of the check. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated.
Disclosure of Prior Relevant Agreements. You must disclose to the Company any and all agreements relating to your prior employment that may affect your eligibility to be employed by the Company or limit the manner in which you may be employed. It is the Company’s understanding that any such agreements will not prevent you from performing the duties of your position, and you represent that such is the case. Moreover, you agree that, during the term of your employment with the Company, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of your employment, and you will not engage in any other activities that conflict with your obligations to the Company. Similarly, you agree not disclose any third party confidential information to the Company, including that of your former employer. You further agree that you will not use any such information in performing your duties for the Company.
Agreement to Abide by Company Policies. As a Company employee, you will be expected to abide by the Company’s policies, rules, and standards. You will be required to sign an acknowledgment that you have read and understand the Company’s policies and rules of conduct which are included in the Company Handbook (which the Company will soon distribute).
At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement (“Confidential Information and Arbitration Agreement”). As a condition of your employment, you will be required to sign and comply with the Company’s At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement which requires, among other provisions, the assignment of patent rights to any invention made during your employment at the Company, and non-disclosure of Company proprietary information. As set forth more fully in the Confidential Information and Arbitration Agreement, in the event of any dispute or claim relating to or arising out of our employment relationship, you and the Company agree that (i) any and all disputes between you and the Company shall be fully and finally resolved by binding arbitration, (ii) you are waiving any and all rights to a jury trial (but all court remedies will be available in arbitration), (iii) all disputes shall be resolved by a neutral arbitrator who shall issue a written opinion, (iv) the arbitration shall provide for adequate discovery, and (v) the Company shall pay all the arbitration fees, except an amount equal to the filing fees you would have paid had you filed a complaint in a court of law. Please note that we must receive your executed Confidential Information and Arbitration Agreement before your first day of employment.
- 2 -
Entire Agreement. This letter, along with the Confidential Information and Arbitration Agreement, set forth the entire agreement between you and the Company regarding the terms of your employment. By signing below, you are agreeing to these terms, and you acknowledge and agree that you are not relying on any representations, promises or statements, oral or written, other than those contained in this letter and the Confidential Information and Arbitration Agreement. This letter, including, but not limited to, its at-will employment provision, may not be modified or amended except by a written agreement signed by the President of the Company and you. This offer of employment will terminate if it is not accepted, signed and returned by January 25, 2019.
To accept the Company’s offer, please sign and date this letter in the space provided below. We look forward to your acceptance of this offer and to working with you at Metromile, Inc.
Sincerely,
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/s/ Dan Preston |
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Dan Preston, CEO |
ACCEPTED AND AGREED:
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/s/ Paw Andersen |
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1/18/2019 |
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3/12/2019 |
Paw Andersen |
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Date |
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Anticipated Start Date |
- 3 -
Exhibit 10.10
September 21, 2017
Lindsay Alexovich,
I am pleased to offer you a full-time position with Metromile, Inc. (the “Company”) in San Francisco (Headquarters), as a Vice President, Controller, commencing on or before October 30, 2017.
Duties and Responsibilities. You will initially report to Carrie Dolan, CFO. You shall have such job duties and responsibilities commensurate with your position, which duties may change from time-to time as the Company’s business needs and market conditions change.
Compensation. You will be paid a starting salary of $275,000 per year (less required deductions and withholdings), which will be paid semi-monthly in accordance with the Company’s normal payroll procedures.
Benefits. You will be eligible to participate in the Company’s Flexible Time Away policy as outlined in the employee handbook. In addition, as a regular, full-time employee of the Company, you will be eligible to participate in the employee benefit plans and programs currently and hereafter maintained by the Company and generally available to similarly situated employees of the Company. Your participation in such plans and programs is subject in each case to the terms and conditions of the plan or program in question, including any eligibility requirements for the plan or program.
At-Will Employment. Your employment with the Company is at will. This means that either you or the Company may terminate your employment at any time, for any reason. Should you choose to resign, the Company appreciates you providing two weeks’ notice of your resignation. The Company reserves the right to modify job titles, salaries, and benefits from time-to-time, as it deems necessary or appropriate.
Stock Options. If you decide to join the Company, it will be recommended to the Company’s Board of Directors that the Company grant you an option to purchase 150,000 shares of the Company’s Common Stock at a price per share equal to the fair market value per share of the Common Stock on the date of grant, as determined by the Company’s Board of Directors. 25% of the shares subject to the option shall vest 12 months after the date your vesting begins subject to your continuing employment with the Company, and no shares shall vest before such date. The remaining shares shall vest monthly over the next 36 months in equal monthly amounts subject to your continued employment with the Company. This option grant shall be subject to the terms and conditions of the Company’s Equity Incentive Plan and Stock Option Agreement, including vesting requirements. No right to any stock is earned or accrued until such time that vesting occurs, and the grant does not confer any right to continued vesting or employment.
Background Check and Form I-9. The Company reserves the right to conduct background checks on all of its potential employees. Your job offer, therefore, is contingent on your consent to such background check and your clearance of the check. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated.
Disclosure of Prior Relevant Agreements. You must disclose to the Company any and all agreements relating to your prior employment that may affect your eligibility to be employed by the Company or limit the manner in which you may be employed. It is the Company’s understanding that any such agreements will not prevent you from performing the duties of your position, and you represent that such is the case. Moreover, you agree that, during the term of your employment with the Company, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of your employment, and you will not engage in any other activities that conflict with your obligations to the Company. Similarly, you agree not disclose any third party confidential information to the Company, including that of your former employer. You further agree that you will not use any such information in performing your duties for the Company.
Agreement to Abide by Company Policies. As a Company employee, you will be expected to abide by the Company’s policies, rules and standards. You will be required to sign an acknowledgment that you have read and understand the Company’s policies and rules of conduct which are included in the Company Handbook (which the Company will soon distribute).
- 2 -
At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement (“Confidential Information and Arbitration Agreement”). As a condition of your employment, you will be required to sign and comply with the Company’s At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement which requires, among other provisions, the assignment of patent rights to any invention made during your employment at the Company, and non-disclosure of Company proprietary information. As set forth more fully in the Confidential Information and Arbitration Agreement, in the event of any dispute or claim relating to or arising out of our employment relationship, you and the Company agree that (i) any and all disputes between you and the Company shall be fully and finally resolved by binding arbitration, (ii) you are waiving any and all rights to a jury trial (but all court remedies will be available in arbitration), (iii) all disputes shall be resolved by a neutral arbitrator who shall issue a written opinion, (iv) the arbitration shall provide for adequate discovery, and (v) the Company shall pay all the arbitration fees, except an amount equal to the filing fees you would have paid had you filed a complaint in a court of law. Please note that we must receive your executed Confidential Information and Arbitration Agreement before your first day of employment.
Entire Agreement. This letter, along with the Confidential Information and Arbitration Agreement, set forth the entire agreement between you and the Company regarding the terms of your employment. By signing below, you are agreeing to these terms, and you acknowledge and agree that you are not relying on any representations, promises or statements, oral or written, other than those contained in this letter and the Confidential Information and Arbitration Agreement. This letter, including, but not limited to, its at-will employment provision, may not be modified or amended except by a written agreement signed by the President of the Company and you. This offer of employment will terminate if it is not accepted, signed and returned by 10/22/2017.
To accept the Company’s offer, please sign and date this letter in the space provided below. We look forward to your acceptance of this offer and to working with you at Metromile, Inc.
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Sincerely, |
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/s/ Carrie Dolan |
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Carrie Dolan, CFO |
ACCEPTED AND AGREED:
/s/ Lindsay Alexovich |
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9/21/2017 |
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October 30, 2017 |
Lindsay Alexovich |
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Date |
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Anticipated Start Date |
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Exhibit 10.11
1/3/2020
Jesse McKendry,
I am pleased to offer you a full-time position with Metromile, Inc. (the “Company”) in Cleveland, as an Insurance Product Manager, commencing on or before January 13, 2020.
Duties and Responsibilities. You will initially report to Jeff Briglia, COO. You shall have such job duties and responsibilities commensurate with your position, which duties may change from time-to-time as the Company’s business needs and market conditions change.
Compensation. You will be paid a starting salary of $220,000 per year (less required deductions and withholdings), which will be paid semi-monthly in accordance with the Company’s normal payroll procedures.
Benefits. You will be eligible to participate in the Company’s Flexible Time Away policy as outlined in the employee handbook. In addition, as a regular, full-time employee of the Company, you will be eligible to participate in the employee benefit plans and programs currently and hereafter maintained by the Company and generally available to similarly situated employees of the Company. Your participation in such plans and programs is subject in each case to the terms and conditions of the plan or program in question, including any eligibility requirements for the plan or program.
At-Will Employment. Your employment with the Company is at will. This means that either you or the Company may terminate your employment at any time, for any reason. Should you choose to resign, the Company appreciates you providing two weeks’ notice of your resignation. The Company reserves the right to modify job titles, salaries, and benefits from time-to-time, as it deems necessary or appropriate.
Stock Options. If you decide to join the Company, it will be recommended to the Company’s Board of Directors that the Company grant you an option to purchase 50,000 shares of the Company’s Common Stock at a price per share equal to the fair market value per share of the Common Stock on the date of grant, as determined by the Company’s Board of Directors. 25% of the shares subject to the option shall vest 12 months after the date your vesting begins subject to your continuing employment with the Company, and no shares shall vest before such date. The remaining shares shall vest monthly over the next 36 months in equal monthly amounts subject to your continued employment with the Company. This option grant shall be subject to the terms and conditions of the Company’s Equity Incentive Plan and Stock Option Agreement, including vesting requirements. No right to any stock is earned or accrued until such time that vesting occurs, and the grant does not confer any right to continued vesting or employment.
Background Check and Form I-9. The Company reserves the right to conduct background checks on all of its potential employees. Your job offer, therefore, is contingent on your consent to such background check and your clearance of the check. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated.
Disclosure of Prior Relevant Agreements. You must disclose to the Company any and all agreements relating to your prior employment that may affect your eligibility to be employed by the Company or limit the manner in which you may be employed. It is the Company’s understanding that any such agreements will not prevent you from performing the duties of your position, and you represent that such is the case. Moreover, you agree that, during the term of your employment with the Company, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of your employment, and you will not engage in any other activities that conflict with your obligations to the Company. Similarly, you agree not disclose any third party confidential information to the Company, including that of your former employer. You further agree that you will not use any such information in performing your duties for the Company.
Agreement to Abide by Company Policies. As a Company employee, you will be expected to abide by the Company’s policies, rules, and standards. You will be required to sign an acknowledgment that you have read and understand the Company’s policies and rules of conduct which are included in the Company Handbook (which the Company will soon distribute).
At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement (“Confidential Information and Arbitration Agreement”). As a condition of your employment, you will be required to sign and comply with the Company’s At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement which requires, among other provisions, the assignment of patent rights to any invention made during your employment at the Company, and non-disclosure of Company proprietary information. As set forth more fully in the Confidential Information and Arbitration Agreement, in the event of any dispute or claim relating to or arising out of our employment relationship, you and the Company agree that (i) any and all disputes between you and the Company shall be fully and finally resolved by binding arbitration, (ii) you are waiving any and all rights to a jury trial (but all court remedies will be available in arbitration), (iii) all disputes shall be resolved by a neutral arbitrator who shall issue a written opinion, (iv) the arbitration shall provide for adequate discovery, and (v) the Company shall pay all the arbitration fees, except an amount equal to the filing fees you would have paid had you filed a complaint in a court of law. Please note that we must receive your executed Confidential Information and Arbitration Agreement before your first day of employment.
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Entire Agreement. This letter, along with the Confidential Information and Arbitration Agreement, set forth the entire agreement between you and the Company regarding the terms of your employment. By signing below, you are agreeing to these terms, and you acknowledge and agree that you are not relying on any representations, promises or statements, oral or written, other than those contained in this letter and the Confidential Information and Arbitration Agreement. This letter, including, but not limited to, its at-will employment provision, may not be modified or amended except by a written agreement signed by the President of the Company and you. This offer of employment will terminate if it is not accepted, signed and returned by 1/6/2020.
To accept the Company’s offer, please sign and date this letter in the space provided below. We look forward to your acceptance of this offer and to working with you at Metromile, Inc.
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Sincerely, |
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/s/ Jeff Briglia |
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Jeff Briglia, COO |
ACCEPTED AND AGREED:
/s/ Jesse McKendry |
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1/3/2020 |
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Jan 13, 2020 |
Jesse McKendry |
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Date |
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Anticipated Start Date |
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Exhibit 10.12
METROMILE, INC.
CONFIDENTIAL INFORMATION AND
INVENTION ASSIGNMENT AGREEMENT
As a condition of my business relationship with MetroMile, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”), and in consideration of my business relationship with the Company and my receipt of the compensation now and hereafter paid to me on behalf of Company, I agree to the following provisions of this MetroMile, Inc. Confidential Information and Invention Assignment Agreement (this “Agreement”):
1. CONFIDENTIALITY
A. Definition of Confidential Information. I understand that “Company Confidential Information” means information that the Company has or will develop, acquire, create, compile, discover or own, that has value in or to the Company’s business which is not generally known and which the Company wishes to maintain as confidential. Company Confidential Information includes both information disclosed by the Company to me, and information developed or learned by me during the course of my business relationship with Company. Company Confidential Information also includes all information of which the unauthorized disclosure could be detrimental to the interests of Company, whether or not such information is identified as Company Confidential Information. By example, and without limitation, Company Confidential Information includes any and all non-public information that relates to the actual or anticipated business and/or products, research or development of the Company, or to the Company’s technical data, trade secrets, or know-how, including, but not limited to, research, product plans, or other information regarding the Company’s products or services and markets therefor, customer lists and customers (including, but not limited to, customers of the Company on which I called or with which I may become acquainted during the term of my business relationship), software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances, and other business information disclosed by the Company either directly or indirectly in writing, orally or by drawings or inspection of premises, parts, equipment, or other Company property. Notwithstanding the foregoing, Company Confidential Information shall not include any such information which I can establish (i) was publicly known or made generally available prior to the time of disclosure by Company to me; (ii) becomes publicly known or made generally available after disclosure by Company to me through no wrongful action or omission by me; or (iii) is in my rightful possession, without confidentiality obligations, at the time of disclosure by Company as shown by my then-contemporaneous written records. I understand that nothing in this Agreement is intended to limit employees’ rights to discuss the terms, wages, and working conditions of their employment, as protected by applicable law.
B. Nonuse and Nondisclosure. I agree that during and after my business relationship with the Company, I will hold in the strictest confidence, and take all reasonable precautions to prevent any unauthorized use or disclosure of Company Confidential Information, and I will not (i) use the Company Confidential Information for any purpose whatsoever other than for the benefit of the Company in the course of my business relationship, or (ii) disclose the Company Confidential Information to any third party without the prior written authorization of the President, CEO, or the Board of Directors of the Company. Prior to disclosure when compelled by applicable law; I shall provide prior written notice to the President, CEO, and General Counsel of MetroMile, Inc. (as applicable). I agree that I obtain no title to any Company Confidential Information, and that as between Company and myself, MetroMile, Inc. retains all Confidential Information as the sole property of MetroMile, Inc. I understand that my unauthorized use or disclosure of Company Confidential Information during my business relationship may lead to disciplinary action, up to and including immediate termination and legal action by the Company. I understand that my obligations under this Section 1.B shall continue after termination of my business relationship.
C. Former Employer Confidential Information. I agree that during my business relationship with the Company, I will not improperly use, disclose, or induce the Company to use any proprietary information or trade secrets of any former employer or other person or entity with which I have an obligation to keep in confidence. I further agree that I will not bring onto the Company’s premises or transfer onto the Company’s technology systems any unpublished document, proprietary information, or trade secrets belonging to any such third party unless disclosure to, and use by, the Company has been consented to in writing by such third party.
D. Third Party Information. I recognize that the Company has received and in the future will receive from third parties associated with the Company, e.g., the Company’s customers, suppliers, licensors, licensees, partners, or collaborators (“Associated Third Parties”), their confidential or proprietary information (“Associated Third Party Confidential Information”) subject to a duty on the Company’s part to maintain the confidentiality of such Associated Third Party Confidential Information and to use it only for certain limited purposes. By way of example, Associated Third Party Confidential Information may include the habits or practices of Associated Third Parties, the technology of Associated Third Parties, requirements of Associated Third Parties, and information related to the business conducted between the Company and such Associated Third Parties. I agree at all times during my business relationship with the Company and thereafter, that I owe the Company and its Associated Third Parties a duty to hold all such Associated Third Party Confidential Information in the strictest confidence, and not to use it or to disclose it to any person, firm, corporation, or other third party except as necessary in carrying out my work for the Company consistent with the Company’s agreement with such Associated Third Parties. I further agree to comply with any and all Company policies and guidelines that may be adopted from time to time regarding Associated Third Parties and Associated Third Party Confidential Information. I understand that my unauthorized use or disclosure of Associated Third Party Confidential Information or violation of any Company policies during my business relationship may lead to disciplinary action, up to and including immediate termination and legal action by the Company.
2. OWNERSHIP
A. Assignment of Inventions. As between Company and myself, I agree that all right, title, and interest in and to any and all copyrightable material, notes, records, drawings, designs, inventions, improvements, developments, discoveries and trade secrets conceived, discovered, authored, invented, developed or reduced to practice by me, solely or in collaboration with others, during the period of time I am in the employ of the Company (including during my off-duty hours), or with the use of Company’s equipment, supplies, facilities, or Company Confidential Information, and any copyrights, patents, trade secrets, mask work rights or other intellectual property rights relating to the foregoing, except as provided in Section 2.G below (collectively, “Inventions”), are the sole property of MetroMile, Inc. I also agree to promptly make full written disclosure to MetroMile, Inc. of any Inventions, and to deliver and assign and hereby irrevocably assign fully to MetroMile, Inc. all of my right, title and interest in and to Inventions. I agree that this assignment includes a present conveyance to MetroMile, Inc. of ownership of Inventions that are not yet in existence. I further acknowledge that all original works of authorship that are made by me (solely or jointly with others) within the scope of and during the period of my business relationship with the Company and that are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act. I understand and agree that the decision whether or not to commercialize or market any Inventions is within the Company’s sole discretion and for the Company’s sole benefit, and that no royalty or other consideration will be due to me as a result of the Company’s efforts to commercialize or market any such Inventions.
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B. Pre-Existing Materials. I have attached hereto as Exhibit A, a list describing all inventions, discoveries, original works of authorship, developments, improvements, trade secrets and other proprietary information or intellectual property rights owned by me or in which I have an interest prior to, or separate from, my business relationship with the Company and which are subject to California Labor Code Section 2870 (attached hereto as Exhibit B), and which relate to the Company’s proposed business, products, or research and development (“Prior Inventions”); or, if no such list is attached, I represent and warrant that there are no such Prior Inventions. Furthermore, I represent and warrant that if any Prior Inventions are included on Exhibit A, they will not materially affect my ability to perform all obligations under this Agreement. I will inform MetroMile, Inc. in writing before incorporating such Prior Inventions into any Invention or otherwise utilizing such Prior Invention in the course of my business relationship with the Company, and the Company is hereby granted a nonexclusive, royalty-free, perpetual, irrevocable, transferable worldwide license (with the right to grant and authorize sublicenses) to make, have made, use, import, offer for sale, sell, reproduce, distribute, modify, adapt, prepare derivative works of, display, perform, and otherwise exploit such Prior Inventions, without restriction, including, without limitation, as part of or in connection with such Invention, and to practice any method related thereto. I will not incorporate any invention, improvement, development, concept, discovery, work of authorship or other proprietary information owned by any third party into any Invention without MetroMile, Inc.’s prior written permission.
C. Moral Rights. Any assignment to MetroMile, Inc. of Inventions includes all rights of attribution, paternity, integrity, modification, disclosure and withdrawal, and any other rights throughout the world that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,” or the like (collectively, “Moral Rights”). To the extent that Moral Rights cannot be assigned under applicable law, I hereby waive and agree not to enforce any and all Moral Rights, including, without limitation, any limitation on subsequent modification, to the extent permitted under applicable law.
D. Maintenance of Records. I agree to keep and maintain adequate, current, accurate, and authentic written records of all Inventions made by me (solely or jointly with others) during the term of my business relationship with the Company. The records will be in the form of notes, sketches, drawings, electronic files, reports, or any other format that may be specified by the Company. As between Company and myself, the records are and will be available to and remain the sole property of MetroMile, Inc. at all times.
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E. Further Assurances. I agree to assist the Company, or its designee, at the Company’s expense, in every proper way to secure the Company’s rights in the Inventions in any and all countries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments, and all other instruments that the Company shall deem proper or necessary in order to apply for, register, obtain, maintain, defend, and enforce such rights, and in order to deliver, assign and convey to the Company, its successors, assigns, and nominees the sole and exclusive rights, title, and interest in and to all Inventions, and testifying in a suit or other proceeding relating to such Inventions. I further agree that my obligations under this Section 2.E shall continue after the termination of this Agreement.
F. Attorney-in-Fact. I agree that, if the Company is unable because of my unavailability, mental or physical incapacity, or for any other reason to secure my signature with respect to any Inventions, including, without limitation, for the purpose of applying for or pursuing any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned to MetroMile, Inc. in Section 2.A, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for and on my behalf to execute and file any papers and oaths, and to do all other lawfully permitted acts with respect to such Inventions to further the prosecution and issuance of patents, copyright and mask work registrations with the same legal force and effect as if executed by me. This power of attorney shall be deemed coupled with an interest, and shall be irrevocable.
G. Exception to Assignments. I UNDERSTAND THAT THE PROVISIONS OF THIS AGREEMENT REQUIRING ASSIGNMENT OF INVENTIONS TO METROMILE, INC. DO NOT APPLY TO ANY INVENTION THAT QUALIFIES FULLY UNDER THE PROVISIONS OF CALIFORNIA LABOR CODE SECTION 2870 (ATTACHED HERETO AS EXHIBIT B). I WILL ADVISE METROMILE, INC. PROMPTLY IN WRITING OF ANY INVENTIONS THAT I BELIEVE MEET THE CRITERIA IN CALIFORNIA LABOR CODE SECTION 2870 AND ARE NOT OTHERWISE DISCLOSED ON EXHIBIT A.
3. CONFLICTING OBLIGATIONS
A. Current Obligations. I agree that during the term of my business relationship with the Company, I will not engage in or undertake any other employment, relationship, occupation, consulting relationship, or commitment that is directly related to the business in which the Company is now involved or becomes involved or has plans to become involved, nor will I engage in any other activities that conflict with my obligations to the Company.
B. Prior Relationships. Without limiting Section 3.A, I represent and warrant that I have no other agreements, relationships, or commitments to any other person or entity that conflict with the provisions of this Agreement, my obligations to the Company under this Agreement, or my ability to become employed and perform the services for which I am being hired by the Company. I further agree that if I have signed a confidentiality agreement or similar type of agreement with any former employer or other entity, I will comply with the terms of any such agreement to the extent that its terms are lawful under applicable law. I represent and warrant that after undertaking a careful search (including searches of my computers, cell phones, electronic devices, and documents), I have returned all property and confidential information belonging to all prior employers (and/or other third parties I have performed services for in accordance with the terms of my applicable agreement). Moreover, I agree to fully indemnify the Company, its directors, officers, agents, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns for all verdicts, judgments, settlements, and other losses incurred by any of them resulting from my breach of my obligations under any agreement with a third party to which I am a party or obligation to which I am bound, as well as any reasonable attorneys’ fees and costs if the plaintiff is the prevailing party in such an action, except as prohibited by law.
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4. RETURN OF COMPANY MATERIALS
Upon separation from the Company, on Company’s earlier request during my business relationship, or at any time subsequent to my business relationship upon demand from the Company, I will immediately deliver to MetroMile, Inc., and will not keep in my possession, recreate, or deliver to anyone else, any and all Company property, including, but not limited to, Company Confidential Information, Associated Third Party Confidential Information, all devices and equipment belonging to the Company (including computers, handheld electronic devices, telephone equipment, and other electronic devices), all tangible embodiments of the Inventions, all electronically stored information and passwords to access such property, Company credit cards, records, data, notes, notebooks, reports, files, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, photographs, charts, any other documents and property, and reproductions of any of the foregoing items, including, without limitation, those records maintained pursuant to Section 2.D. I also consent to an exit interview to confirm my compliance with this Article 4.
5. TERMINATION CERTIFICATION
Upon separation from the Company, I agree to immediately sign and deliver to the Company the “Termination Certification” attached hereto as Exhibit C. I also agree to keep MetroMile, Inc. advised of my home and business address for a period of three (3) years after termination of my business relationship with the Company, so that the Company can contact me regarding my continuing obligations provided by this Agreement.
6. NOTIFICATION OF NEW EMPLOYER
In the event that I terminate my business relationship with the Company, I hereby grant consent to notification by the Company to my new employer about my obligations under this Agreement.
7. SOLICITATION OF EMPLOYEES
To the fullest extent permitted under applicable law, I agree that during my business relationship and for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether voluntary or involuntary, with or without cause, I will not directly or indirectly solicit any of the Company’s employees to leave their employment at the Company. I agree that nothing in this Article 7 shall affect my continuing obligations under this Agreement during and after this twelve (12) month period, including, without limitation, my obligations under Article 1.
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8. CONFLICT OF INTEREST GUIDELINES
I agree to diligently adhere to all policies of the Company, including the Company’s insider trading policies and the Company’s Conflict of Interest Guidelines. A copy of the Company’s current Conflict of Interest Guidelines is attached as Exhibit D hereto, but I understand that these Conflict of Interest Guidelines may be revised from time to time during my business relationship.
9. REPRESENTATIONS
Without limiting my obligations under Section 2.E above, I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent and warrant that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my business relationship with the Company. I hereby represent and warrant that I have not entered into, and I will not enter into, any oral or written agreement in conflict herewith.
10. AUDIT
I acknowledge that I have no reasonable expectation of privacy in any computer, technology system, email, handheld device, telephone, voicemail, or documents that are used to conduct the business of the Company. All information, data, and messages created, received, sent, or stored in these systems are, at all times, the property of the Company. As such, the Company has the right to audit and search all such items and systems, without further notice to me, to ensure that the Company is licensed to use the software on the Company’s devices in compliance with the Company’s software licensing policies, to ensure compliance with the Company’s policies, and for any other business-related purposes in the Company’s sole discretion. I understand that I am not permitted to add any unlicensed, unauthorized, or non-compliant applications to the Company’s technology systems, including, without limitation, open source or free software not authorized by the Company, and that I shall refrain from copying unlicensed software onto the Company’s technology systems or using non-licensed software or websites. I understand that it is my responsibility to comply with the Company’s policies governing use of the Company’s documents and the internet, email, telephone, and technology systems to which I will have access in connection with my business relationship.
I am aware that the Company has or may acquire software and systems that are capable of monitoring and recording all network traffic to and from any computer I may use. The Company reserves the right to access, review, copy, and delete any of the information, data, or messages accessed through these systems with or without notice to me and/or in my absence. This includes, but is not limited to, all e-mail messages sent or received, all website visits, all chat sessions, all news group activity (including groups visited, messages read, and postings by me), and all file transfers into and out of the Company’s internal networks. The Company further reserves the right to retrieve previously deleted messages from e-mail or voicemail and monitor usage of the Internet, including websites visited and any information I have downloaded. In addition, the Company may review Internet and technology systems activity and analyze usage patterns, and may choose to publicize this data to assure that technology systems are devoted to legitimate business purposes.
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11. MISCELLANEOUS
A. Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by the laws of the State of California without regard to California’s conflicts of law rules that may result in the application of the laws of any jurisdiction other than California. To the extent that any lawsuit is permitted under this Agreement, I hereby expressly consent to the personal and exclusive jurisdiction and venue of the state and federal courts located in California for any lawsuit filed against me by the Company.
B. Assignability. This Agreement will be binding upon my heirs, executors, assigns, administrators, and other legal representatives, and will be for the benefit of the Company, its successors, and its assigns. There are no intended third-party beneficiaries to this Agreement, except as may be expressly otherwise stated. Notwithstanding anything to the contrary herein, MetroMile, Inc. may assign this Agreement and its rights and obligations under this Agreement to any successor to all or substantially all of MetroMile, Inc.’s relevant assets, whether by merger, consolidation, reorganization, reincorporation, sale of assets or stock, or otherwise.
C. Entire Agreement. This Agreement, together with the Exhibits herein and any executed written offer letter between me and the Company, to the extent such materials are not in conflict with this Agreement, sets forth the entire agreement and understanding between the Company and me with respect to the subject matter herein and supersedes all prior written and oral agreements, discussions, or representations between us, including, but not limited to, any representations made during my interview(s) or relocation negotiations. I represent and warrant that I am not relying on any statement or representation not contained in this Agreement. Any subsequent change or changes in my duties, salary, or compensation will not affect the validity or scope of this Agreement.
D. Headings. Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.
E. Severability. If a court or other body of competent jurisdiction finds, or the Parties mutually believe, any provision of this Agreement, or portion thereof, to be invalid or unenforceable, such provision will be enforced to the maximum extent permissible so as to effect the intent of the Parties, and the remainder of this Agreement will continue in full force and effect.
F. Modification, Waiver. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in a writing signed by the President or CEO of MetroMile, Inc. and me. Waiver by MetroMile, Inc. of a breach of any provision of this Agreement will not operate as a waiver of any other or subsequent breach.
G. Survivorship. The rights and obligations of the parties to this Agreement will survive termination of my business relationship with the Company.
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EXHIBIT A
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
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☐ No inventions or improvements
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EXHIBIT B
CALIFORNIA LABOR CODE SECTION 2870
INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT
“(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.”
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EXHIBIT C
METROMILE, INC. TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, any other documents or property, or reproductions of any and all aforementioned items belonging to MetroMile, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”).
I further certify that I have complied with all the terms of the Company’s Confidential Information and Invention Assignment Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein) conceived or made by me (solely or jointly with others), as covered by that agreement.
I further agree that, in compliance with the Confidential Information and Invention Assignment Agreement, I will preserve as confidential all Company Confidential Information and Associated Third Party Confidential Information, including trade secrets, confidential knowledge, data, or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, databases, other original works of authorship, customer lists, business plans, financial information, or other subject matter pertaining to any business of the Company or any of its employees, clients, consultants, or licensees.
I also agree that for twelve (12) months from this date, I will not directly or indirectly solicit any of the Company’s employees to leave their employment at the Company. I agree that nothing in this paragraph shall affect my continuing obligations under the Confidential Information and Invention Assignment Agreement during and after this twelve (12) month period, including, without limitation, my obligations under Article 1 (Confidentiality) thereof.
After terminating my business relationship with the Company, I will be employed by ___________________________________________________ in the position of ______________________________________________________.
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EXHIBIT D
METROMILE, INC. CONFLICT OF INTEREST GUIDELINES
It is the policy of MetroMile, Inc. to conduct its affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees, and independent contractors must avoid activities that are in conflict, or give the appearance of being in conflict, with these principles and with the interests of the Company. The following are potentially compromising situations that must be avoided:
1. Revealing confidential information to outsiders or misusing confidential information. Unauthorized divulging of information is a violation of this policy whether or not for personal gain and whether or not harm to the Company is intended. (The Confidential Information and Invention Assignment Agreement elaborates on this principle and is a binding agreement.)
2. Accepting or offering substantial gifts, excessive entertainment, favors, or payments that may be deemed to constitute undue influence or otherwise be improper or embarrassing to the Company.
3. Participating in civic or professional organizations that might involve divulging confidential information of the Company.
4. Initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or is or appears to be a personal or social involvement.
5. Initiating or approving any form of personal or social harassment of employees.
6. Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company.
7. Borrowing from or lending to employees, customers, or suppliers.
8. Acquiring real estate of interest to the Company.
9. Improperly using or disclosing to the Company any proprietary information or trade secrets of any former or concurrent employer or other person or entity with whom obligations of confidentiality exist.
10. Unlawfully discussing prices, costs, customers, sales, or markets with competing companies or their employees.
11. Making any unlawful agreement with distributors with respect to prices.
12. Improperly using or authorizing the use of any inventions that are the subject of patent claims of any other person or entity.
13. Engaging in any conduct that is not in the best interest of the Company.
Each officer, employee, and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in discharge without warning.
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Exhibit 10.13
METROMILE, INC.
AT-WILL EMPLOYMENT, CONFIDENTIAL INFORMATION,
INVENTION ASSIGNMENT, AND ARBITRATION AGREEMENT
As a condition of my employment with MetroMile, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”), and in consideration of my employment with the Company and my receipt of the compensation now and hereafter paid to me by Company, I agree to the following provisions of this MetroMile, Inc. At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement (this “Agreement”):
1. AT-WILL EMPLOYMENT
I UNDERSTAND AND ACKNOWLEDGE THAT MY EMPLOYMENT WITH THE COMPANY IS FOR NO SPECIFIED TERM AND CONSTITUTES “AT-WILL” EMPLOYMENT. I ALSO UNDERSTAND THAT ANY REPRESENTATION TO THE CONTRARY IS UNAUTHORIZED AND NOT VALID UNLESS IN WRITING AND SIGNED BY THE PRESIDENT OR CEO OF METROMILE, INC. ACCORDINGLY, I ACKNOWLEDGE THAT MY EMPLOYMENT RELATIONSHIP MAY BE TERMINATED AT ANY TIME, WITH OR WITHOUT GOOD CAUSE OR FOR ANY OR NO CAUSE, AT MY OPTION OR AT THE OPTION OF THE COMPANY, WITH OR WITHOUT NOTICE. I FURTHER ACKNOWLEDGE THAT THE COMPANY MAY MODIFY JOB TITLES, SALARIES, AND BENEFITS FROM TIME TO TIME AS IT DEEMS NECESSARY.
2. CONFIDENTIALITY
A. Definition of Confidential Information. I understand that “Company Confidential Information” means information that the Company has or will develop, acquire, create, compile, discover or own, that has value in or to the Company’s business which is not generally known and which the Company wishes to maintain as confidential. Company Confidential Information includes both information disclosed by the Company to me, and information developed or learned by me during the course of my employment with Company. Company Confidential Information also includes all information of which the unauthorized disclosure could be detrimental to the interests of Company, whether or not such information is identified as Company Confidential Information. By example, and without limitation, Company Confidential Information includes any and all non-public information that relates to the actual or anticipated business and/or products, research or development of the Company, or to the Company’s technical data, trade secrets, or know-how, including, but not limited to, research, product plans, or other information regarding the Company’s products or services and markets therefor, customer lists and customers (including, but not limited to, customers of the Company on which I called or with which I may become acquainted during the term of my employment), software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances, and other business information disclosed by the Company either directly or indirectly in writing, orally or by drawings or inspection of premises, parts, equipment, or other Company property. Notwithstanding the foregoing, Company Confidential Information shall not include any such information which I can establish (i) was publicly known or made generally available prior to the time of disclosure by Company to me; (ii) becomes publicly known or made generally available after disclosure by Company to me through no wrongful action or omission by me; or (iii) is in my rightful possession, without confidentiality obligations, at the time of disclosure by Company as shown by my then-contemporaneous written records. I understand that nothing in this Agreement is intended to limit employees’ rights to discuss the terms, wages, and working conditions of their employment, as protected by applicable law.
B. Nonuse and Nondisclosure. I agree that during and after my employment with the Company, I will hold in the strictest confidence, and take all reasonable precautions to prevent any unauthorized use or disclosure of Company Confidential Information, and I will not (i) use the Company Confidential Information for any purpose whatsoever other than for the benefit of the Company in the course of my employment, or (ii) disclose the Company Confidential Information to any third party without the prior written authorization of the President, CEO, or the Board of Directors of the Company. Prior to disclosure when compelled by applicable law; I shall provide prior written notice to the President, CEO, and General Counsel of MetroMile, Inc. (as applicable). I agree that I obtain no title to any Company Confidential Information, and that as between Company and myself, MetroMile, Inc. retains all Confidential Information as the sole property of MetroMile, Inc. I understand that my unauthorized use or disclosure of Company Confidential Information during my employment may lead to disciplinary action, up to and including immediate termination and legal action by the Company. I understand that my obligations under this Section 2.B shall continue after termination of my employment.
C. Former Employer Confidential Information. I agree that during my employment with the Company, I will not improperly use, disclose, or induce the Company to use any proprietary information or trade secrets of any former employer or other person or entity with which I have an obligation to keep in confidence. I further agree that I will not bring onto the Company’s premises or transfer onto the Company’s technology systems any unpublished document, proprietary information, or trade secrets belonging to any such third party unless disclosure to, and use by, the Company has been consented to in writing by such third party.
D. Third Party Information. I recognize that the Company has received and in the future will receive from third parties associated with the Company, e.g., the Company’s customers, suppliers, licensors, licensees, partners, or collaborators (“Associated Third Parties”), their confidential or proprietary information (“Associated Third Party Confidential Information”) subject to a duty on the Company’s part to maintain the confidentiality of such Associated Third Party Confidential Information and to use it only for certain limited purposes. By way of example, Associated Third Party Confidential Information may include the habits or practices of Associated Third Parties, the technology of Associated Third Parties, requirements of Associated Third Parties, and information related to the business conducted between the Company and such Associated Third Parties. I agree at all times during my employment with the Company and thereafter, that I owe the Company and its Associated Third Parties a duty to hold all such Associated Third Party Confidential Information in the strictest confidence, and not to use it or to disclose it to any person, firm, corporation, or other third party except as necessary in carrying out my work for the Company consistent with the Company’s agreement with such Associated Third Parties. I further agree to comply with any and all Company policies and guidelines that may be adopted from time to time regarding Associated Third Parties and Associated Third Party Confidential Information. I understand that my unauthorized use or disclosure of Associated Third Party Confidential Information or violation of any Company policies during my employment may lead to disciplinary action, up to and including immediate termination and legal action by the Company.
3. OWNERSHIP
A. Assignment of Inventions. As between Company and myself, I agree that all right, title, and interest in and to any and all copyrightable material, notes, records, drawings, designs, inventions, improvements, developments, discoveries and trade secrets conceived, discovered, authored, invented, developed or reduced to practice by me, solely or in collaboration with others, during the period of time I am in the employ of the Company (including during my off-duty hours), or with the use of Company’s equipment, supplies, facilities, or Company Confidential Information, and any copyrights, patents, trade secrets, mask work rights or other intellectual property rights relating to the foregoing, except as provided in 3.G below (collectively, “Inventions”), are the sole property of MetroMile, Inc. I also agree to promptly make full written disclosure to MetroMile, Inc. of any Inventions, and to deliver and assign and hereby irrevocably assign fully to MetroMile, Inc. all of my right, title and interest in and to Inventions. I agree that this assignment includes a present conveyance to MetroMile, Inc. of ownership of Inventions that are not yet in existence. I further acknowledge that all original works of authorship that are made by me (solely or jointly with others) within the scope of and during the period of my employment with the Company and that are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act. I understand and agree that the decision whether or not to commercialize or market any Inventions is within the Company’s sole discretion and for the Company’s sole benefit, and that no royalty or other consideration will be due to me as a result of the Company’s efforts to commercialize or market any such Inventions.
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B. Pre-Existing Materials. I have attached hereto as Exhibit A, a list describing all inventions, discoveries, original works of authorship, developments, improvements, trade secrets and other proprietary information or intellectual property rights owned by me or in which I have an interest prior to, or separate from, my employment with the Company and which are subject to California Labor Code Section 2870 (attached hereto as Exhibit B), and which relate to the Company’s proposed business, products, or research and development (“Prior Inventions”); or, if no such list is attached, I represent and warrant that there are no such Prior Inventions. Furthermore, I represent and warrant that if any Prior Inventions are included on Exhibit A, they will not materially affect my ability to perform all obligations under this Agreement. I will inform MetroMile, Inc. in writing before incorporating such Prior Inventions into any Invention or otherwise utilizing such Prior Invention in the course of my employment with the Company, and the Company is hereby granted a nonexclusive, royalty-free, perpetual, irrevocable, transferable worldwide license (with the right to grant and authorize sublicenses) to make, have made, use, import, offer for sale, sell, reproduce, distribute, modify, adapt, prepare derivative works of, display, perform, and otherwise exploit such Prior Inventions, without restriction, including, without limitation, as part of or in connection with such Invention, and to practice any method related thereto. I will not incorporate any invention, improvement, development, concept, discovery, work of authorship or other proprietary information owned by any third party into any Invention without MetroMile, Inc.’s prior written permission.
C. Moral Rights. Any assignment to MetroMile, Inc. of Inventions includes all rights of attribution, paternity, integrity, modification, disclosure and withdrawal, and any other rights throughout the world that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,” or the like (collectively, “Moral Rights”). To the extent that Moral Rights cannot be assigned under applicable law, I hereby waive and agree not to enforce any and all Moral Rights, including, without limitation, any limitation on subsequent modification, to the extent permitted under applicable law.
D. Maintenance of Records. I agree to keep and maintain adequate, current, accurate, and authentic written records of all Inventions made by me (solely or jointly with others) during the term of my employment with the Company. The records will be in the form of notes, sketches, drawings, electronic files, reports, or any other format that may be specified by the Company. As between Company and myself, the records are and will be available to and remain the sole property of MetroMile, Inc. at all times.
E. Further Assurances. I agree to assist the Company, or its designee, at the Company’s expense, in every proper way to secure the Company’s rights in the Inventions in any and all countries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments, and all other instruments that the Company shall deem proper or necessary in order to apply for, register, obtain, maintain, defend, and enforce such rights, and in order to deliver, assign and convey to the Company, its successors, assigns, and nominees the sole and exclusive rights, title, and interest in and to all Inventions, and testifying in a suit or other proceeding relating to such Inventions. I further agree that my obligations under this Section 3.E shall continue after the termination of this Agreement.
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F. Attorney-in-Fact. I agree that, if the Company is unable because of my unavailability, mental or physical incapacity, or for any other reason to secure my signature with respect to any Inventions, including, without limitation, for the purpose of applying for or pursuing any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned to MetroMile, Inc. in Section 3.A, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for and on my behalf to execute and file any papers and oaths, and to do all other lawfully permitted acts with respect to such Inventions to further the prosecution and issuance of patents, copyright and mask work registrations with the same legal force and effect as if executed by me. This power of attorney shall be deemed coupled with an interest, and shall be irrevocable.
G. Exception to Assignments. I UNDERSTAND THAT THE PROVISIONS OF THIS AGREEMENT REQUIRING ASSIGNMENT OF INVENTIONS TO METROMILE, INC. DO NOT APPLY TO ANY INVENTION THAT QUALIFIES FULLY UNDER THE PROVISIONS OF CALIFORNIA LABOR CODE SECTION 2870 (ATTACHED HERETO AS EXHIBIT B). I WILL ADVISE METROMILE, INC. PROMPTLY IN WRITING OF ANY INVENTIONS THAT I BELIEVE MEET THE CRITERIA IN CALIFORNIA LABOR CODE SECTION 2870 AND ARE NOT OTHERWISE DISCLOSED ON EXHIBIT A.
4. CONFLICTING OBLIGATIONS
A. Current Obligations. I agree that during the term of my employment with the Company, I will not engage in or undertake any other employment, occupation, consulting relationship, or commitment that is directly related to the business in which the Company is now involved or becomes involved or has plans to become involved, nor will I engage in any other activities that conflict with my obligations to the Company.
B. Prior Relationships. Without limiting Section 4.A, I represent and warrant that I have no other agreements, relationships, or commitments to any other person or entity that conflict with the provisions of this Agreement, my obligations to the Company under this Agreement, or my ability to become employed and perform the services for which I am being hired by the Company. I further agree that if I have signed a confidentiality agreement or similar type of agreement with any former employer or other entity, I will comply with the terms of any such agreement to the extent that its terms are lawful under applicable law. I represent and warrant that after undertaking a careful search (including searches of my computers, cell phones, electronic devices, and documents), I have returned all property and confidential information belonging to all prior employers (and/or other third parties I have performed services for in accordance with the terms of my applicable agreement). Moreover, I agree to fully indemnify the Company, its directors, officers, agents, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns for all verdicts, judgments, settlements, and other losses incurred by any of them resulting from my breach of my obligations under any agreement with a third party to which I am a party or obligation to which I am bound, as well as any reasonable attorneys’ fees and costs if the plaintiff is the prevailing party in such an action, except as prohibited by law.
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5. RETURN OF COMPANY MATERIALS
Upon separation from employment with the Company, on Company’s earlier request during my employment, or at any time subsequent to my employment upon demand from the Company, I will immediately deliver to MetroMile, Inc., and will not keep in my possession, recreate, or deliver to anyone else, any and all Company property, including, but not limited to, Company Confidential Information, Associated Third Party Confidential Information, all devices and equipment belonging to the Company (including computers, handheld electronic devices, telephone equipment, and other electronic devices), all tangible embodiments of the Inventions, all electronically stored information and passwords to access such property, Company credit cards, records, data, notes, notebooks, reports, files, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, photographs, charts, any other documents and property, and reproductions of any of the foregoing items, including, without limitation, those records maintained pursuant to Section 3.D. I also consent to an exit interview to confirm my compliance with this Article 5.
6. TERMINATION CERTIFICATION
Upon separation from employment with the Company, I agree to immediately sign and deliver to the Company the “Termination Certification” attached hereto as
Exhibit C. I also agree to keep MetroMile, Inc. advised of my home and business address for a period of three (3) years after termination of my employment with the Company, so that the Company can contact me regarding my continuing obligations provided by this Agreement.
7. NOTIFICATION OF NEW EMPLOYER
In the event that I leave the employ of the Company, I hereby grant consent to notification by the Company to my new employer about my obligations under this Agreement.
8. SOLICITATION OF EMPLOYEES
To the fullest extent permitted under applicable law, I agree that during my employment and for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether voluntary or involuntary, with or without cause, I will not directly or indirectly solicit any of the Company’s employees to leave their employment at the Company. I agree that nothing in
this Article 8 shall affect my continuing obligations under this Agreement during and after this twelve (12) month period, including, without limitation, my obligations under Article 2.
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9. CONFLICT OF INTEREST GUIDELINES
I agree to diligently adhere to all policies of the Company, including the Company’s insider trading policies and the Company’s Conflict of Interest Guidelines. A copy of the Company’s current Conflict of Interest Guidelines is attached as Exhibit D hereto, but I understand that these Conflict of Interest Guidelines may be revised from time to time during my employment.
10. REPRESENTATIONS
Without limiting my obligations under Section 3.E above, I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent and warrant that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I hereby represent and warrant that I have not entered into, and I will not enter into, any oral or written agreement in conflict herewith.
11. AUDIT
I acknowledge that I have no reasonable expectation of privacy in any computer, technology system, email, handheld device, telephone, voicemail, or documents that are used to conduct the business of the Company. All information, data, and messages created, received, sent, or stored in these systems are, at all times, the property of the Company. As such, the Company has the right to audit and search all such items and systems, without further notice to me, to ensure that the Company is licensed to use the software on the Company’s devices in compliance with the Company’s software licensing policies, to ensure compliance with the Company’s policies, and for any other business-related purposes in the Company’s sole discretion. I understand that I am not permitted to add any unlicensed, unauthorized, or non-compliant applications to the Company’s technology systems, including, without limitation, open source or free software not authorized by the Company, and that I shall refrain from copying unlicensed software onto the Company’s technology systems or using non-licensed software or websites. I understand that it is my responsibility to comply with the Company’s policies governing use of the Company’s documents and the internet, email, telephone, and technology systems to which I will have access in connection with my employment.
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I am aware that the Company has or may acquire software and systems that are capable of monitoring and recording all network traffic to and from any computer I may use. The Company reserves the right to access, review, copy, and delete any of the information, data, or messages accessed through these systems with or without notice to me and/or in my absence. This includes, but is not limited to, all e-mail messages sent or received, all website visits, all chat sessions, all news group activity (including groups visited, messages read, and postings by me), and all file transfers into and out of the Company’s internal networks. The Company further reserves the right to retrieve previously deleted messages from e-mail or voicemail and monitor usage of the Internet, including websites visited and any information I have downloaded. In addition, the Company may review Internet and technology systems activity and analyze usage patterns, and may choose to publicize this data to assure that technology systems are devoted to legitimate business purposes.
12. ARBITRATION AND EQUITABLE RELIEF
A. Arbitration. IN CONSIDERATION OF MY EMPLOYMENT WITH THE COMPANY, ITS PROMISE TO ARBITRATE ALL EMPLOYMENT-RELATED DISPUTES, AND MY RECEIPT OF THE COMPENSATION, PAY RAISES, AND OTHER BENEFITS PAID TO ME BY THE COMPANY, AT PRESENT AND IN THE FUTURE, I AGREE THAT ANY AND ALL CONTROVERSIES, CLAIMS, OR DISPUTES WITH ANYONE (INCLUDING THE COMPANY AND ANY EMPLOYEE, OFFICER, DIRECTOR, SHAREHOLDER, OR BENEFIT PLAN OF THE COMPANY, IN THEIR CAPACITY AS SUCH OR OTHERWISE), ARISING OUT OF, RELATING TO, OR RESULTING FROM MY EMPLOYMENT WITH THE COMPANY OR THE TERMINATION OF MY EMPLOYMENT WITH THE COMPANY, INCLUDING ANY BREACH OF THIS AGREEMENT, SHALL BE SUBJECT TO BINDING ARBITRATION UNDER THE ARBITRATION PROVISIONS SET FORTH IN CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 1280 THROUGH 1294.2, INCLUDING SECTION 1281.8 (THE “ACT”), AND PURSUANT TO CALIFORNIA LAW. THE FEDERAL ARBITRATION ACT SHALL CONTINUE TO APPLY WITH FULL FORCE AND EFFECT NOTWITHSTANDING THE APPLICATION OF PROCEDURAL RULES SET FORTH IN THE ACT. DISPUTES THAT I AGREE TO ARBITRATE, AND THEREBY AGREE TO WAIVE ANY RIGHT TO A TRIAL BY JURY, INCLUDE ANY STATUTORY CLAIMS UNDER LOCAL, STATE, OR FEDERAL LAW, INCLUDING, BUT NOT LIMITED TO, CLAIMS UNDER TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, TILE AMERICANS WITH DISABILITIES ACT OF 1990, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE OLDER WORKERS BENEFIT PROTECTION ACT, THE SARBANES-OXLEY ACT, THE WORKER ADJUSTMENT AND RETRAINING NOTIFICATION ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, THE FAMILY AND MEDICAL LEAVE ACT, THE CALIFORNIA FAMILY RIGHTS ACT, THE CALIFORNIA LABOR CODE, CLAIMS OF HARASSMENT, DISCRIMINATION, AND WRONGFUL TERMINATION, AND ANY STATUTORY OR COMMON LAW CLAIMS. NOTWITHSTANDING THE FOREGOING, I UNDERSTAND THAT NOTHING IN THIS AGREEMENT CONSTITUTES A WAIVER OF MY RIGHTS UNDER SECTION 7 OF THE NATIONAL LABOR RELATIONS ACT. I FURTHER UNDERSTAND THAT THIS AGREEMENT TO ARBITRATE ALSO APPLIES TO ANY DISPUTES THAT THE COMPANY MAY HAVE WITH ME.
B. Procedure. I AGREE THAT ANY ARBITRATION WILL BE ADMINISTERED BY JUDICIAL ARBITRATION & MEDIATION SERVICES, INC. (“JAMS”), PURSUANT TO ITS EMPLOYMENT ARBITRATION RULES & PROCEDURES (THE “JAMS RULES”), WHICH ARE AVAILABLE AT http://www.jamsadr.com/rules-employment-arbitration/ AND FROM HUMAN RESOURCES. I AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO DECIDE ANY MOTIONS BROUGHT BY ANY PARTY TO THE ARBITRATION, INCLUDING MOTIONS FOR SUMMARY JUDGMENT AND/OR ADJUDICATION, AND MOTIONS TO DISMISS AND DEMURRERS, APPLYING THE STANDARDS SET FORTH UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. I AGREE THAT THE ARBITRATOR SHALL ISSUE A WRITTEN DECISION ON THE MERITS. I ALSO AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO AWARD ANY REMEDIES AVAILABLE UNDER APPLICABLE LAW, AND THAT THE ARBITRATOR SHALL AWARD ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, WHERE PROVIDED BY APPLICABLE LAW. I AGREE THAT THE DECREE OR AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED AS A FINAL AND BINDING JUDGMENT IN ANY COURT HAVING JURISDICTION THEREOF. I UNDERSTAND THAT THE COMPANY WILL PAY FOR ANY ADMINISTRATIVE OR HEARING FEES CHARGED BY THE ARBITRATOR OR JAMS EXCEPT THAT I SHALL PAY ANY FILING FEES ASSOCIATED WITH ANY ARBITRATION THAT I INITIATE, BUT ONLY SO MUCH OF THE FILING FEES AS I WOULD HAVE INSTEAD PAID HAD I FILED A COMPLAINT IN A COURT OF LAW. I AGREE THAT THE ARBITRATOR SHALL ADMINISTER AND CONDUCT ANY ARBITRATION IN ACCORDANCE WITH CALIFORNIA LAW, INCLUDING THE CALIFORNIA CODE OF CIVIL PROCEDURE AND THE CALIFORNIA EVIDENCE CODE, AND THAT THE ARBITRATOR SHALL APPLY SUBSTANTIVE AND PROCEDURAL CALIFORNIA LAW TO ANY DISPUTE OR CLAIM, WITHOUT REFERENCE TO RULES OF CONFLICT OF LAW. TO THE EXTENT THAT THE JAMS RULES CONFLICT WITH CALIFORNIA LAW, CALIFORNIA LAW SHALL TAKE PRECEDENCE. I AGREE THAT ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE CONDUCTED IN SAN FRANCISCO COUNTY, CALIFORNIA.
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C. Remedy. EXCEPT AS PROVIDED BY THE ACT AND THIS AGREEMENT, ARBITRATION SHALL BE THE SOLE, EXCLUSIVE, AND FINAL REMEDY FOR ANY DISPUTE BETWEEN ME AND THE COMPANY. ACCORDINGLY, EXCEPT AS PROVIDED FOR BY THE ACT AND THIS AGREEMENT, NEITHER I NOR THE COMPANY WILL BE PERMITTED TO PURSUE COURT ACTION REGARDING CLAIMS THAT ARE SUBJECT TO ARBITRATION.
D. Administrative Relief. I UNDERSTAND THAT THIS AGREEMENT DOES NOT PROHIBIT ME FROM PURSUING AN ADMINISTRATIVE CLAIM WITH A LOCAL, STATE, OR FEDERAL ADMINISTRATIVE BODY OR GOVERNMENT AGENCY THAT IS AUTHORIZED TO ENFORCE OR ADMINISTER LAWS RELATED TO EMPLOYMENT, INCLUDING, BUT NOT LIMITED TO, THE DEPARTMENT OF FAIR EMPLOYMENT AND HOUSING, THE EQUAL EMPLOYMENT OPPORTUNITY COMMISSION, THE NATIONAL LABOR RELATIONS BOARD, OR THE WORKERS’ COMPENSATION BOARD. THIS AGREEMENT DOES, HOWEVER, PRECLUDE ME FROM PURSUING COURT ACTION REGARDING ANY SUCH CLAIM, EXCEPT AS PERMITTED BY LAW.
E. Voluntary Nature of Agreement. I ACKNOWLEDGE AND AGREE THAT I AM EXECUTING THIS AGREEMENT VOLUNTARILY AND WITHOUT ANY DURESS OR UNDUE INFLUENCE BY THE COMPANY OR ANYONE ELSE. I ACKNOWLEDGE AND AGREE THAT I HAVE RECEIVED A COPY OF THE TEXT OF CALIFORNIA LABOR CODE SECTION 2870 IN EXHIBIT B. I FURTHER ACKNOWLEDGE AND AGREE THAT I HAVE CAREFULLY READ THIS AGREEMENT AND THAT I HAVE ASKED ANY QUESTIONS NEEDED FOR ME TO UNDERSTAND THE TERMS, CONSEQUENCES, AND BINDING EFFECT OF THIS AGREEMENT AND FULLY UNDERSTAND IT, INCLUDING THAT I AM WAIVING MY RIGHT TO A JURY TRIAL. FINALLY, I AGREE THAT I HAVE BEEN PROVIDED AN OPPORTUNITY TO SEEK THE ADVICE OF AN ATTORNEY OF MY CHOICE BEFORE SIGNING THIS AGREEMENT.
13. MISCELLANEOUS
A. Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by the laws of the State of California without regard to California’s conflicts of law rules that may result in the application of the laws of any jurisdiction other than California. To the extent that any lawsuit is permitted under this Agreement, I hereby expressly consent to the personal and exclusive jurisdiction and venue of the state and federal courts located in California for any lawsuit filed against me by the Company.
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B. Assignability. This Agreement will be binding upon my heirs, executors, assigns, administrators, and other legal representatives, and will be for the benefit of the Company, its successors, and its assigns. There are no intended third-party beneficiaries to this Agreement, except as may be expressly otherwise stated. Notwithstanding anything to the contrary herein, MetroMile, Inc. may assign this Agreement and its rights and obligations under this Agreement to any successor to all or substantially all of MetroMile, Inc.’s relevant assets, whether by merger, consolidation, reorganization, reincorporation, sale of assets or stock, or otherwise.
C. Entire Agreement. This Agreement, together with the Exhibits herein and any executed written offer letter between me and the Company, to the extent such materials are not in conflict with this Agreement, sets forth the entire agreement and understanding between the Company and me with respect to the subject matter herein and supersedes all prior written and oral agreements, discussions, or representations between us, including, but not limited to, any representations made during my interview(s) or relocation negotiations. I represent and warrant that I am not relying on any statement or representation not contained in this Agreement. Any subsequent change or changes in my duties, salary, or compensation will not affect the validity or scope of this Agreement.
D. Headings. Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.
E. Severability. if a court or other body of competent jurisdiction finds, or the Parties mutually believe, any provision of this Agreement, or portion thereof, to be invalid or unenforceable, such provision will be enforced to the maximum extent permissible so as to effect the intent of the Parties, and the remainder of this Agreement will continue in full force and effect.
F. Modification, Waiver. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in a writing signed by the President or CEO of MetroMile, Inc. and me. Waiver by MetroMile, Inc. of a breach of any provision of this Agreement will not operate as a waiver of any other or subsequent breach.
G. Survivorship. The rights and obligations of the parties to this Agreement will survive termination of my employment with the Company.
Date: 2/7/13 |
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/s/ Dan Preston |
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Dan Preston |
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Witness: |
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/s/ Tavie Armfield |
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Name (typed or printed) Tavie Armfield |
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EXHIBIT A
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
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Identifying Number or
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[See Attached]
___ No inventions or improvements
1 Additional Sheets Attached
Date 2/7/13 |
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Signature |
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/s/ Dan Preston |
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Dan Preston |
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Name of Employee (typed or printed) |
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Dan Preston |
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List of Prior Inventions
[________________________________] |
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/s/ Dan Preston |
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EXHIBIT B
CALIFORNIA LABOR CODE SECTION 2870
INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT
“(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.”
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EXHIBIT C
METROMILE, INC. TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, any other documents or property, or reproductions of any and all aforementioned items belonging to MetroMile, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”).
I further certify that I have complied with all the terms of the Company’s At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein) conceived or made by me (solely or jointly with others), as covered by that agreement.
I further agree that, in compliance with the At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement, I will preserve as confidential all Company Confidential Information and Associated Third Party Confidential Information, including trade secrets, confidential knowledge, data, or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, databases, other original works of authorship, customer lists, business plans, financial information, or other subject matter pertaining to any business of the Company or any of its employees, clients, consultants, or licensees.
I also agree that for twelve (12) months from this date, I will not directly or indirectly solicit any of the Company’s employees to leave their employment at the Company. I agree that nothing in this paragraph shall affect my continuing obligations under the At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement during and after this twelve (12) month period, including, without limitation, my obligations under Article 2 (Confidentiality) thereof.
After leaving the Company’s employment, I will be employed by ________________________________________________________________ in the
position of ________________________________________________________________.
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EXHIBIT D
METROMILE, INC. CONFLICT OF INTEREST GUIDELINES
It is the policy of MetroMile, Inc. to conduct its affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees, and independent contractors must avoid activities that are in conflict, or give the appearance of being in conflict, with these principles and with the interests of the Company. The following are potentially compromising situations that must be avoided:
1. Revealing confidential information to outsiders or misusing confidential information. Unauthorized divulging of information is a violation of this policy whether or not for personal gain and whether or not harm to the Company is intended. (The At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement elaborates on this principle and is a binding agreement.)
2. Accepting or offering substantial gifts, excessive entertainment, favors, or payments that may be deemed to constitute undue influence or otherwise be improper or embarrassing to the Company.
3. Participating in civic or professional organizations that might involve divulging confidential information of the Company.
4. Initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or is or appears to be a personal or social involvement.
5. Initiating or approving any form of personal or social harassment of employees.
6. Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company.
7. Borrowing from or lending to employees, customers, or suppliers.
8. Acquiring real estate of interest to the Company.
9. Improperly using or disclosing to the Company any proprietary information or trade secrets of any former or concurrent employer or other person or entity with whom obligations of confidentiality exist.
10. Unlawfully discussing prices, costs, customers, sales, or markets with competing companies or their employees.
11. Making any unlawful agreement with distributors with respect to prices.
12. Improperly using or authorizing the use of any inventions that are the
subject of patent claims of any other person or entity.
13. Engaging in any conduct that is not in the best interest of the Company.
Each officer, employee, and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in discharge without warning.
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Exhibit 10.14
METROMlLE, INC. AT-WILL EMPLOYMENT, CONFIDENTIAL INFORMATION,
INVENTION ASSIGNMENT, AND ARBITRATION AGREEMENT
As a condition of my employment with MetroMile, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”), and in consideration of my employment with the Company and my receipt of the compensation now and hereafter paid to me by Company, I agree to the following provisions of this MetroMile, Inc. At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement (this “Agreement”):
1. AT-WILL EMPLOYMENT
l UNDERSTAND AND ACKNOWLEDGE THAT MY EMPLOYMENT WITH THE COMPANY IS FOR NO SPECIFIED TERM AND CONSTITUTES “AT-WILL” EMPLOYMENT. I ALSO UNDERSTAND THAT ANY REPRESENTATION TO THE CONTRARY IS UNAUTHORIZED AND NOT VALID UNLESS IN WRITING AND SIGNED BY THE PRESIDENT OR CEO OF METROMILE, INC. ACCORDINGLY, I ACKNOWLEDGE THAT MY EMPLOYMENT RELATIONSHIP MAY BE TERMINATED AT ANY TIME, WITH OR WITHOUT GOOD CAUSE OR FOR ANY OR NO CAUSE, AT MY OPTION OR AT THE OPTION OF THE COMPANY, WITH OR WITHOUT NOTICE. I FURTHER ACKNOWLEDGE THAT THE COMPANY MAY MODIFY JOB TITLES, SALARIES, AND BENEFITS FROM TIME TO TIME AS TT DEEMS NECESSARY.
2. CONFIDENTIALITY
A. Definition of Confidential Information. I understand that “Company Confidential Information” means information (including any and all combinations of individual items of information) that the Company has or will develop, acquire, create, compile, discover or own, that has value in or to the Company’ s business which is not generally known and which the Company wishes to maintain as confidential. Company Confidential Information includes both information disclosed by the Company to me, and information developed or learned by me during the course of my employment with Company. Company Confidential Information also includes all information of which the unauthorized disclosure could be detrimental to the interests of Company, whether or not such information is identified as Company Confidential Information. By example, and without limitation, Company Confidential Information includes any and all non-public information that relates to the actual or anticipated business and/or products, research or development of the Company, or to the Company’s technical data, trade secrets, or know-how, including, but not limited to, research, product plans, or other information regarding the Company’s products or services and markets therefor, customer lists and customers (including, but not limited to, customers of the Company on which I called or with which J may become acquainted during the term of my employment), software, developments, inventions, discoveries, ideas, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances, and other business information disclosed by the Company either directly or indirectly in writing, orally or by drawings or inspection of premises, parts, equipment, or other Company property. Notwithstanding the foregoing, Company Confidential Information shall not include any such information which I can establish (i) was publicly known or made generally available prior to the time of disclosure by Company to me; (ii) becomes publicly known or made generally available after disclosure by Company to me through no wrongful action or omission by me; or (iii) is in my rightful possession, without confidentiality obligations, at the time of disclosure by Company as shown by my then-contemporaneous written records; provided that any combination of individual items of information shall not be deemed to be within any of the foregoing exceptions merely because one or more of the individual items are within such exception, unless the combination as a whole is within such exception. I understand that nothing in this Agreement is intended to limit employees’ rights to discuss the terms, wages, and working conditions of their employment, as protected by applicable law.
B. Nonuse and Nondisclosure. I agree that during and after my employment with the Company, I will hold in the strictest confidence, and take all reasonable precautions to prevent any unauthorized use or disclosure of Company Confidential Information, and I will not (i) use the Company Confidential Information for any purpose whatsoever other than for the benefit of the Company in the course of my employment, or (ii) disclose the Company Confidential Information to any third party without the prior written authorization of the President, CEO, or the Board of Directors of the Company. Prior to disclosure when compelled by applicable law; I shall provide prior written notice to the President, CEO, and General Counsel of MetroMile, Inc. (as applicable). I agree that I obtain no title to any Company Confidential Information, and that as between Company and myself, MetroMile, Inc. retains all Confidential Information as the sole property of MetroMile, Inc. I understand that my unauthorized use or disclosure of Company Confidential Information during my employment may lead to disciplinary action, up to and including immediate termination and legal action by the Company. I understand that my obligations under this Section 2.B shall continue after tem1ination of my employment.
C. Former Employer Confidential Information. I agree that during my employment with the Company, I will not improperly use, disclose, or induce the Company to use any proprietary information or trade secrets of any former employer or other person or entity with which I have an obligation to keep in confidence. I further agree that I will not bring onto the Company’s premises or transfer onto the Company’s technology systems any unpublished document, proprietary information, or trade secrets belonging to any such third party unless disclosure to, and use by, the Company has been consented to in writing by such third party.
D. Third Party Information. I recognize that the Company has received and in the future will receive from third parties associated with the Company, e.g., the Company’s customers, suppliers, licensors, licensees, partners, or collaborators (“Associated Third Parties”), their confidential or proprietary information (“Associated Third Party Confidential Information”) subject to a duty on the Company’s part to maintain the confidentiality of such Associated Third Party Confidential Information and to use it only for certain limited purposes. By way of example, Associated Third Party Confidential Information may include the habits or practices of Associated Third Parties, the technology of Associated Third Parties, requirements of Associated Third Parties, and information related to the business conducted between the Company and such Associated Third Parties. I agree at all times during my employment with the Company and thereafter, that I owe the Company and its Associated Third Parties a duty to hold all such Associated Third Party Confidential Information in the strictest confidence, and not to use it or to disclose it to any person, firm, corporation, or other third party except as necessary in carrying out my work for the Company consistent with the Company’s agreement with such Associated Third Parties. I further agree to comply with any and all Company policies and guidelines that may be adopted from time to time regarding Associated Third Parties and Associated Third Party Confidential Information. J understand that my unauthorized use or disclosure of Associated Third Party Confidential Information or violation of any Company policies during my employment may lead to disciplinary action, up to and including immediate tem1ination and legal action by the Company.
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3. OWNERSHIP
A. Assignment of Inventions. As between the Company and myself, I agree that all right, title, and interest in and to any and all copyrightable material, notes, records, drawings, designs, logos, inventions, improvements, developments, discoveries, ideas and trade secrets conceived, discovered, authored, invented, developed or reduced to practice by me, solely or in collaboration with others, during the period of time I am in the employ of the Company (including during my off-duty hours), or with the use of Company’s equipment, supplies, facilities, or Company Confidential Information, and any copyrights, patents, trade secrets, mask work rights or other intellectual property rights relating to the foregoing, except as provided in Section 3.G below (collectively, “Inventions”), are the sole property of MetroMile, Inc. I also agree to promptly make full written disclosure to MetroMile, Inc. of any Inventions, and to deliver and assign and hereby irrevocably assign fully to MetroMile, Inc. all of my right, title and interest in and to Inventions. I agree that this assignment includes a present conveyance to MetroMile, Inc. of ownership of Inventions that are not yet in existence. I further acknowledge that all original works of authorship that are made by me (solely or jointly with others) within the scope of and during the period of my employment with the Company and that are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act. I understand and agree that the decision whether or not to commercialize or market any Inventions is within the Company’s sole discretion and for the Company’s sole benefit, and that no royalty or other consideration will be due to me as a result of the Company’s efforts to commercialize or market any such Inventions.
B. Pre-Existing Materials. I will inform MetroMile, Inc. in writing before incorporating any inventions, discoveries, ideas, original works of authorship, developments, improvements, trade secrets and other proprietary information or intellectual property rights owned by me or in which I have an interest prior to, or separate from, my employment with the Company, including, without limitation, any such inventions that are subject to California Labor Code Section 2870 (attached hereto as Exhibit B) (“Prior Inventions”) into any Invention or otherwise utilizing any such Prior Invention in the course of my employment with the Company; and the Company is hereby granted a nonexclusive, royalty-free, perpetual, irrevocable, transferable worldwide license (with the right to grant and authorize sublicenses) to make, have made, use, import, offer for sale, sell, reproduce, distribute, modify, adapt, prepare derivative works of, display, perform, and otherwise exploit such Prior Inventions, without restriction, including, without limitation, as part of or in connection with such Invention, and to practice any method related thereto. I will not incorporate any inventions, discoveries, ideas, original works of authorship, developments, improvements, trade secrets and other proprietary information or intellectual property rights owned by any third party into any Invention without MetroMile, Inc. ‘s prior written permission. I have attached hereto as Exhibit A, a list describing all Prior Inventions or, if no such list is attached, I represent and warrant that there are no such Prior Inventions. Furthermore, I represent and warrant that if any Prior Inventions are included on Exhibit A, they will not materially affect my ability to perform all obligations under this Agreement.
C. Moral Rights. Any assignment to MetroMile, Inc. of Inventions includes all rights of attribution, paternity, integrity, modification, disclosure and withdrawal, and any other rights throughout the world that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral,” or the like (collectively, “Moral Rights”). To the extent that Moral Rights cannot be assigned under applicable law, 1 hereby waive and agree not to enforce any and all Moral Rights, including, without limitation, any limitation on subsequent modification, to the extent permitted under applicable law.
D. Maintenance of Records. I agree to keep and maintain adequate, current, accurate, and authentic written records of all Inventions made by me (solely or jointly with others) during the term of my employment with the Company. The records will be in the form of notes, sketches, drawings, electronic files, reports, or any other format that may be specified by the Company. As between Company and myself, the records are and will be available to and remain the sole property of MetroMile, Inc. at all times.
E. Further Assurances. I agree to assist the Company, or its designee, at the Company’s expense, in every proper way to secure the Company’s rights in the Inventions in any and all countries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments, and all other instruments that the Company shall deem proper or necessary in order to apply for, register, obtain, maintain, defend, and enforce such rights, and in order to deliver, assign and convey to the Company, its successors, assigns, and nominees the sole and exclusive rights, title, and interest in and to all Inventions, and testifying in a suit or other proceeding relating to such Inventions. I further agree that my obligations under this Section 3.E shall continue after the termination of this Agreement.
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F. Attorney-in-Fact. I agree that, if the Company is unable because of my unavailability, mental or physical incapacity, or for any other reason to secure my signature with respect to any Inventions, including, without limitation, for the purpose of applying for or pursuing any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned to MetroMile, Inc. in Section 3.A, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for and on my behalf to execute and file any papers and oaths, and to do all other lawfully permitted acts with respect to such Inventions to further the prosecution and issuance of patents, copyright and mask work registrations with the same legal force and effect as if executed by me. This power of attorney shall be deemed coupled with an interest, and shall be irrevocable.
G. Exception to Assignments. I UNDERSTAND THAT THE PROVISIONS OF THIS AGREEMENT REQUIRING ASSIGNMENT OF INVENTIONS (AS DEFINED UNDER SECTION 3.A ABOVE) TO METROMILE, INC. DO NOT APPLY TO ANY INVENTION THAT QUALIFIES FULLY UNDER THE PROVISIONS OF CALIFORNIA LABOR CODE SECTION 2870 (ATTACHED HERETO AS EXHIBIT B). I WILL ADVISE METROMlLE, INC. PROMPTLY IN WRITING OF ANY INVENTIONS THAT I BELIEVE MEET THE CRITERIA IN CALIFORNIA LABOR CODE SECTION 2870 AND ARE NOT OTHERWISE DISCLOSED ON EXHIBIT A TO PERMIT A DETERMINATION OF OWNERSHIP BY THE COMPANY, ANY SUCH DISCLOSURE WILL BE RECEIVED IN CONFIDENCE.
4. CONFLICTING OBLIGATIONS
A. Current Obligations. I agree that during the term of my employment with the Company, I will not engage in or undertake any other employment, occupation, consulting relationship, or commitment that is directly related to the business in which the Company is now involved or becomes involved or has plans to become involved, nor will I engage in any other activities that conflict with my obligations to the Company.
B. Prior Relationships. Without limiting Section 4.A, I represent and warrant that I have no other agreements, relationships, or commitments to any other person or entity that conflict with the provisions of this Agreement, my obligations to the Company under this Agreement, or my ability to become employed and perform the services for which I am being hired by the Company. I further agree that if I have signed a confidentiality agreement or similar type of agreement with any former employer or other entity, I will comply with the terms of any such agreement to the extent that its terms are lawful under applicable law. I represent and warrant that after undertaking a careful search (including searches of my computers, cell phones, electronic devices, and documents), I have returned all property and confidential information belonging to all prior employers (and/or other third parties I have performed services for in accordance with the terms of my applicable agreement). Moreover, I agree to fully indemnify the Company, its directors, officers, agents, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns for all verdicts, judgments, settlements, and other losses incurred by any of them resulting from my breach of my obligations under any agreement with a third party to which I am a party or obligation to which 1 am bound, as well as any reasonable attorneys’ fees and costs if the plaintiff is the prevailing party in such an action, except as prohibited by law.
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5. RETURN OF COMPANY MATERIALS
A. Definition of Electronic Media Equipment and Electronic Media Systems. I understand that “Electronic Media Equipment” includes, but is not limited to, computers, external storage devices, thumb drives, handheld electronic devices, telephone equipment, and other electronic media devices. I understand that “Electronic Media Systems” includes, but is not limited to, computer servers, messaging and email systems or accounts, and web-based services (including cloud-based information storage accounts), whether provided for my use directly by the company or by third-party providers on behalf of the company.
B. Return of Company Property. I understand that anything that I created or worked on for the Company while working for the Company belongs solely to the Company and that I cannot remove, retain, or use such information without the Company’s express written permission. Accordingly, upon separation from employment with the Company or upon the Company’s request at any other time, I will immediately deliver to MetroMile, Inc., and will not keep in my possession, recreate, or deliver to anyone else, any and all Company property, including, but not limited to, Company Confidential Information, Associated Third Party Confidential Information, all Company equipment including all Company Electronic Media Equipment, all tangible embodiments of the Inventions, all electronically stored information and passwords to access such property, Company credit cards, records, data, notes, notebooks, reports, files, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, photographs, charts, any other documents and property, and reproductions of any of the foregoing items, including, without limitation, those records maintained pursuant to Section 3.D.
C. Return of Company Information on Company Electronic Media Equipment. In connection with my obligation to return information to the Company, I agree that I will not copy, delete, or alter any information, including personal information voluntarily created or stored, contained upon my Company Electronic Media Equipment before I return the information to the Company.
D. Return of Company Information on Personal Electronic Media Equipment. In addition, if I have used any personal Electronic Media Equipment or personal Electronic Media Systems to create, receive, store, review, prepare or transmit any Company information, including but not limited to, Company Confidential Information, I agree to make a prompt and reasonable search for such information in good faith, including reviewing any personal Electronic Media Equipment or personal Electronic Media Systems to locate such information and if I locate such information I agree to notify the Company of that fact and then provide the Company with a computer-useable copy of all such Company information from those equipment and systems; and I agree to cooperate reasonably with the Company to verify that the necessary copying is completed (including upon request providing a sworn declaration confirming the return of property and deletion of information), and, upon confirmation of compliance by the Company, I agree to delete and expunge all Company information.
E. No Expectation of Privacy in Company Property. I understand that I have no expectation of privacy in Company property, and I agree that any Company property situated on Company premises, or held by third-party providers for the benefit of the company, is subject to inspection by Company personnel at any time with or without further notice. I also understand and agree that as it relates to the Company’s desire to protect its confidential and proprietary information, I have no expectation of privacy as to any personal Electronic Media Equipment or personal Electronic Media Systems that I have used for Company purposes. I further agree that the Company, at its sole discretion, may have access to such personal Electronic Media Equipment or personal Electronic Media Systems to retrieve, destroy, or ensure the permanent deletion of Company information from such equipment or systems. I also consent to an exit interview and an audit to confirm my compliance with this Section 5, and I will certify in writing that I have complied with the requirements of this Section 5.
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6. TERMINATION CERTIFICATION
Upon separation from employment with the Company, I agree to immediately sign and deliver to the Company the “Termination Certification” attached hereto as Exhibit C. I also agree to keep MetroMile, Inc. advised of my home and business address for a period of three (3) years after termination of my employment with the Company, so that the Company can contact me regarding my continuing obligations provided by this Agreement.
7. NOTIFICATION OF NEW EMPLOYER
In the event that I leave the employ of the Company, I hereby grant consent to notification by the Company to my new employer about my obligations under this Agreement.
8. SOLICITATION OF EMPLOYEES
To the fullest extent permitted under applicable law, I agree that during my employment and for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether voluntary or involuntary, with or without cause, I will not directly or indirectly solicit any of the Company’s employees to leave their employment at the Company. I agree that nothing in this Section 8 shall affect my continuing obligations under this Agreement during and after this twelve (12) month period, including, without limitation, my obligations under Section 2.
9. CONFLICT OF INTEREST GUIDELINES
J agree to diligently adhere to all policies of the Company, including the Company’s insider trading policies and the Company’s Conflict of Interest Guidelines. A copy of the Company’s current Conflict of Interest Guidelines is attached as Exhibit D hereto, but I understand that these Conflict of Interest Guidelines may be revised from time to time during my employment.
10. REPRESENTATIONS
Without limiting my obligations under Section 3.E above, I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent and warrant that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I hereby represent and warrant that I have not entered into, and I will not enter into, any oral or written agreement in conflict herewith.
11. AUDIT
I acknowledge that I have no reasonable expectation of privacy in any computer, handheld device, telephone, voicemail, email or other technology system that is used to conduct the business of the Company. All information, data, and messages created, received, sent, or stored in these systems are, at all times, the property of the Company. As such, the Company has the right to audit and search all such items and systems, without further notice to me, to ensure that the Company is licensed to use the software on the Company’s devices in compliance with the Company’s software licensing policies, to ensure compliance with the Company’s policies, and for any other business-related purposes in the Company’s sole discretion. 1 understand that I am not permitted to add any unlicensed, unauthorized, or non-compliant applications to the Company’s technology systems, including, without limitation, open source or free software not authorized by the Company, and that I shall refrain from copying unlicensed software onto the Company’s technology systems or using non-licensed software or websites. I understand that it is my responsibility to comply with the Company’s policies governing use of the Company’s documents and the internet, email, telephone, and technology systems to which I will have access in connection with my employment.
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I am aware that the Company has or may acquire software and systems that are capable of monitoring and recording all Company network traffic to and from any computer, handheld device, telephone, voicemail, email or other technology system I may use to access the Company’s internal networks. The Company reserves the right to access, review, copy, and delete any of the infom1ation, data, or messages accessed through these systems with or without notice to me and/or in my absence. This includes, but is not limited to, all e-mail messages sent or received, all website visits, all chat sessions, all news group activity (including groups visited, messages read, and postings by me), and all file transfers into and out of the Company’s internal networks. The Company further reserves the right to retrieve previously deleted messages from e-mail or voicemail and monitor usage of the Internet, including websites visited and any information I have downloaded. In addition, the Company may review Internet and technology systems activity and analyze usage patterns, and may choose to publicize this data to assure that technology systems are devoted to legitimate business purposes.
12. ARBITRATION AND EQUITABLE RELIEF
A. Arbitration. IN CONSIDERATION OF MY EMPLOYMENT WITH THE COMPANY, ITS PROMISE TO ARBITRATE ALL EMPLOYMENT-RELATED DISPUTES, AND MY RECEIPT OF THE COMPENSATION, PAY RAISES, AND OTHER BENEFITS PAID TO ME BY THE COMPANY, AT PRESENT AND IN THE FUTURE, I AGREE THAT ANY AND ALL CONTROVERSIES, CLAIMS, OR DISPUTES WITH ANYONE (INCLUDING THE COMPANY AND ANY EMPLOYEE, OFFICER, DIRECTOR, SHAREHOLDER, OR BENEFIT PLAN OF THE COMPANY, IN THEIR CAPACITY AS SUCH OR OTHERWISE), ARISING OUT OF, RELATING TO, OR RESULTING FROM MY EMPLOYMENT OR RELATIONSHIP WITH THE COMPANY OR THE TERMINATION OF MY EMPLOYMENT OR RELATIONSHIP WITH THE COMPANY, INCLUDING ANY BREACH OF THIS AGREEMENT, SHALL BE SUBJECT TO BINDING ARBITRATION UNDER THE FEDERAL ARBITRATION ACT AND PURSUANT TO THE ARBITRATION PROVISIONS SET FORTH IN CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 1280 THROUGH 1294.2 (THE “CCP ACT”) AND CALIFORNIA LAW, AND SHALL BE BROUGHT IN ANY INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF, REPRESENTATIVE OR CLASS MEMBER IN ANY PURPORTED CLASS, COLLECTIVE OR REPRESENTATIVE PROCEEDING. NOTWITHSTANDING THE FOREGOING, I UNDERSTAND THAT I MAY BRING A PROCEEDING AS A PRIVATE ATTORNEY GENERAL AS PERMITTED BY LAW. FOR THE AVOIDANCE OF DOUBT, THE FEDERAL ARBITRATION ACT GOVERNS THIS AGREEMENT AND SHALL CONTINUE TO APPLY WITH FULL FORCE AND EFFECT NOTWITHSTANDING THE APPLICATION OF PROCEDURAL RULES SET FORTH IN THE CCP ACT AND CALIFORNIA LAW. I AGREE TO ARBITRATE ANY AND ALL COMMON LAW AND/OR STATUTORY CLAIMS UNDER LOCAL, STATE, OR FEDERAL LAW, INCLUDING, BUT NOT LIMITED TO, CLAIMS UNDER TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE OLDER WORKERS BENEFIT PROTECTION ACT, THE SARBANES OXLEY ACT, THE WORKER ADJUSTMENT AND RETRAINING NOTIFICATION” ACT, THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, THE FAMILY AND MEDICAL LEAVE ACT, THE CALIFORNIA FAMILY RIGHTS ACT, THE CALIFORNIA LABOR CODE, CLATh1S RELATING TO EMPLOYMENT STATUS, CLASSIFICATION AND RELATIONSHIP WITH THE COMPANY, AND CLAIMS OF HARASSMENT, DISCRIMINATION, WRONGFUL TERMINATION, AND BREACH OF CONTRACT, EXCEPT AS PROHIBITED BY LAW. I ALSO AGREE TO ARBITRATE ANY AND ALL DISPUTES ARISING OUT OF OR RELATING TO THE INTERPRETATION OR APPLICATION OF THIS AGREEMENT TO ARBITRATE, BUT NOT DISPUTES ABOUT THE ENFORCEABILITY, REVOCABILITY OR VALIDITY OF THIS AGREEMENT TO ARBITRATE OR ANY PORTION HEREOF OR THE CLASS, COLLECTIVE AND REPRESENTATIVE PROCEEDING WAIVER HEREIN. WITH RESPECT TO ALL SUCH CLAIMS AND DISPUTES THAT I AGREE TO ARBITRATE, I HEREBY EXPRESSLY AGREE TO WAIVE, AND DO WAIVE, ANY RIGHT TO A TRIAL BY JURY. NOTWITHSTANDING THE FOREGOING, I UNDERSTAND THAT NOTHING IN THE AGREEMENT CONSTITUTES A WAIVER OF MY RIGHTS UNDER SECTION 7 OF THE NATIONAL LABOR RELATIONS ACT. I FURTHER UNDERSTAND THAT THIS AGREEMENT TO ARBITRATE ALSO APPLIES TO ANY DISPUTES THAT THE COMPANY MAY HAVE WITH ME.
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B. Procedure. I AGREE THAT ANY ARBITRATION WILL BE ADMINISTERED BY JUDICIAL ARBITRATION & MEDIATION SERVICES, INC. (“JAMS”), PURSUANT TO ITS EMPLOYMENT ARBITRATION RULES & PROCEDURES (THE “JAMS RULES”), WHICH ARE AVAILABLE AT http://www.iamsadr.com/rules-employment-arbitration/ AND FROM HUMAN RESOURCES AND ATTACHED HERETO AS EXHIBIT E]. I AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO DECIDE ANY MOTIONS BROUGHT BY ANY PARTY TO THE ARBITRATION, INCLUDING MOTIONS FOR SUMMARY JUDGMENT AND/OR ADJUDICATION, AND MOTIONS TO DISMISS AND DEMURRERS, APPLYING THE STANDARDS SET FORTH UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. I AGREE THAT THE ARBITRATOR SHALL ISSUE A WRITTEN DECISION ON THE MERITS. I ALSO AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO AWARD ANY REMEDIES AVAILABLE UNDER APPLICABLE LAW, AND THAT THE ARBITRATOR SHALL AWARD ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, WHERE PROVIDED BY APPLICABLE LAW. I AGREE THAT THE DECREE OR AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED AS A FINAL AND BINDING JUDGMENT IN ANY COURT HAVING JURISDICTION THEREOF. I UNDERSTAND THAT THE COMPANY WILL PAY FOR ANY ADMINISTRATIVE OR HEARING FEES CHARGED BY THE ARBITRATOR OR JAMS EXCEPT THAT I SHALL PAY ANY FILING FEES ASSOCIATED WITH ANY ARBITRATION THAT I INITIATE, BUT ONLY SO MUCH OF THE FILING FEES AS I WOULD HAVE INSTEAD PAID HAD I FILED A COMPLAINT IN A COURT OF LAW. I AGREE THAT THE ARBITRATOR SHALL ADMINISTER AND CONDUCT ANY ARBITR.-4.TION IN ACCORDANCE WITH CALIFORNIA LAW, INCLUDING THE CALIFORNIA CODE OF CIVIL PROCEDURE AND THE CALIFORNIA EVIDENCE CODE, AND THAT THE ARBITRATOR SHALL APPLY SUBSTANTIVE AND PROCEDURAL CALIFORNIA LAW TO ANY DISPUTE OR CLAIM, WITHOUT REFERENCE TO RULES OF CONFLICT OF LAW. TO THE EXTENT THAT THE JAMS RULES CONFLICT WITH CALIFORNIA LAW, CALIFORNIA LAW SHALL TAKE PRECEDENCE. I AGREE THAT ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE CONDUCTED IN SAN FRANCISCO COUNTY, CALIFORNIA.
C. Remedy. EXCEPT AS PROVIDED BY THE CCP ACT AND THIS AGREEMENT, ARBITRATION SHALL BE THE SOLE, EXCLUSIVE, AND FINAL REMEDY FOR ANY DISPUTE BETWEEN ME AND THE COMPANY. ACCORDINGLY, EXCEPT AS PROVIDED FOR BY THE CCP ACT AND THIS AGREEMENT, NEITHER I NOR THE COMPANY WILL BE PERMITTED TO PURSUE OR PARTICIPATE IN COURT ACTION REGARDING CLAIMS THAT ARE SUBJECT TO ARBITRATION.
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D. Administrative Relief. I UNDERSTAND THAT THIS AGREEMENT DOES NOT PROHIBIT ME FROM PURSUING AN ADMINISTRATIVE CLAIM WITH A LOCAL, STATE, OR FEDERAL ADMINISTRATIVE BODY OR GOVERNMENT AGENCY THAT IS AUTHORIZED TO ENFORCE OR ADMINISTER LAWS RELATED TO EMPLOYMENT, INCLUDING, BUT NOT LIMITED TO, THE DEPARTMENT OF FAIR EMPLOYMENT AND HOUSING, THE EQUAL EMPLOYMENT OPPORTUNITY COMMISSION, THE NATIONAL LABOR RELATIONS BOARD, OR THE WORKERS’ COMPENSATION BOARD. THIS AGREEMENT DOES, HOWEVER, PRECLUDE ME FROM PURSUING COURT ACTION REGARDING ANY SUCH CLAIM, EXCEPT AS PERMITTED BY LAW.
E. Voluntary Nature of Agreement. I ACKNOWLEDGE AND AGREE THAT I AM EXECUTING THIS AGREEMENT VOLUNTARILY AND WITHOUT ANY DURESS OR UNDUE INFLUENCE BY THE COMPANY OR ANYONE ELSE. I ACKNOWLEDGE AND AGREE THAT I HAVE RECEIVED A COPY OF THE TEXT OF CALIFORNIA LABOR CODE SECTION 2870 IN EXHIBIT B. I FURTHER ACKNOWLEDGE AND AGREE THAT I HAVE CAREFULLY READ THIS AGREEMENT Ai”\ID THAT I HAVE ASKED ANY QUESTIONS NEEDED FOR ME TO UNDERSTAND THE TERMS, CONSEQUENCES, AND BINDING EFFECT OF THIS AGREEMENT AND FULLY UNDERSTAND IT, INCLUDING THAT I AM WAIVING MY RIGHT TO A JURY TRIAL. FINALLY, I AGREE THAT I HAVE BEEN PROVIDED AN OPPORTUNITY TO SEEK THE ADVICE OF AN ATTORNEY OF MY CHOICE BEFORE SIGNING THIS AGREEMENT.
13. MISCELLANEOUS
A. Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by the laws of the State of California without regard to California’s conflicts of law rules that may result in the application of the laws of any jurisdiction other than California. To the extent that any lawsuit is permitted under this Agreement, I hereby expressly consent to the personal and exclusive jurisdiction and venue of the state and federal courts located in California for any lawsuit filed against me by the Company.
B. Assignability. This Agreement will be binding upon my heirs, executors, assigns, administrators, and other legal representatives, and will be for the benefit of the Company, its successors, and its assigns. There are no intended third-party beneficiaries to this Agreement, except as may be expressly otherwise stated. Notwithstanding anything to the contrary herein, MetroMile, Inc. may assign this Agreement and its rights and obligations under this Agreement to any successor to all or substantially all of MetroMile, Inc.’s relevant assets, whether by merger, consolidation, reorganization, reincorporation, sale of assets or stock, or otherwise.
C. Entire Agreement. This Agreement, together with the Exhibits herein and any executed written offer letter between me and the Company, to the extent such materials are not in conflict with this Agreement, sets forth the entire agreement and understanding between the Company and me with respect to the subject matter herein and supersedes all prior written and oral agreements, discussions, or representations between us, including, but not limited to, any representations made during my interview(s) or relocation negotiations. I represent and warrant that I am not relying on any statement or representation not contained in this Agreement. Any subsequent change or changes in my duties, salary, compensation, conditions or any other terms of my employment will not affect the validity or scope of this Agreement.
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D. Headings. Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.
E. Severability. If a court or other body of competent jurisdiction finds, or the Parties mutually believe, any provision of this Agreement, or portion thereof, to be invalid or unenforceable, such provision will be enforced to the maximum extent permissible so as to effect the intent of the Parties’ and the remainder of this Agreement win continue in full force and effect.
F. Modification, Waiver. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in a writing signed by the President or CEO of MetroMile, Inc. and me. Waiver by MetroMile, Inc. of a breach of any provision of this Agreement will not operate as a waiver of any other or subsequent breach.
G. Survivorship. The rights and obligations of the parties to this Agreement will survive termination of my employment with the Company.
14. PROTECTED ACTIVITY NOT PROHIBITED
I understand that nothing in this Agreement shall in any way limit or prohibit me from engaging for a lawful purpose in any Protected Activity. For purposes of this Agreement, “Protected Activity” shall mean filing a charge or complaint or otherwise communicating cooperating, or participating with, any state, federal, or other governmental agency, including the Securities and Exchange Commission, the Equal Employment Opportunity Commission and the National Labor Relations Board. Notwithstanding any restrictions set forth in this Agreement, I understand that I am not required to obtain authorization from the Company prior to disclosing information to, or communicating with, such agencies, nor am I obligated to advise the Company as to any such disclosures or communications. Notwithstanding, in making any such disclosures or communications, I agree to take all reasonable precautions to prevent any unauthorized use or disclosure of any information that may constitute Company Confidential Information to any parties other than the relevant government agencies. I further understand that “Protected Activity” does not include the disclosure of any Company attorney-client privileged communications, and that any such disclosure without the Company’s written consent shall constitute a material breach of this Agreement.
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/s/ Lindsay Alexovich |
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EXHIBIT A
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
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√ No inventions or improvements
__ Additional Sheets Attached
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11/04/2017 |
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/s/ Lindsay Alexovich |
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Lindsay Alexovich |
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EXHIBIT B
CALIFORNIA LABOR CODE SECTION 2870
INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT
“(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.”
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EXHIBIT C
METROMILE, INC. TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, any other documents or property, or reproductions of any and all aforementioned items belonging to MetroMile, Inc., its subsidiaries, affiliates, successors or assigns (together, the “Company”).
I further certify that I have complied with all the terms of the Company’s At-Will Employment, Confidential Infom1ation, Invention Assignment, and Arbitration Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein) conceived or made by me (solely or jointly with others), as covered by that agreement.
I further agree that, in compliance with the At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement and subject to its Protected Activity exclusion, I will preserve as confidential all Company Confidential Information and Associated Third Party Confidential Information, including trade secrets, confidential knowledge, data, or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, databases, other original works of authorship, customer lists, business plans, financial information, or other subject matter pertaining to any business of the Company or any of its employees, clients, consultants, or licensees.
I also agree that for twelve (12) months from this date, I will not directly or indirectly solicit any of the Company’s employees to leave their employment at the Company. I agree that nothing in this paragraph shall affect my continuing obligations under the At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement during and after this twelve (12) month period, including, without limitation, my obligations under Section 2 (Confidentiality) thereof.
After leaving the Company’s employment, I will be employed by ______________________________
in the position of ____________________________________________.
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EXHIBIT D
METROMILE, INC. CONFLICT OF INTEREST GUIDELINES
It is the policy of MetroMile, Inc. to conduct its affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees, and independent contractors must avoid activities that are in conflict, or give the appearance of being in conflict, with these principles and with the interests of the Company. The following are potentially compromising situations that must be avoided:
1. Revealing confidential information to outsiders or misusing confidential info1mation. Unauthorized divulging of information is a violation of this policy whether or not for personal gain and whether or not harm to the Company is intended. (The At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement elaborates on this principle and is a binding agreement.)
2. Accepting or offering substantial gifts, excessive entertainment, favors, or payments that may be deemed to constitute undue influence or otherwise be improper or embarrassing to the Company.
3. Participating in civic or professional organizations that might involve divulging confidential information of the Company.
4. Initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or is or appears to be a personal or social involvement.
5. Initiating or approving any fo1m of personal or social harassment of employees.
6. Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company.
7. Borrowing from or lending to employees, customers, or suppliers.
8. Acquiring real estate of interest to the Company.
9. Improperly using or disclosing to the Company any proprietary information or trade secrets of any former or concurrent employer or other person or entity with whom obligations of confidentiality exist.
10. Unlawfully discussing prices, costs, customers, sales, or markets with competing companies or their employees.
11. Making any unlawful agreement with distributors with respect to prices.
12. Improperly using or authorizing the use of any inventions that arc the subject of patent claims of any other person or entity.
13. Engaging in any conduct that is not in the best interest of the Company.
Each officer, employee, and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in discharge without warning. I understand that nothing in these guidelines is intended to limit employees’ rights to discuss the terms, wages, and working conditions of their employment, as protected by applicable law.
Protected Activity Not Prohibited. I understand that nothing in these guidelines shall in any way limit or prohibit me from engaging for a lawful purpose in any Protected Activity. For purposes of these guidelines, “Protected Activity” means filing a charge or complaint, or otherwise communicating, cooperating, or participating with, any state, federal, or other governmental agency, including the Securities and Exchange Commission, the Equal Employment Opportunity Commission, and the National Labor Relations Board. Notwithstanding any restrictions set forth in these guidelines, I understand that I am not required to obtain authorization from the Company prior to disclosing information to, or communicating with, such agencies, nor am I obligated to advise the Company as to any such disclosures or communications. Notwithstanding, in making any such disclosures or communications, I agree to take all reasonable precautions to prevent any unauthorized use or disclosure of any information that may constitute Company confidential information to any parties other than the relevant government agencies. I further understand that “Protected Activity” does not include the disclosure of any Company attorney-client privileged communications, and that any such disclosure without the Company’s written consent shall constitute a violation of these guidelines.
14
EXHIBIT E
JUDICIAL ARBITRATION & MEDIATION SERVICES, INC.
EMPLOYMENT ARBITRATION RULES & PROCEDURES
[GO TO THIS WEBSITE, http: rwww.jamsadr.com/rules-employment-arbitration/ THEN PRINT OUT THE RULES AND APPEND THEM TO THIS EXHIBIT, THEN DELETE THIS NOTE.]
15
Exhibit 10.15
OFFICE LEASE
425 MKT REIT, LLC (LANDLORD)
AND
METROMILE, INC. (TENANT)
425 MARKET STREET
San Francisco, California
TABLE OF CONTENTS
|
|
Page |
|
|
|
ARTICLE ONE BASIC LEASE PROVISIONS |
1 |
|
1.01 |
BASIC LEASE PROVISIONS |
1 |
1.02 |
ENUMERATION OF EXHIBITS & RIDER(S) |
3 |
1.03 |
DEFINITIONS |
3 |
|
|
|
ARTICLE TWO PREMISES, TERM AND FAILURE TO GIVE POSSESSION |
9 |
|
2.01 |
LEASE OF PREMISES |
9 |
2.02 |
TERM |
9 |
2.03 |
FAILURE TO GIVE POSSESSION |
9 |
2.04 |
AREA OF PREMISES |
9 |
2.05 |
CONDITION OF PREMISES |
9 |
|
|
|
ARTICLE THREE RENT |
10 |
|
|
|
|
ARTICLE FOUR RENT ADJUSTMENTS AND PAYMENTS |
10 |
|
4.01 |
RENT ADJUSTMENTS |
10 |
4.02 |
STATEMENT OF LANDLORD |
10 |
4.03 |
BOOKS AND RECORDS |
11 |
4.04 |
PARTIAL OCCUPANCY; COST POOLS |
12 |
4.05 |
TENANT OR LEASE SPECIFIC TAXES |
12 |
|
|
|
ARTICLE FIVE SECURITY DEPOSIT |
13 |
|
|
|
|
ARTICLE SIX SERVICES |
14 |
|
6.01 |
LANDLORD’S GENERAL SERVICES |
14 |
6.02 |
ELECTRICAL SERVICES |
15 |
6.03 |
ADDITIONAL AND AFTER-HOUR SERVICES |
16 |
6.04 |
TELEPHONE SERVICES |
16 |
6.05 |
DELAYS IN FURNISHING SERVICES |
17 |
6.06 |
CHOICE OF SERVICE PROVIDER |
17 |
6.07 |
SIGNAGE |
18 |
|
|
|
ARTICLE SEVEN POSSESSION, USE AND CONDITION OF PREMISES |
18 |
|
7.01 |
POSSESSION AND USE OF PREMISES |
18 |
7.02 |
LANDLORD ACCESS TO PREMISES; APPROVALS |
21 |
7.03 |
QUIET ENJOYMENT |
21 |
|
|
|
ARTICLE EIGHT MAINTENANCE |
22 |
|
8.01 |
LANDLORD’S MAINTENANCE |
22 |
-i-
TABLE OF CONTENTS
(continued)
|
|
Page |
|
|
|
8.02 |
TENANT’S MAINTENANCE |
22 |
|
|
|
ARTICLE NINE ALTERATIONS AND IMPROVEMENTS |
23 |
|
9.01 |
TENANT ALTERATIONS |
23 |
9.02 |
LIENS |
24 |
|
|
|
ARTICLE TEN ASSIGNMENT AND SUBLETTING |
24 |
|
10.01 |
ASSIGNMENT AND SUBLETTING |
24 |
10.02 |
RECAPTURE |
26 |
10.03 |
EXCESS RENT |
26 |
10.04 |
TENANT LIABILITY |
27 |
10.05 |
ASSUMPTION AND ATTORNMENT |
27 |
|
|
|
ARTICLE ELEVEN DEFAULT AND REMEDIES |
27 |
|
11.01 |
EVENTS OF DEFAULT |
27 |
11.02 |
LANDLORD’S REMEDIES |
28 |
11.03 |
ATTORNEY’S FEES |
31 |
11.04 |
BANKRUPTCY |
31 |
11.05 |
LANDLORD’S DEFAULT |
32 |
|
|
|
ARTICLE TWELVE SURRENDER OF PREMISES |
32 |
|
12.01 |
IN GENERAL |
32 |
12.02 |
LANDLORD’S RIGHTS |
33 |
|
|
|
ARTICLE THIRTEEN HOLDING OVER |
33 |
|
|
|
|
ARTICLE FOURTEEN DAMAGE BY FIRE OR OTHER CASUALTY |
33 |
|
14.01 |
SUBSTANTIAL UNTENANTABILITY |
33 |
14.02 |
INSUBSTANTIAL UNTENANTABILITY |
34 |
14.03 |
RENT ABATEMENT |
35 |
14.04 |
WAIVER OF STATUTORY REMEDIES |
35 |
|
|
|
ARTICLE FIFTEEN EMINENT DOMAIN |
35 |
|
15.01 |
TAKING OF WHOLE OR SUBSTANTIAL PART |
35 |
15.02 |
TAKING OF PART |
36 |
15.03 |
COMPENSATION |
36 |
|
|
|
ARTICLE SIXTEEN INSURANCE |
36 |
|
16.01 |
TENANT’S INSURANCE |
36 |
16.02 |
FORM OF POLICIES |
37 |
-ii-
TABLE OF CONTENTS
(continued)
|
|
Page |
|
|
|
16.03 |
LANDLORD’S INSURANCE |
37 |
16.04 |
WAIVER OF SUBROGATION |
37 |
16.05 |
NOTICE OF CASUALTY |
38 |
|
|
|
ARTICLE SEVENTEEN WAIVER OF CLAIMS AND INDEMNITY |
39 |
|
17.01 |
WAIVER OF CLAIMS |
39 |
17.02 |
INDEMNITY BY TENANT |
39 |
17.03 |
WAIVER OF CONSEQUENTIAL DAMAGES |
39 |
|
|
|
ARTICLE EIGHTEEN RULES AND REGULATIONS |
40 |
|
18.01 |
RULES |
40 |
18.02 |
ENFORCEMENT |
40 |
|
|
|
ARTICLE NINETEEN LANDLORD’S RESERVED RIGHTS |
40 |
|
|
|
|
ARTICLE TWENTY ESTOPPEL CERTIFICATE |
41 |
|
20.01 |
IN GENERAL |
41 |
20.02 |
ENFORCEMENT |
41 |
|
|
|
ARTICLE TWENTY-ONE INTENTIONALLY OMITTED |
41 |
|
|
|
|
ARTICLE TWENTY-TWO REAL ESTATE BROKERS |
41 |
|
|
|
|
ARTICLE TWENTY-THREE MORTGAGEE PROTECTION |
42 |
|
23.01 |
SUBORDINATION AND ATTORNMENT |
42 |
23.02 |
MORTGAGEE PROTECTION |
42 |
|
|
|
ARTICLE TWENTY-FOUR NOTICES |
43 |
|
|
|
|
ARTICLE TWENTY-FIVE OFAC |
43 |
|
|
|
|
ARTICLE TWENTY-SIX MISCELLANEOUS |
44 |
|
26.01 |
LATE CHARGES |
44 |
26.02 |
NO JURY TRIAL; VENUE; JURISDICTION |
45 |
26.03 |
DEFAULT UNDER OTHER LEASE |
45 |
26.04 |
OPTION |
45 |
26.05 |
TENANT AUTHORITY |
45 |
26.06 |
ENTIRE AGREEMENT |
45 |
26.07 |
MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE |
46 |
26.08 |
EXCULPATION |
46 |
26.09 |
ACCORD AND SATISFACTION |
46 |
26.10 |
LANDLORD’S OBLIGATIONS ON SALE OF BUILDING |
46 |
-iii-
TABLE OF CONTENTS
(continued)
|
|
Page |
|
|
|
26.11 |
BINDING EFFECT |
46 |
26.12 |
CAPTIONS |
46 |
26.13 |
TIME; APPLICABLE LAW; CONSTRUCTION |
47 |
26.14 |
ABANDONMENT |
47 |
26.15 |
LANDLORD’S RIGHT TO PERFORM TENANT’S DUTIES |
47 |
26.16 |
SECURITY SYSTEM |
47 |
26.17 |
NO LIGHT, AIR OR VIEW EASEMENTS |
47 |
26.18 |
RECORDATION |
48 |
26.19 |
SURVIVAL |
48 |
26.20 |
EXHIBITS OR RIDERS |
48 |
26.21 |
ELECTRICAL USAGE INFORMATION |
48 |
26.22 |
DISCLOSURE REGARDING CERTIFIED ACCESS SPECIALIST |
48 |
|
|
|
ARTICLE TWENTY-SEVEN HAZARDOUS SUBSTANCES DISCLOSURE |
49 |
-iv-
OFFICE LEASE
ARTICLE ONE
BASIC LEASE PROVISIONS
1.01 BASIC LEASE PROVISIONS - In the event of any conflict between these Basic Lease Provisions and any other Lease provision, such other Lease provision shall control.
(1) PROJECT AND ADDRESS:
425 Market Street
San Francisco, California 94105
(2) LANDLORD AND ADDRESS:
425 MKT REIT, LLC,
a Delaware limited liability company
Notices to Landlord shall be addressed:
425 MKT REIT, LLC
do Cushman & Wakefield of California, Inc. Suite 955
425 Market Street
San Francisco, California 94105
with copies to the following:
425 MKT REIT, LLC
c/o MetLife Real Estate
425 Market Street, Suite 1050
San Francisco, CA 94105
Attention: Assistant Vice President
and
425 MKT REIT, LLC
do MetLife Real Estate
425 Market Street, Suite 1050
San Francisco, CA 94105
Attention: Associate General Counsel
(3) |
TENANT AND CURRENT ADDRESS: |
(a) Name Metromile, Inc.
(b) |
State of [incorporation] or [partnership]: a Delaware corporation |
1
(c) |
Tax Identification Number: *** |
Tenant shall notify Landlord of any change in the foregoing.
Notices to Tenant shall be addressed:
(4) |
DATE OF LEASE: as of , 2019 |
(5) |
LEASE TERM: One hundred twenty-four (124). full calendar months commencing on the Commencement Date. |
(6) |
PROJECTED COMMENCEMENT DATE: December 1, 2019. |
(7) |
PROJECTED EXPIRATION DATE. One hundred twenty-four (124) full calendar months after the Commencement Date |
(8) |
MONTHLY BASE RENT: |
|
|
|
|
|
Period from/to |
|
Monthly |
|
|
Month 1 — Month 12 |
|
$ |
174,`426.67 |
|
Month 13 — Month 24 |
|
$ |
179,659.47 |
|
Month 25 — Month 36 |
|
$ |
185,049.25 |
|
Month 37 — Month 48 |
|
$ |
190,600.73 |
|
Month 49 — Month 60 |
|
$ |
196,318.75 |
|
Month 61 — Month 72 |
|
$ |
202,208.31 |
|
Month 73 — Month 84 |
|
$ |
208,274.56 |
|
Month 85 — Month 96 |
|
$ |
214,522.80 |
|
Month 97 — Month 108 |
|
$ |
220,958.48 |
|
Month 109 — Month 120 |
|
$ |
227,587.24 |
|
Month 121 — Month 124 |
|
$ |
234,414.85 |
|
* |
Notwithstanding anything in the foregoing to the contrary, provided that a monetary Default (as defined in Section 11.01) by Tenant has not previously occurred, Landlord agrees to forbear in the collection of and abate the Monthly Base Rent due and payable for the first four (4) full calendar months of the Term, totaling not more than Six Hundred Ninety-Seven Thousand Seven Hundred Six and 68/100 Dollars ($697,706.68) in the aggregate (collectively, “Abated Rent”); provided, further, that if Landlord terminates this Lease as a result of a Default by Tenant at any time during the Term, all previously Abated Rent shall be immediately due and payable in full at that time without the necessity of further notice or action by Landlord. |
(9) |
RENTABLE AREA OF THE BUILDING: 945,394 rentable square feet |
(10) |
RENTABLE AREA OF THE PREMISES: 26,164 square feet |
(11) |
SECURITY DEPOSIT: The cash and/or Letter of Credit in the amount equal to the Monthly Base Rent for the last twelve (12) months of the Term (and any proceeds of the Letter of Credit drawn and held by Landlord) if required pursuant to Article Five. |
2
(12) |
SUITE NUMBER OF PREMISES: Suite 700, which consists of the entire seventh (7th) floor of the Building |
(13) |
TENANT’S SHARE OF THE BUILDING: 2.77% |
(14) |
BASE YEARS: |
Operating Expense Base Year: The calendar year 2020
Taxes Base Year: The City of San Francisco fiscal year beginning July 1, 2019 and ending June 30, 2020.
(15) |
BROKERS: |
Landlord’s Broker: Cushman & Wakefield of California, Inc.
Tenant’s Broker: Avison Young Northern California, Ltd.
(16) |
PERMITTED USE: General office use. |
1.02 ENUMERATION OF EXHIBITS & RIDER(S)
The Exhibits and Rider(s) set forth below and attached to this Lease are incorporated in this Lease by this reference:
|
|
EXHIBIT A |
Plan of Premises |
EXHIBIT B |
Workletter Agreement (intentionally omitted) |
EXHIBIT C |
Rules and Regulations |
EXHIBIT D |
Fair Market Rental Rate |
EXHIBIT E |
Transactional Costs |
EXHIBIT F |
Form of Letter of Credit |
|
|
RIDER 1 |
Commencement Date Agreement |
RIDER 2 |
Additional Provisions |
1.03 DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
ADJUSTMENT YEAR: The applicable calendar year or any portion thereof after the Operating Expenses Base Year and Taxes Base Year for which a Rent Adjustment computation is being made.
AFFILIATE: Any corporation or other business entity which is owned or controlled by, owns or controls, or is under common ownership or control with Tenant.
BUILDING: The building located at the Project. For purposes of this Lease, Project Areas means all Land and any portions of the Real Property located on the Land, and includes but is not limited to Common Areas as defined for purposes of this Lease. Project Areas on a given floor include but are not limited to columns, core stairwells, core restrooms, elevator shafts and elevators, service elevator lobby, and core rooms reserved for janitorial, electrical or mechanical purposes.
3
COMMENCEMENT DATE: The date specified in Rider 2.
COMMON AREAS: All areas of the Building made available from time to time for the general common use or benefit of the tenants of the Building, and their employees and invitees, or the public, as such areas currently exist and as they may be changed from time to time.
DECORATION: Tenant Alterations which do not require a building permit and which do not involve any of the structural elements of the Building, or any of the Building’s systems, including its electrical, mechanical, plumbing, security, heating, ventilating, air-conditioning, communication, and fire and life safety systems.
DEFAULT RATE: Two (2) percentage points above the rate then most recently announced by Bank of America N.T.& S.A. at its San Francisco headquarters as its corporate base lending rate, from time to time announced, but in no event higher than the maximum rate permitted by Law. In the event the foregoing rate is no longer announced, Landlord shall choose a reasonably equivalent rate.
DELIVERY DATE: The date for Landlord’s delivery to Tenant of possession of the Premises with the Landlord Work Substantially Complete, as provided in Rider 2.
ENVIRONMENTAL LAWS: All Laws governing the use, storage, disposal or generation of any Hazardous Material, including the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act of 1976, as amended.
EXPIRATION DATE: The date specified in Section 1.01(7) unless changed by operation of Section 4 of Rider 2.
FORCE MAJEURE: Any accident, casualty, act of God, war or civil commotion, strike or labor troubles, or any cause whatsoever beyond the reasonable control of Landlord, including water shortages, energy shortages or governmental preemption in connection with an act of God, a national emergency or by reason of Law, or by reason of the conditions of supply and demand which have been or are affected by act of God, war or other emergency.
HAZARDOUS MATERIAL: Such substances, material and wastes which are or become regulated under any Environmental Law; or which are classified as hazardous or toxic under any Environmental Law; and explosives and firearms, radioactive material, asbestos, and polychlorinated biphenyls.
INDEMNITEES: Collectively, Landlord, any Mortgagee or ground lessor of the Property, the property manager and the leasing manager for the Property and their respective directors, officers, agents and employees.
LAND: The parcel(s) of real estate on which the Building and Project are located.
LANDLORD WORK: The construction or installation of improvements to be furnished by Landlord at Landlord’s expense as more particularly provided in Exhibit B, specifically described in Rider 2 attached hereto.
4
LAWS OR LAW: All laws, ordinances, rules, regulations, other requirements, orders, rulings or decisions adopted or made by any governmental body, agency, department or judicial authority having jurisdiction over the Property, the Premises or Tenant’s activities at the Premises and any covenants, conditions or restrictions of record which affect the Property.
LEASE: This instrument and all exhibits and riders attached hereto, as may be amended from time to time.
LEASE YEAR: The twelve (12) month period beginning on the first (1st) day of the first (1st) month following the Commencement Date (unless the Commencement Date is the first (1st) day of a calendar month in which case beginning on the Commencement Date), and each subsequent twelve (12) month period, or shorter, period until the Expiration Date.
MONTHLY BASE RENT. The monthly rent specified in Section 1.01(8).
MORTGAGEE: Any holder of a mortgage, deed of trust or other security instrument encumbering the Property.
NATIONAL HOLIDAYS: New Year’s Day, President’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day and other holidays recognized by the Landlord and the janitorial and other unions servicing the Building in accordance with their contracts.
OPERATING EXPENSES: All costs, expenses and disbursements of every kind and nature incurred in connection with the ownership, management, operation, maintenance, replacement and repair of the Building, and including the amortized portion of any capital expenditure or improvement (“Capital Expenditure”), together with interest thereon and the costs of changing utility service providers. Operating Expenses shall not include, (i) costs of alterations of the premises of tenants of the Building, (ii) depreciation charges, (iii) interest and principal payments on loans (except for loans for capital expenditures or improvements which Landlord is allowed to include in Operating Expenses as provided above), (iv) ground rental payments, (v) real estate brokerage and leasing commissions, (vi) advertising and marketing expenses, (vii) costs of Landlord reimbursed by insurance proceeds, (viii) expenses incurred in negotiating leases of other tenants in the Building or enforcing lease obligations of other tenants in the Building and (ix) Landlord’s or Landlord’s property manager’s corporate general overhead or corporate general administrative expenses. If any Operating Expense, though paid in one year, relates to more than one calendar year, at the option of Landlord such expense may be proportionately allocated among such related calendar years. Operating Expenses shall in no event include the following (“Exclusions”):
(1) Costs incurred by Landlord with respect to goods and services (including utilities) sold or supplied to Tenant or other tenants of the Building to the extent that Landlord is entitled to receive reimbursement for such costs other than recoupments through Rent Adjustments from Tenant and the equivalent to Rent Adjustments collected from other tenants of the Building.
(2) Costs incurred by Landlord for the repair of damage to the Building (including the amount of any insurance deductible) to the extent that Landlord is reimbursed from any source (including without limitation by insurance, condemnation or warranty proceeds) other than recoupments through Rent Adjustments from Tenant and the equivalent to Rent Adjustments collected from other tenants of the Building.
5
(3) Costs (including permit, license and inspection costs but excluding costs of utilities) incurred with respect to the installation of tenant improvements made for new tenants of the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating space leased by or available for leasing to tenants of the Building.
(4) Leasing commissions, attorneys’ fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants of the Building.
(5) Costs, fees and compensation (excluding, however, management fees) paid to Landlord or to subsidiaries or affiliates of Landlord for services in the Building to the extent the same exceed the charges for comparable services rendered by unaffiliated third parties of comparable stature and reputation.
(6) Interest and principal on any mortgage encumbering the Real Property and direct costs for refinancing any such mortgage.
(7) Contributions and donations made by Landlord to charitable organizations.
(8) Any compensation paid to clerks, attendants or other persons working for commercial concessions operated for profit by Landlord or in the parking garage servicing the Building.
(9) Wages and benefits of employees who do not devote substantially all of their time to the Building unless such wages and benefits are prorated to reflect time spent on operating and managing the Building vis-à-vis time spent on matters unrelated to operating and managing the Building and employees above the level of manager of the Building.
(10) Capital Expenditures incurred in order to comply with disability, life, fire and safety codes or other laws, in effect and as interpreted and enforced by governmental authorities prior to the date of this Lease.
(11) Costs other than Capital Expenditures arising from Hazardous Materials which were installed by Landlord, its agents, officers and employees and which, at the time of installation, Landlord knew or should have known were in fact Hazardous Materials.
(12) Costs to purchase fine art (including, without limitation, paintings and sculpture).
(13) Advertising and promotional expenditures primarily directed toward leasing tenant space in the Building and costs of signs in or on the Building identifying any tenant of the Building, except the Building directories.
OPERATING EXPENSES BASE YEAR: The calendar year designated in Section 1.01(14).
PREMISES: The space located in the Building at the Suite Number listed in Section 1.01(12) and depicted on Exhibit A attached hereto, excluding Project Areas on the floor(s) on which the Premises is located.
6
PROJECT or PROPERTY: The Project consists of the office building located at the address specified in Section 1.01(1), together with any and all areas, improvements, parking garage, sidewalks, landscaping and improvements, included as part of the Common Areas, and the Land, any associated interests in real property, and the personal property, fixtures, machinery, equipment, systems and apparatus located in or used in conjunction with any of the foregoing. The Project may also be referred to as the Property.
PROJECT AREAS: As defined under the definition of Building above.
REAL PROPERTY: The Property excluding any personal property.
RENT: Collectively, Monthly Base Rent, Rent Adjustments and Rent Adjustment Deposits, and all other charges, payments, late fees or other amounts required to be paid by Tenant under this Lease.
RENT ADJUSTMENT. Any amounts owed by Tenant for payment of Operating Expenses or Taxes. The Rent Adjustments shall be determined and paid as provided in Article Four.
RENT ADJUSTMENT DEPOSIT: An amount equal to Landlord’s estimate of the Rent Adjustment attributable to each month of the applicable Adjustment Year. On or before the beginning of each Adjustment Year or with Landlord’s Statement (defined in Article Four), Landlord may estimate and notify Tenant in writing of its estimate of the excess, if any, of Operating Expenses over those for the Operating Expenses Base Year and of Taxes over those for the Taxes Base Year. Prior to the first determination by Landlord of the amount of Operating Expenses for the Operating Expenses Base Year and of Taxes for the Taxes Base Year, Landlord may estimate such amounts in the foregoing calculation. Landlord shall have the right from time to time during any Adjustment Year to provide a new or revised estimate of Operating Expenses and/or Taxes and to notify Tenant in writing thereof, of corresponding adjustments in Tenant’s Rent Adjustment Deposit payable over the remainder of such year, and of the amount or revised amount due allocable to months preceding such change. The last estimate by Landlord shall remain in effect as the applicable Rent Adjustment Deposit unless and until Landlord notifies Tenant in writing of a change.
RENTABLE AREA OF THE BUILDING: The amount of square footage set forth in Section 1.01(9) which represents the sum of the rentable area of all space intended for occupancy in the Building.
RENTABLE AREA OF THE PREMISES: The amount of square footage set forth in Section 1.01(10).
SECURITY DEPOSIT: The funds specified in Section 1.01(11), if any, deposited by Tenant with Landlord as security for Tenant’s performance of its obligations under this Lease.
STANDARD OPERATING HOURS: Monday through Friday from 7:00 A.M. to 6:00 P.M., excluding National Holidays.
SUBSTANTIALLY COMPLETE OR SUBSTANTIAL COMPLETION: When the Landlord Work is completed in accordance with the final Construction Drawings except for minor insubstantial details of construction, decoration or mechanical adjustments which remain to be done and that do not materially interfere with Tenant’s use of the Premises for the permitted use (“punch list items”). Substantial Completion shall be deemed to have occurred notwithstanding a requirement to complete punch list items. Contemporaneously with or promptly after Substantial Completion of the Landlord Work, Tenant shall have the right to submit a written “punch list” to Landlord, setting forth any incomplete or defective item of construction. Landlord shall complete with reasonable diligence “punch list” items mutually agreed upon by Landlord and Tenant with respect to the Landlord Work.
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TAXES: All federal, state and local governmental taxes, assessments and charges of every kind or nature, whether general, special, ordinary or extraordinary, which shall be due and payable because of or in connection with the ownership, leasing, management, control or operation of the Building (including any personal property used in connection therewith), including all of its components and the taxes, assessments and charges with respect to the Project Areas, which may also include any rental or similar taxes levied in lieu of or in addition to general real and/or personal property taxes. For purposes hereof, Taxes for any year shall be Taxes which are assessed for any period of such year on an accrual basis, whether or not such Taxes are billed and payable in a subsequent calendar year. There shall be included in Taxes for any year the amount of all fees, costs and expenses (including reasonable attorneys’ fees) paid during such year in connection with seeking or obtaining any refund or reduction of Taxes. Taxes for any year shall be reduced by the net amount of any tax refund received by Landlord attributable to such year. If a special assessment payable in installments is levied against the any part of the Building, Taxes for any year shall include only the installment of such assessment and any interest payable or paid during such year (and the assessment shall be spread over the longest period in which same may be paid). Taxes shall not include any federal or state inheritance, general income, gift or estate taxes, except that if a change occurs in the method of taxation resulting in whole or in part in the substitution of any such taxes, or any other assessment, for any Taxes as above defined, such substituted taxes or assessments shall be included in the Taxes. Taxes paid by Tenant pursuant to Section 4.05 shall not be included in any computation of Taxes payable pursuant to Sections 4.01 and 4.02 below.
TAXES BASE YEAR: As defined in Section 1.01(14).
TENANT ADDITIONS: Collectively, Landlord Work, Tenant Work and Tenant Alterations.
TENANT ALTERATIONS: Any alterations, improvements, additions, installations or construction in or to the Premises or any Real Property systems serving the Premises done or caused to be done by Tenant after the date hereof, whether prior to or after the Commencement Date (including Tenant Work, but excluding Landlord Work); and any supplementary air-conditioning systems installed by Landlord or by Tenant at Landlord’s request pursuant to Section 6.01(b).
TENANT DELAY: Any event or occurrence which delays the Substantial Completion of the Landlord Work which is caused by or is described as follows:
(i) special work, changes, alterations or additions requested or made by Tenant in the design or finish in any part of the Premises after approval of the plans and specifications (as described in Rider 2);
(ii) Tenant’s delay in submitting plans, supplying information, approving plans, specifications or estimates, giving authorizations or otherwise;
(iii) failure to approve and pay for such work as Landlord undertakes to complete at Tenant’s expense;
(iv) the performance or completion by Tenant or any person engaged by Tenant of any work in or about the Premises; or
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(v) failure to perform or comply with any obligation or condition binding upon Tenant pursuant to Rider 2, including the failure to approve and pay for such Landlord Work or other items if and to the extent Rider 2 provides they are to be approved or paid by Tenant.
Landlord shall use reasonable efforts to notify Tenant, orally or in writing, of any circumstances of which Landlord is aware that have caused or may cause a Tenant Delay, so that Tenant may take whatever action is appropriate to minimize or prevent such Tenant Delay.
TENANT WORK: All work installed or furnished to the Premises by Tenant in connection with Tenant’s initial occupancy pursuant to Rider 2 and the Workletter, if any.
TENANT’S SHARE: The percentage specified in Section 1.01(13) which represents the ratio of the Rentable Area of the Premises to the Rentable Area of the Building.
TERM: The term of this Lease which shall commence on the Commencement Date and expire on the Expiration Date.
TERMINATION DATE: The Expiration Date or such earlier date as this Lease terminates or Tenant’s right to possession of the Premises terminates.
WORKLETTER: The agreement regarding the manner of completion of Landlord Work and Tenant Work set forth on Exhibit B hereto.
ARTICLE TWO
PREMISES, TERM AND FAILURE TO GIVE POSSESSION
2.01 LEASE OF PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term and upon the terms, covenants and conditions provided in this Lease.
2.02 TERM
The Commencement Date shall be as defined in Rider 2.
2.03 FAILURE TO GIVE POSSESSION
(intentionally omitted; see Rider 2)
2.04 AREA OF PREMISES
Landlord and Tenant agree that for all purposes of this Lease the Rentable Area of the Premises and the Rentable Area of the Building as set forth in Article One are controlling, and are not subject to revision after the date of this Lease.
2.05 CONDITION OF PREMISES
The Premises shall be delivered and leased in the condition provided in Rider 2.
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ARTICLE THREE
RENT
Tenant agrees to pay to Landlord at the first office specified in Section 1.01(2), or to such other persons, or at such other places designated by Landlord, without any prior demand therefor in immediately available funds and without any deduction or offset whatsoever (except as otherwise expressly provided in this Lease), Rent, including Monthly Base Rent and Rent Adjustments in accordance with Article Four, during the Term. Monthly Base Rent shall be paid monthly in advance on the first (1st) day of each month of the Term, except that the first installment of Monthly Base Rent (allocable to the fifth month of the Term) shall be paid by Tenant to Landlord concurrently with execution of this Lease. Monthly Base Rent shall be prorated for partial months within the Term. Unpaid Rent shall bear interest at the Default Rate from the date due until paid. Tenant’s covenant to pay Rent shall be independent of every other covenant in this Lease. Notwithstanding the first sentence of this Article Three, Tenant shall have the right to make payments of Rent to Landlord by electronic funds or ACH transfer to Landlord.
ARTICLE FOUR
RENT ADJUSTMENTS AND PAYMENTS
4.01 RENT ADJUSTMENTS
Tenant shall pay to Landlord Rent Adjustments with respect to each Adjustment Year as follows:
(a) The Rent Adjustment Deposit representing Tenant’s Share of Operating Expenses for the applicable Adjustment Year in excess of Operating Expenses for the Operating Expenses Base Year, monthly during the Term with the payment of Monthly Base Rent; and
(b) The Rent Adjustment Deposit representing Tenant’s Share of Taxes for the applicable Adjustment Year in excess of Taxes for the Taxes Base Year, monthly during the Term with the payment of Monthly Base Rent; and
(c) Any Rent Adjustments due in excess of the Rent Adjustment Deposits in accordance with Section 4.02. Rent Adjustments due from Tenant to Landlord for any Adjustment Year shall be Tenant’s Share of Operating Expenses for such year in excess of Operating Expenses for the Operating Expenses Base Year, and Tenant’s Share of Taxes for such year in excess of Taxes for the Taxes Base Year.
4.02 STATEMENT OF LANDLORD
As soon as feasible after the expiration of the Operating Expenses Base Year and the Taxes Base Year, and each Adjustment Year thereafter, Landlord will furnish Tenant a statement (“Landlord’s Statement”) showing the following:
(a) Operating Expenses and Taxes for the Operating Expenses Base Year and Taxes Base Year, and thereafter for the last Adjustment Year;
(b) The amount of Rent Adjustments due Landlord for the last Adjustment Year, less credit for Rent Adjustment Deposits paid, if any;
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(c) Any change in the Rent Adjustment Deposit due monthly in the current Adjustment Year, including the amount or revised amount due for months preceding any such change pursuant to Landlord’s Statement; and
(d) The amount of any taxes assessed pursuant to Section 4.05 below.
Tenant shall pay to Landlord within ten (10) business days after receipt of such statement any amounts for Rent Adjustments then due in accordance with Landlord’s Statement. Any amounts due from Landlord to Tenant pursuant to this Section shall be credited to the Rent Adjustment Deposit next coming due, or refunded to Tenant if the Term has already expired, provided that if Tenant is then in default hereunder, Landlord may deduct from such refund the amount necessary to cure Tenant’s default. No interest or penalties shall accrue on any amounts which Landlord is obligated to credit or refund to Tenant by reason of this Section 4.02. Landlord’s failure to deliver Landlord’s Statement or to compute the amount of the Rent Adjustments shall not constitute a waiver by Landlord of its right to deliver such items nor constitute a waiver or release of Tenant’s obligations to pay such amounts. The Rent Adjustment Deposit shall be credited against Rent Adjustments due for the applicable Adjustment Year. During the last complete calendar year or during any partial calendar year in which the Lease terminates, Landlord may include in the Rent Adjustment Deposit its estimate of Rent Adjustments which may not be finally determined until after the termination of this Lease. Tenant’s obligation to pay Rent Adjustments survives the expiration or termination of the Lease. Notwithstanding the foregoing, in no event shall the sum of Monthly Base Rent and the Rent Adjustments be less than the Monthly Base Rent payable.
4.03 BOOKS AND RECORDS
Landlord shall maintain books and records showing Operating Expenses and Taxes in accordance with sound accounting and management practices, consistently applied. The Tenant or its representative (which representative shall be a certified public accountant licensed to do business in the state in which the Property is located and whose primary business is certified public accounting) shall have the right, for a period of sixty (60) days following the date upon which Landlord’s Statement is delivered to Tenant, to examine the Landlord’s books and records with respect to the items in the foregoing statement of Operating Expenses and Taxes during normal business hours, upon written notice, delivered at least three (3) business days in advance. If Tenant does not object in writing to Landlord’s Statement within ninety (90) days of Tenant’s receipt thereof, specifying the nature of the item in dispute and the reasons therefor, then Landlord’s Statement shall be considered final and accepted by Tenant. Any amount due to the Landlord as shown on Landlord’s Statement, whether or not disputed by Tenant as provided herein shall be paid by Tenant when due as provided above, without prejudice to any such written exception.
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4.04 PARTIAL OCCUPANCY; COST POOLS
For purposes of determining Rent Adjustments, if the Project is not fully occupied during all or a portion of any year during the Term, Landlord may make reasonable and appropriate adjustments to those Operating Expenses for such year that vary depending on occupancy, employing sound accounting and management principles consistently applied, to determine the amount of Operating Expenses that would have been paid or incurred by Landlord had the Project been 100% occupied, and the amount so determined shall be deemed to have been the amount of Operating Expenses for such year. In the event that the Real Property is not fully assessed for all or a portion of any year (including the Base Year) during the Term and Landlord reasonably anticipates that a reassessment of the Real Property is likely to occur, then Taxes shall be adjusted to an amount which, in Landlord’s reasonable discretion and judgment, would have been payable in such year if the Real Property had been fully assessed. If, following the expiration of the third (3rd) full fiscal year after Landlord has adjusted Taxes as provided in the preceding sentence (i.e., which fiscal year ends on June 30th) (i.e., because Landlord anticipated that a reassessment of the Real Property was likely to occur) and such reassessment does not occur as Landlord had anticipated (either because no reassessment occurred, or a reassessment occurred but for a value different from that which Landlord had anticipated), then Landlord shall, within forty-five (45) days following the end of such fiscal year, refund any overpayment of Taxes to Tenant (which reimbursement obligation shall survive the expiration or earlier termination of this Lease); provided, however, that nothing in this Section shall prohibit Landlord from recovering Taxes from Tenant in accordance with the terms of this Lease if the Real Property is later reassessed by the applicable taxing authority. In the event any other tenant in the Building provides itself with a service of a type which Landlord would supply under the Lease without an additional or separate charge to Tenant, then Operating Expenses shall be deemed to include the cost Landlord would have incurred had Landlord provided such service to such other tenant. In addition, Landlord shall have the right, from time to time, to equitably allocate and prorate some or all of the Operating Expenses among different tenants of the Project (the “Cost Pools”), adjusting Tenant’s Share as to each of the separately allocated costs based on the ratio of the Rentable Area of the Premises to the Rentable Areas of all of the premises to which such costs are allocated. Such Cost Pools may include, without limitation, the office space tenants and retail space tenants of the buildings in the Project.
4.05 TENANT OR LEASE SPECIFIC TAXES
In addition to Monthly Base Rent, Rent Adjustments, Rent Adjustment Deposits and other charges to be paid by Tenant, Tenant shall pay to Landlord, upon demand, any and all taxes payable by Landlord (other than federal or state inheritance, general income, gift or estate taxes) whether or not now customary or within the contemplation of the parties hereto: (a) upon, allocable to, or measured by the Rent payable hereunder, including any gross receipts tax or excise tax levied by any governmental or taxing body with respect to the receipt of such rent (including, without limitation, the Early Care and Commercial Rents Tax imposed by the City and County of San Francisco (as the same may be supplemented, amended, modified or replaced from time to time)); or (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (c) upon the measured value of Tenant’s personal property located in the Premises or in any storeroom or any other place in the Premises or the Property, or the areas used in connection with the operation of the Property, it being the intention of Landlord and Tenant that, to the extent possible, such personal property taxes shall be billed to and paid directly by Tenant; or (d) resulting from Landlord Work, Tenant Work or Tenant Alterations to the Premises, whether title thereto is in Landlord or Tenant; or (e) upon this transaction. Taxes paid by Tenant pursuant to this Section 4.05 shall not be included in any computation of Taxes payable pursuant to Sections 4.01 and 4.02, and Tenant shall have no obligation to pay any Taxes under this Section 4.05 to the extent the same are payable by Tenant under Sections 4.01 and 4.02 and vice-versa.
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ARTICLE FIVE
SECURITY DEPOSIT
(a) Tenant shall pay Landlord, within thirty (30) days following the mutual execution and delivery of this Lease, in immediately available funds the amount of the Security Deposit specified in Section 1.01 as security (“Security”) for the full and faithful performance by Tenant of each and every term, provision, covenant, and condition of this Lease. If there is a Default under this Lease by Tenant, then Landlord may use, apply, or retain the whole or any part of the Security for the payment of any such Rent not paid when due, for the cost of repairing such damage, for the cost of cleaning the Premises, for the payment of any other sum which Landlord expends by reason of Tenant’s Default, including for compensation of Landlord for any other loss or damage to Landlord occasioned by Tenant’s Default, including, but not limited to, any loss of future Rent and any damage or deficiency in the reletting of the Premises (whether such loss, damages or deficiency accrue before or after summary proceedings or other reentry by Landlord) and the amount of the unpaid past Rent, future Rent loss, and all other losses, costs and damages, that Landlord would be entitled to recover if Landlord were to pursue recovery under Section 11.02(b) or (c) of this Lease. If Landlord so uses, applies or retains all or part of the Security, Tenant shall within ten (10) business days after demand pay or deliver to Landlord in immediately available funds the sum necessary to replace the amount used, applied or retained, except as specified in (d) below. The Security (except for any amounts retained for application by Landlord as provided herein) shall be returned or paid over to Tenant no later than ninety (90) days after the latest of: (i) the Termination Date; (ii) the removal of Tenant from the Premises; (iii) the surrender of the Premises by Tenant to Landlord in accordance with this Lease; or (iv) the date Rent Adjustments owed pursuant to this Lease have been computed by Landlord and paid by Tenant. Provided, however, in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder.
(b) The Security shall not be deemed an advance rent deposit or an advance payment of any kind, or a measure of Landlord’s damages with respect to Tenant’s failure to perform, nor shall any action or inaction of Landlord with respect to it be a waiver of, or bar or defense to, enforcement of any right or remedy of Landlord. Landlord shall not be required to keep the Security separate from its general funds and shall not have any fiduciary or other duties concerning the Security except as set forth in this Section. Tenant shall not be entitled to any interest on the Security. In the event of any sale, lease or transfer of Landlord’s interest in the Building, Landlord shall transfer the Security, or balance thereof, to the vendee, transferee or lessee and any such transfer shall release Landlord from all liability for the return of the Security. Tenant thereafter shall look solely to such vendee, transferee or lessee for the return or payment of the Security. Tenant shall not assign or encumber or attempt to assign or encumber the Security or any interest in it and Landlord shall not be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance, and regardless of one or more assignments of this Lease, Landlord may return the Security to the original Tenant without liability to any assignee. Tenant hereby waives any and all rights of Tenant under the provisions of Section 1950.7 of the California Civil Code or other Law, now or hereafter enacted, regarding security deposits.
(c) Notwithstanding anything to the contrary contained in this Lease, Tenant shall have the right initially or at any time during the Term to substitute a letter of credit in the amount of the Security Deposit specified in this Lease (the “Letter of Credit”) for a cash security deposit as the Security under this Lease. Such Letter of Credit shall conform to the requirements set forth in Section 5 of Rider 2. Within forty five (45) days of the date Tenant delivers a conforming Letter of Credit to Landlord, Landlord shall return the Security Deposit to Tenant, and Landlord shall have no further obligation to return or account for the Security Deposit. After Tenant’s delivery of a conforming Letter of Credit and Landlord’s return of the Security Deposit to Tenant, references to the “Security” in this Lease shall refer to the Letter of Credit.
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(d) If Tenant fails timely to perform any obligation under this Article Five after any notice and cure period expressly provided under this Article Five, such breach shall constitute a Default by Tenant under this Lease without any right to or requirement of any further notice or cure period under any other Article of this Lease.
(e) If at any time Landlord is holding Tenant’s cash Security Deposit, and if at such time Tenant would have had the right to a Reduction (as defined in Section 5(e) of Rider 2) of the Letter of Credit (if Tenant had delivered the Letter of Credit in lieu of a cash Security Deposit as provided in Section 5(c) above), then at such time Tenant shall have the right to a Reduction of the cash Security Deposit on the same terms as Tenant has to a Reduction of the Letter of Credit under Section 5(e) of Rider 2. Provided that Tenant has satisfied the Reduction Conditions (as defined in Section 5(e) of Rider 2), Landlord shall deliver to Tenant the applicable Reduction Amount (calculated as provided in Section 5(e) of Rider 2) within thirty (30) days following Tenant’s delivery of Landlord of Tenant’s Financial Information (as defined in Section 5(e) of Rider 2) evidencing Tenant’s full satisfaction of the Reduction Conditions.
ARTICLE SIX
SERVICES
6.01 LANDLORD’S GENERAL SERVICES
(a) So long as the Lease is in full force and effect and Tenant has paid all Rent then due, Landlord shall furnish or cause the following services to be furnished to Tenant:
(1) heat, ventilation and air-conditioning (“HVAC”) in the Premises during Standard Operating Hours, as necessary in Landlord’s reasonable judgment for the comfortable occupancy of the Premises under normal business operations, subject to compliance with all applicable voluntary and mandatory regulations and Laws, which HVAC service shall be consistent with those HVAC services provided by comparable landlords of comparable Class A office buildings located in San Francisco, California;
(2) tempered and cold water for use in restrooms and lavatories in common with other tenants from the regular supply of the Building;
(3) customary cleaning and janitorial services in the Premises five (5) days per week, excluding National Holidays;
(4) washing of the outside windows in the Premises weather permitting at intervals determined by Landlord;
(5) automatic passenger elevator service in common with other tenants of the Building and, subject to reasonable scheduling by Landlord and payment of the standard charges (without mark-up by Landlord), freight elevator service provided outside of Standard Operating Hours;
(b) If Tenant uses heat generating machines or equipment in the Premises to an extent which adversely affects the temperature otherwise maintained by the air-cooling system or whenever the occupancy or electrical load adversely affects the temperature otherwise maintained by the air-cooling system, Landlord reserves the right to install or to require Tenant to install supplementary air-conditioning units in the Premises. Tenant shall bear all costs and expenses related to the installation, maintenance and operation of such units.
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(c) Tenant shall pay Landlord at rates fixed by Landlord for all tenants in the Building, charges for all water furnished to the Premises beyond that described in Section 6.01(a)(2), including the expenses of installation of a water line, meter and fixtures.
6.02 ELECTRICAL SERVICES
(a) So long as the Lease is in full force and effect and Tenant has paid all Rent then due, Landlord shall furnish or cause to be furnished to the Premises electric current for general business office use, including normal lighting, normal business office machines, customary janitorial service, and making alterations or repairs (whether by Landlord or Tenant). Notwithstanding any provision of the Lease to the contrary, without, in each instance, the prior written consent of Landlord, which may be withheld in Landlord’s sole discretion, Tenant shall not: (i) make any alterations or additions to the electric equipment or systems; or (ii) install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises other than personal computers, lap-top computers, photocopiers, printers, scanners, shredders, and ancillary equipment that is consistent with customary and normal general office use (and provided that Tenant’s use of electric current complies with the terms of the following sentence). Tenant’s use of electric current shall at no time exceed the lesser of (x) the capacity of the wiring, feeders and risers providing electric current to the Premises or the Building; or (y) a connected electrical load for lighting purposes in excess of the wattage per square foot of Rentable Area of the Premises required for Building standard amounts of lighting plus a connected load for all other power requirements of five (5) watts per square foot of Rentable Area of the Premises. The consent of Landlord to the installation of electric equipment shall not relieve Tenant from the obligation to limit usage of electricity to no more than such capacity.
(b) If and to the extent electric current is furnished to the Premises in excess of the amount of electric current normally used during Standard Operating Hours in a general business office in a first class office building with the type of electrical equipment and normal business office machines described in subparagraph (a) above, then (i) Tenant shall pay Landlord upon notice from Landlord the cost of such excess electric current, as additional Rent, (ii) the cost of such excess use and all additional costs separately billed to Tenant pursuant to this Section shall not be included as part of Operating Expenses, and (iii) Landlord may in its sole discretion either (i) install one or more meters to measure electric current furnished to the Premises or (ii) reasonably estimate electric current furnished to the Premises. Within ten (10) business days of Landlord’s request and reasonable supporting documentation, Tenant shall pay Landlord the cost of installing and maintaining all such meters and of any electrical engineering or consulting firm, if Landlord retains such firm to estimate the electric current furnished to the Premises in lieu of installation of a meter. Tenant shall pay Landlord for such excess electric current at the then current rates charged to Landlord for such electricity provided to the Property by the utility provider chosen by Landlord plus any additional cost of Landlord in keeping account of the electric current so consumed. Landlord’s notice shall specify whether such excess use shall be payable (i) in advance as reasonably estimated by Landlord in monthly installments at the time prescribed for monthly installments of Monthly Base Rent or (ii) within ten (10) days after notice from Landlord given from time to time of the amount due for prior excess use as metered or reasonably estimated by Landlord.
(c) So long as the Lease is in full force and effect and Tenant has paid all Rent then due, Landlord shall furnish or cause to be furnished to the Premises replacement lamps, bulbs, ballasts and starters used in any normal Building lighting installed in the Premises, except that if the replacement or repair of such items is a result of negligence of Tenant, its employees, agents, servants, licensees, subtenants, contractors or invitees, such cost shall be paid by Tenant within ten (10) days after notice from Landlord and shall not be included as part of Operating Expenses.
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6.03 ADDITIONAL AND AFTER-HOUR SERVICES
At Tenant’s written request, Landlord shall furnish additional quantities of any of the services or utilities specified in Section 6.01 on the terms set forth herein. For HVAC: (a) for service after Standard Operating Hours on Monday through Friday (except National Holidays), Tenant shall deliver to Landlord a written request before 2:00 P.M. of such day, and (b) for service on a Saturday, Sunday or National Holiday, Tenant shall deliver to Landlord a written request before 2:00 P.M. on the last business day prior to the requested service. For services or utilities requested by Tenant and furnished by Landlord, Tenant shall pay to Landlord as a charge therefor Landlord’s prevailing rates charged from time to time for such services and utilities. Without limiting the generality of the foregoing, for HVAC service beyond Standard Operating Hours, as of the date of this Lease, a two (2) hour minimum usage is required per activation. If Tenant shall fail to make any such payment, Landlord may, upon notice to Tenant and in addition to Landlord’s other remedies under this Lease, discontinue any or all of such additional services.
6.04 TELEPHONE SERVICES
All telegraph, telephone, and communication connections which Tenant may desire shall be subject to Landlord’s prior written approval, in Landlord’s sole discretion, and the location of all wires and the work in connection therewith shall be performed by contractors approved by Landlord and shall be subject to the direction of Landlord, except that such approval is not required as to Tenant’s telephone equipment (including cabling) within the Premises and from the Premises in a route designated by Landlord to any telephone cabinet or panel provided (as existing or as installed as part of Landlord’s Work, if any) on Tenant’s floor for Tenant’s connection to the telephone cable serving the Building so long as Tenant’s equipment does not require connections different than or additional to those to the telephone cabinet or panel provided. Except to the extent of such cabling within the Premises or from the Premises to such telephone cabinet or panel, Landlord reserves the right to designate and control the entity or entities providing telephone or other communication cable installation, removal, repair and maintenance in the Building and to restrict and control access to telephone cabinets or panels. In the event Landlord designates a particular vendor or vendors to provide such cable installation, removal, repair and maintenance for the Building, Tenant agrees to abide by and participate in such program. Tenant shall have non-exclusive access to existing distribution in the risers of the Building) and shall be responsible for and shall pay all costs incurred in connection with the installation of telephone cables and communication wiring in the Premises, including any hook-up, access and maintenance fees related to the installation of such wires and cables in the Premises and the commencement of service therein, and the maintenance thereafter of such wire and cables; and there shall be included in Operating Expenses for the Building all installation, removal, hook-up or maintenance costs incurred by Landlord in connection with telephone cables and communication wiring serving the Building which are not allocable to any individual users of such service but are allocable to the Building generally. If Tenant fails to maintain all telephone cables and communication wiring in the Premises and such failure affects or interferes with the operation or maintenance of any other telephone cables or communication wiring serving the Building, Landlord or any vendor hired by Landlord may enter into and upon the Premises forthwith and perform such repairs, restorations or alterations as Landlord deems necessary in order to eliminate any such interference (and Landlord may recover from Tenant all of Landlord’s costs in connection therewith). No later than the Termination Date, Tenant agrees to remove all telephone cables and communication wiring installed by Tenant for and during Tenant’s occupancy, which Landlord shall request Tenant to remove. Tenant agrees that neither Landlord nor any of its agents or employees shall be liable to Tenant, or any of Tenant’s employees, agents, customers or invitees or anyone claiming through, by or under Tenant, for any damages, injuries, losses, expenses, claims or causes of action because of any interruption, diminution, delay or discontinuance at any time for any reason in the furnishing of any telephone or other communication service to the Premises and the Building.
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6.05 DELAYS IN FURNISHING SERVICES
(a) Tenant agrees that Landlord shall not be in breach of this Lease nor be liable to Tenant for damages or otherwise, for any failure to furnish, or a delay in furnishing, or a change in the quantity or character of any service when such failure, delay or change is occasioned, in whole or in part, by repairs, improvements or mechanical breakdowns by an event of Force Majeure or by the act or default of Tenant or any party other than Landlord and its employees, contractors, or agents. No such failure, delay or change shall be deemed to be an eviction or disturbance of Tenant’s use and possession of the Premises, or relieve Tenant from paying Rent or from performing any other obligations of Tenant under this Lease, without any deduction or offset. Failure to any extent to make available, or any slowdown, stoppage, or interruption of, the specified utility services resulting from any cause, including changes in service provider or Landlord’s compliance with any voluntary or similar governmental or business guidelines now or hereafter published or any requirements now or hereafter established by any governmental agency, board, or bureau having jurisdiction over the operation of the Property, shall not render Landlord liable in any respect for damages to either persons, property, or business, nor be construed as an eviction of Tenant or work an abatement of Rent, nor relieve Tenant of Tenant’s obligations for fulfillment of any covenant or agreement hereof. Should any equipment or machinery furnished by Landlord break down or for any cause cease to function properly, Landlord shall use reasonable diligence to repair same promptly, but Tenant shall have no claim for abatement of Rent or damages on account of any interruption of service occasioned thereby or resulting therefrom.
(b) Tenant acknowledges that all of Landlord’s covenants and obligation under this Article Six are subject to the requirements of the governing documents for the Project of which the Premises form a part. Accordingly, Landlord shall have no liability hereunder if the Project fails to provide a service required to be provided to Tenant hereunder so long as Landlord uses commercially reasonable efforts, at Landlord’s sole expense, to cause the Project to do so.
6.06 CHOICE OF SERVICE PROVIDER
Tenant acknowledges that Landlord may, at Landlord’s sole option, to the extent permitted by applicable law, elect to change, from time to time, the company or companies which provide services (including electrical service, gas service, water, telephone and technical services) to the Building, the Premises and/or its occupants. Notwithstanding anything to the contrary set forth in this Lease, Tenant acknowledges that Landlord has not and does not make any representations or warranties concerning the identity or identities of the company or companies which provide services to the Building and the Premises or its occupants and Tenant acknowledges that the choice of service providers and matters concerning the engagement and termination thereof shall be solely that of Landlord. The foregoing provision is not intended to modify, amend, change or otherwise derogate from any provision of this Lease concerning the nature or type of service to be provided or any specific information concerning the amount thereof to be provided. Tenant agrees to cooperate with Landlord and each of its service providers in connection with any change in service or provider.
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6.07 SIGNAGE
Initial Building standard signage will be installed by Landlord in the directory in the main lobby of the Project and at Tenant’s main entry door to the Premises. Directory signage shall be provided at Landlord’s cost and expense. Tenant may install appropriate signage listing its name and/or logo above the Building standard lobby signage in the elevator lobby of the floor on which Tenant has leased the entire floor, subject to Landlord’s prior written consent (which shall not be unreasonably withheld) and conformity to Building standard signage. All such initial signage (other than in the directory in the main lobby of the Building) shall be procured and installed at Tenant’s sole cost and expense. Any elevator lobby signage installed by Tenant shall also be maintained, repaired, restored and removed by Tenant at Tenant’s cost and expense. Any change in such initial signage shall be only with Landlord’s prior written consent (which shall not be unreasonably withheld), shall conform to Project standard signage and shall be at Tenant’s sole cost and expense.
ARTICLE SEVEN
POSSESSION, USE AND CONDITION OF PREMISES
7.01 POSSESSION AND USE OF PREMISES
(a) Tenant shall occupy and use the Premises only for the uses specified in Section 1.01(16) to conduct Tenants business. Tenant shall not occupy or use the Premises (or permit the use or occupancy of the Premises) for any purpose or in any manner which: (1) is unlawful or in violation of any Law or Environmental Law; (2) may be dangerous to persons or property or which may invalidate any policy of insurance carried on the Building or Project or covering its operations or which may increase the cost of any such insurance or insurance carried by any other occupant of the Project unless such increased cost is paid by Tenant as provided in the rules and regulations of the Building described in Article Eighteen; (3) is contrary to or prohibited by the terms and conditions of this Lease or the rules and regulations of the Building set forth in Article Eighteen; (4) would tend to create or continue a nuisance; or (5) would result in an occupancy density in the Premises of more than one (1) person per 125 square feet of the Premises. Without limiting the generality of the foregoing, Tenant shall not bring upon the Premises or any portion of the Project or use the Premises or permit the Premises or any portion thereof to be used for the growing, manufacturing, administration, distribution (including without limitation, any retail sales), possession, use or consumption of any cannabis, marijuana or cannabinoid product or compound, regardless of the legality or illegality of the same.
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(b) Tenant shall comply with all Environmental Laws pertaining to Tenant’s occupancy and use of the Premises and concerning the proper storage, handling and disposal of any Hazardous Material introduced to the Premises, the Building or the Property by Tenant or other occupants of the Premises, or their employees, servants, agents, contractors, customers or invitees. Landlord shall comply with all Environmental Laws applicable to the Property other than those to be complied with by Tenant pursuant to the preceding sentence or Article Twenty-six. Tenant shall not generate, store, handle or dispose of any Hazardous Material in, on, or about the Property without the prior written consent of Landlord, which may be withheld in Landlord’s sole discretion, except that such consent shall not be required to the extent of Hazardous Material packaged and contained in office products for consumer use in general business offices in quantities for ordinary day-to-day use provided such use does not give rise to, or pose a risk of, exposure to or release of Hazardous Material. In the event that Tenant is notified of any investigation or violation of any Environmental Law arising from Tenant’s activities at the Premises, Tenant shall immediately deliver to Landlord a copy of such notice. In such event or in the event Tenant has failed to comply with its obligations hereunder, Landlord may conduct such tests and studies relating to compliance by Tenant with Environmental Laws or the alleged presence of Hazardous Material upon the Premises as Landlord deems desirable, all of which shall be completed at Tenant’s expense. Landlord’s inspection and testing rights are for Landlord’s own protection only, and Landlord has not, and shall not be deemed to have assumed any responsibility to Tenant or any other party for compliance with Environmental Laws, as a result of the exercise, or non-exercise of such rights. Tenant hereby indemnifies, and agrees to defend, protect and hold harmless, the Indemnitees from any and all loss, claim, demand, action, expense, liability and cost (including attorneys’ fees and expenses) arising out of or in any way related to the presence of any Hazardous Material introduced to the Premises or the Property during the Lease Term by Tenant or other occupants of the Premises, or their employees, servants, agents, contractors, customers or invitees. In case of any action or proceeding brought against the Indemnitees by reason of any such claim, upon notice from Landlord, Tenant covenants to defend such action or proceeding by counsel chosen by Landlord, in Landlord’s sole discretion. Landlord reserves the right to settle, compromise or dispose of any and all actions, claims and demands related to the foregoing indemnity. If any Hazardous Material is released, discharged or disposed of on or about the Property and such release, discharge or disposal is not caused by Tenant or other occupants of the Premises, or their employees, servants, agents, contractors customers or invitees, such release, discharge or disposal shall be deemed casualty damage under Article Fourteen to the extent that the Premises are affected thereby; in such case, Landlord and Tenant shall have the obligations and rights respecting such casualty damage provided under such Article.
(c) Landlord and Tenant acknowledge that the Americans With Disabilities Act of 1990 (42 U.S.C. §12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively referred to herein as the “ADA”) establish requirements for business operations, accessibility and barrier removal, and that such requirements may or may not apply to the Premises, the Building and the Project depending on, among other things: (1) whether Tenant’s business is deemed a “public accommodation” or “commercial facility”, (2) whether such requirements are “readily achievable”, and (3) whether a given alteration affects a “primary function area” or triggers “path of travel” requirements. The parties hereby agree that: (a) Landlord shall be responsible for ADA Title Ill compliance in the Common Areas, except as provided below, (b) Tenant shall be responsible for ADA Title III compliance in the Premises, including any leasehold improvements or other work to be performed in the Premises under or in connection with this Lease, (c) Landlord may perform, or require that Tenant perform, and Tenant shall be responsible for the cost of, ADA Title III “path of travel” requirements triggered by Tenant Additions in the Premises (except in connection with the Landlord Work and except as provided below with respect to the Tenant Work), and (d) Landlord may perform, or require Tenant to perform, and Tenant shall be responsible for the cost of, ADA Title III compliance in the Common Areas necessitated by the Building being deemed to be a “public accommodation” instead of a “commercial facility” as a result of Tenant’s use of the Premises. Tenant shall be solely responsible for requirements under Title I of the ADA relating to Tenant’s employees. To the extent Tenant shall occupy a full floor in the Building, all ADA requirements relating to the restrooms, elevator lobbies and corridors on such floor shall be the responsibility of Tenant. All matters relating to “life safety” on such floors shall also be the responsibility of Tenant.
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Notwithstanding anything to the contrary set forth herein, Landlord, at its cost, shall be responsible for correcting any violations of the ADA in effect and as interpreted and enforced as of the date hereof with respect to the Common Areas of the Building to the extent (i) triggered by the Landlord Work, and (ii) that the need for such correction is triggered by the Tenant Work, provided that the Tenant Work is consistent with general office use in the Building and does not contemplate any increased occupancy density or assemblage use (with such correction, if any, referred to herein as collectively as the “Required Upgrades”). Landlord, at Landlord’s sole cost and expense, shall have the right to contest any alleged Required Upgrades in good faith, including, without limitation, the right to apply for and obtain a waiver or deferment of compliance, the right to assert any and all defenses allowed by Law and the right to appeal any decisions, judgments or rulings to the fullest extent permitted by Law. Landlord, after the exhaustion of any and all rights to appeal or contest, will perform any Required Upgrades required in accordance with this Section. In the event that Tenant becomes aware of the need for any Required Upgrades triggered by the Tenant Work, Tenant shall give prompt, written, reasonably detailed notice thereof to Landlord (“Upgrade Notice”). Landlord shall use commercially reasonable efforts, subject to Landlord’s right to dispute or appeal the Required Upgrades as set forth above, to complete the Required Upgrades as soon as practicable following the date of receipt of Tenant’s Upgrade Notice. Landlord and Tenant agree to reasonably cooperate with each other in order to enable the Required Upgrades to be performed in a timely manner. Landlord shall not be subject to any liability for any delays in completion of the Required Upgrades, nor shall the same entitle Tenant to any credit or abatement of Rent; provided, however, to the extent Landlord’s failure to Substantially Complete the Required Upgrades causes an actual delay in Substantial Completion of the Tenant Work beyond the date that is four (4) months following the Delivery Date (a “Landlord Delay”), Tenant shall promptly notify Landlord of any such Landlord Delay in writing (a “Delay Notice”) and, if Tenant is unable to perform the Tenant Work as a result of Landlord’s failure to complete the Required Upgrades within two (2) business days after receipt of the Delay Notice, then the Commencement Date shall be delayed by one day for each day following the date of Landlord’s receipt of the Delay Notice and ending as of the date that the Required Upgrades are Substantially Complete. Notwithstanding anything to the contrary set forth herein, the Required Upgrades shall specifically exclude any repairs, alterations, improvements or modifications required as a result of any changes made to the space plan for the Tenant Work that is approved by Landlord (other than reasonable changes to such space plan requested by Landlord) or the scope of the Tenant Work described therein or as a result of Tenant’s particular design and/or use of the Premises (other than general office use) (and, in such event, Tenant shall, at its sole cost, perform or cause to be performed in accordance with the terms of the Lease, as amended hereby, such repairs, alterations, improvements and/or modifications).
(d) Landlord and Tenant agree to cooperate and use commercially reasonable efforts to participate in traffic management programs generally applicable to businesses located in or about the area and Tenant shall encourage and support van and car pooling by, and staggered and flexible working hours for, its office workers and service employees to the extent reasonably permitted by the requirements of Tenant’s business. Neither this Section or any other provision of this Lease is intended to or shall create any rights or benefits in any other person, firm, company, governmental entity or the public.
(e) Tenant agrees to cooperate with Landlord and to comply with any and all guidelines or controls concerning energy management imposed upon Landlord by federal or state governmental organizations or by any energy conservation association to which Landlord is a party or which is applicable to the Building.
(f) Tenant shall have access to the Building and the Premises for Tenant and its employees 24 hours per day/7 days per week, subject to the events of Force Majeure and the terms of this Lease and such security or monitoring systems as Landlord may reasonably impose, including, without limitation, sign-in procedures and/or presentation of identification cards to the extent applicable.
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7.02 LANDLORD ACCESS TO PREMISES; APPROVALS
(a) Tenant shall permit Landlord to erect, use and maintain pipes, ducts, wiring and conduits in and through the Premises, so long as Tenant’s use, layout or design of the Premises is not materially affected or altered. Landlord or Landlord’s agents shall have the right to enter upon the Premises in the event of an emergency, or to inspect the Premises, to perform janitorial and other services, to conduct safety and other testing in the Premises and to make such repairs, alterations, improvements or additions to the Premises or the Building or other parts of the Property as Landlord may deem necessary or desirable (including all alterations, improvements and additions in connection with a change in service provider or providers). Janitorial and cleaning services shall be performed after normal business hours. Any entry or work by Landlord may be during normal business hours and Landlord may use reasonable efforts to ensure that any entry or work shall not materially interfere with Tenant’s occupancy of the Premises.
(b) Advance notice shall not be required for entry to perform routine janitorial and cleaning services or for entry in the event of an emergency or urgent situation, as reasonably determined by Landlord, but any other entry or work by Landlord shall be upon at least one (1) business day prior written notice to Tenant, which written notice may include notices e-mailed to Tenant’s on-site manager at the Premises. If Tenant shall not be personally present to permit an entry into the Premises when for any reason an entry therein shall be necessary or permissible, Landlord (or Landlord’s agents), after attempting to notify Tenant (unless Landlord believes an emergency situation exists) as set forth in this Paragraph, may enter the Premises without rendering Landlord or its agents liable therefor, and without relieving Tenant of any obligations under this Lease.
(c) Landlord may enter the Premises for the purpose of conducting such inspections, tests and studies as Landlord may deem desirable or necessary to confirm Tenant’s compliance with all Laws and Environmental Laws or for other purposes necessary in Landlord’s reasonable judgment to ensure the sound condition of the Property and the systems serving the Property. Landlord’s rights under this Section 7.02(c) are for Landlord’s own protection only, and Landlord has not, and shall not be deemed to have assumed, any responsibility to Tenant or any other party as a result of the exercise or non-exercise of such rights, for compliance with Laws or Environmental Laws or for the accuracy or sufficiency of any item or the quality or suitability of any item for its intended use.
(d) Landlord may do any of the foregoing, or undertake any of the inspection or work described in the preceding paragraphs without such action constituting an actual or constructive eviction of Tenant, in whole or in part, or giving rise to an abatement of Rent by reason of loss or interruption of business of the Tenant, or otherwise.
(e) The review, approval or consent of Landlord with respect to any item required or permitted under this Lease is for Landlord’s own protection only, and Landlord has not, and shall not be deemed to have assumed, any responsibility to Tenant or any other party, as a result of the exercise or non-exercise of such rights, for compliance with Laws or Environmental Laws or for the accuracy or sufficiency of any item or the quality or suitability of any item for its intended use.
7.03 QUIET ENJOYMENT
Landlord covenants, in lieu of any implied covenant of quiet possession or quiet enjoyment, that so long as Tenant is in compliance with the covenants and conditions set forth in this Lease, Tenant shall have the right to quiet enjoyment of the Premises without hindrance or interference from Landlord or those claiming through Landlord, and subject to the covenants and conditions set forth in the Lease and to the rights of any Mortgagee or ground lessor.
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ARTICLE EIGHT
MAINTENANCE
8.01 LANDLORD’S MAINTENANCE
Subject to the provisions of Articles Seven and Fourteen, Landlord shall perform (or shall cause to be performed) maintenance and necessary repairs to the foundations, roofs, exterior walls, exterior glass, and the structural elements of the Building (and Project, as appropriate), the electrical, plumbing, heating, ventilating, air-conditioning, mechanical, communication, security and the fire and life safety systems of the Building and those corridors, washrooms and lobbies which are Common Areas, except that: (a) Landlord shall not be responsible for the maintenance or repair of any floor or wall coverings in the Premises (or Project, as appropriate) or any of such systems which are located within the Premises (or Project, as appropriate) which are supplemental or special to the Building’s (or Project, as appropriate) standard systems; and (b) the cost of performing any of said maintenance or repairs whether to the Premises or to the Building (or Project as appropriate) to the extent caused by the negligence of Tenant, its employees, agents, servants, licensees, subtenants, contractors or invitees, shall be paid by Tenant, subject to the waivers set forth in Section 16.04. Landlord shall not be liable to Tenant for any expense, injury, loss or damage resulting from work done in or upon, or in connection with the use of, any adjacent or nearby building, land, street, or alley.
8.02 TENANT’S MAINTENANCE
Subject to the provisions of Article Fourteen, Tenant, at its expense, shall keep and maintain the Premises and all Tenant Additions (subject to Landlord’s obligations in Exhibit B) thereto in good order, condition and repair and in accordance with all Laws and Environmental Laws. Tenant shall not permit waste and shall promptly and adequately repair all damages to the Premises and replace or repair all damaged or broken glass in the interior of the Premises, fixtures or appurtenances. Any repairs or maintenance shall be completed with materials of similar quality to the original materials, all such work to be completed under the supervision of Landlord. Any such repairs or maintenance shall be performed only by contractors or mechanics approved by Landlord, which approval shall not be unreasonably withheld, and whose work will not cause or threaten to cause disharmony or interference with Landlord or other tenants in the Building and their respective agents and contractors performing work in or about the Building. If Tenant fails to perform any of its obligations set forth in this Section 8.02, Landlord may, in its sole discretion and upon 24 hours prior notice to Tenant (except without notice in the case of emergencies), perform the same, and Tenant shall pay to Landlord any costs or expenses incurred by Landlord upon demand.
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ARTICLE NINE
ALTERATIONS AND IMPROVEMENTS
9.01 TENANT ALTERATIONS
(a) The following provisions shall apply to the completion of any Tenant Alterations:
(1) Tenant shall not, except as provided herein, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed, make or cause to be made any Tenant Alterations in or to the Premises or any Property systems serving the Premises. Prior to making any Tenant Alterations, Tenant shall give Landlord ten (10) days prior written notice (or such earlier notice as would be necessary pursuant to applicable Law) to permit Landlord sufficient time to post appropriate notices of non-responsibility. Subject to all other requirements of this Article Nine, Tenant may undertake Decoration work without Landlord’s prior written consent. Tenant shall furnish Landlord with the names and addresses of all contractors and subcontractors and copies of all contracts. All Tenant Alterations shall be completed at such time and in such manner as Landlord may from time to time designate, and only by contractors or mechanics approved by Landlord, which approval shall not be unreasonably withheld, provided, however, that Landlord may, in its sole discretion, specify the engineers and contractors to perform all work relating to the Building’s systems (including the mechanical, heating, plumbing, security, ventilating, air-conditioning, electrical, communication and the fire and life safety systems in the Building). The contractors, mechanics and engineers who may be used are further limited to those whose work will not cause or threaten to cause disharmony or interference with Landlord or other tenants in the Building and their respective agents and contractors performing work in or about the Building. Landlord may further condition its consent upon Tenant furnishing to Landlord and Landlord approving prior to the commencement of any work or delivery of materials to the Premises related to the Tenant Alterations such of the following as specified by Landlord: architectural plans and specifications, opinions from Landlord’s engineers stating that the Tenant Alterations will not in any way adversely affect the Building’s systems, necessary permits and licenses, certificates of insurance, and such other documents in such form reasonably requested by Landlord. Landlord may, in the exercise of reasonable judgment, request that Tenant provide Landlord with appropriate evidence of Tenant’s ability to complete and pay for the completion of the Tenant Alterations such as a performance bond or letter of credit. Upon completion of the Tenant Alterations (other than Decorations), Tenant shall deliver to Landlord an as-built mylar and digitized (if available) set of plans and specifications for the Tenant Alterations, or lieu thereof, CAD files and all documentation relating to the Tenant Alterations in pdf format.
(2) Tenant shall pay the cost of all Tenant Alterations and the cost of decorating the Premises and any work to the Property occasioned thereby. In connection with completion of any Tenant Alterations (other than for Decorations), Tenant shall pay Landlord a construction fee and all elevator and hoisting charges at Landlord’s then standard rate. Upon completion of Tenant Alterations, Tenant shall furnish Landlord with contractors’ affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used in connection therewith and such other documentation reasonably requested by Landlord or Mortgagee.
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(3) Tenant agrees to complete all Tenant Alterations (i) in accordance with all Laws, Environmental Laws, all requirements of applicable insurance companies and in accordance with Landlord’s standard construction rules and regulations, and (ii) in a good and workmanlike manner with the use of good grades of materials. Tenant shall notify Landlord immediately if Tenant receives any notice of violation of any Law in connection with completion of any Tenant Alterations and shall immediately take such steps as are necessary to remedy such violation. In no event shall such supervision or right to supervise by Landlord nor shall any approvals given by Landlord under this Lease constitute any warranty by Landlord to Tenant of the adequacy of the design, workmanship or quality of such work or materials for Tenant’s intended use or of compliance with the requirements of Section 9.01(a)(3)(i) and (ii) above or impose any liability upon Landlord in connection with the performance of such work.
(b) All Tenant Additions to the Premises, whether installed by Landlord or Tenant, shall without compensation or credit to Tenant, become part of the Premises and the property of Landlord at the time of their installation and shall remain in the Premises, unless pursuant to Article Twelve, Tenant may remove them or is required to remove them at Landlord’s request.
9.02 LIENS
Tenant shall not permit any lien or claim for lien of any mechanic, laborer or supplier or any other lien to be filed against the Building, the Land, the Premises, or any other part of the Property arising out of work performed, or alleged to have been performed by, or at the direction of, or on behalf of Tenant. If any such lien or claim for lien is filed, Tenant shall within ten (10) days of receiving notice of such lien or claim (a) have such lien or claim for lien released of record or (b) deliver to Landlord a bond in form, content, amount, and issued by surety, satisfactory to Landlord, indemnifying, protecting, defending and holding harmless the Indemnitees against all costs and liabilities resulting from such lien or claim for lien and the foreclosure or attempted foreclosure thereof. If Tenant fails to take any of the above actions, Landlord, in addition to its rights and remedies under Article Eleven, without investigating the validity of such lien or claim for lien, may pay or discharge the same and Tenant shall, as payment of additional Rent hereunder, reimburse Landlord upon demand for the amount so paid by Landlord, including Landlord’s expenses and attorneys’ fees.
ARTICLE TEN
ASSIGNMENT AND SUBLETTING
10.01 ASSIGNMENT AND SUBLETTING
(a) Without the prior written consent of Landlord, which may be withheld in Landlord’s sole discretion, Tenant may not sublease, assign, mortgage, pledge, hypothecate or otherwise transfer or permit the transfer of this Lease or the encumbering of Tenant’s interest therein in whole or in part, by operation of Law or otherwise or permit the use or occupancy of the Premises, or any part thereof, by anyone other than Tenant, provided, however, if Landlord chooses not to recapture the space proposed to be subleased or assigned as provided in Section 10.02, Landlord shall not unreasonably withhold, condition or delay its consent to a subletting or assignment under this Section 10.01. Tenant agrees that the provisions governing sublease and assignment set forth in this Article Ten shall be deemed to be reasonable. If Tenant desires to enter into any sublease of the Premises or assignment of this Lease, Tenant shall deliver written notice thereof to Landlord (“Tenant’s Notice”), together with the identity of the proposed subtenant or assignee (and certified financial statements thereof for the prior three (3) years) and the proposed principal terms thereof and further financial and other information sufficient for Landlord to make an informed judgment with respect to such proposed subtenant or assignee at least thirty (30) days prior to the commencement date of the term of the proposed sublease or assignment. If Tenant proposes to sublease less than all of the Rentable Area of the Premises, the space proposed to be sublet and the space retained by Tenant must each be a marketable unit as reasonably determined by Landlord and otherwise in compliance with all Laws. Landlord shall notify Tenant in writing of its approval or disapproval of the proposed sublease or assignment or its decision to exercise its rights under Section 10.02 within thirty (30) days after receipt of Tenant’s Notice (and all required information). In no event may Tenant sublease any portion of the Premises or assign the Lease to any other tenant of the Building, except in the event that Landlord does not have available, comparable space in the Building to lease to such tenant of the Building. Tenant shall submit for Landlord’s approval (which approval shall not be unreasonably withheld, conditioned or delayed) any advertising which Tenant or its agents intend to use with respect to the space proposed to be sublet.
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(b) With respect to Landlord’s consent to an assignment or sublease, Landlord may take into consideration any factors which Landlord may deem relevant, and the reasons for which Landlord’s denial shall be deemed to be reasonable shall include the following:
(i) the business reputation or creditworthiness of any proposed subtenant or assignee is not acceptable to Landlord; or
(ii) in Landlord’s reasonable judgment the proposed assignee or subtenant would diminish the value or reputation of the Building or Landlord; or
(iii) any proposed assignee’s or subtenant’s use of the Premises would violate Section 7.01 of the Lease or would violate the provisions of any other leases of tenants in the Project;
(iv) (the proposed assignee or subtenant is either a governmental agency, a school or similar operation, or a medical related practice; or
(v) the proposed subtenant or assignee is a bona fide prospective tenant of Landlord in the Project as demonstrated by a written proposal dated within sixty (60) days prior to the date of Tenant’s request; or
(vi) the proposed subtenant or assignee would materially increase the estimated pedestrian and vehicular traffic to and from the Premises and the Building.
In no event shall Landlord be obligated to consider a consent to any proposed assignment of the Lease which would assign less than the entire Premises. In the event Landlord wrongfully withholds its consent to any proposed sublease of the Premises or assignment of the Lease, Tenant’s sole and exclusive remedy therefor shall be to seek specific performance of Landlord’s obligations to consent to such sublease or assignment.
(c) Any sublease or assignment shall be expressly subject to the terms and conditions of this Lease. Any subtenant or assignee shall execute such documents as Landlord may reasonably require to evidence such subtenant or assignee’s assumption of the obligations and liabilities of Tenant under this Lease (which, in the case of a sublease, shall be to the extent such obligations or liabilities related to the portion of the Premises being sublet). Tenant shall deliver to Landlord a copy of all agreements executed by Tenant and the proposed subtenant and assignee with respect to the Premises. Landlord’s approval of a sublease, assignment, hypothecation, transfer or third party use or occupancy shall not constitute a waiver of Tenant’s obligation to obtain Landlord’s consent to further assignments or subleases, hypothecations, transfers or third party use or occupancy.
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(d) For purposes of this Article Ten, an assignment shall be deemed to include a change in the majority control of Tenant, resulting from any transfer, sale or assignment of shares of stock of Tenant occurring by operation of Law or otherwise if Tenant is a corporation whose shares of stock are not traded publicly. If Tenant is a partnership, any change in the partners of Tenant shall be deemed to be an assignment.
(e) Notwithstanding anything to the contrary contained in this Article Ten and provided there is no uncured default under this Lease, Tenant shall have the right, without the prior written consent of Landlord, to assign this Lease to an Affiliate or to sublease the Premises or any part thereof to an Affiliate, but (i) no later than fifteen (15) days prior to the effective date of the assignment or sublease, the assignee shall execute documents satisfactory to Landlord to evidence such assignee’s assumption of the obligations and liabilities of Tenant under this Lease, unless Landlord modifies or waives such requirement in the case of any assignment which occurs by operation of law (and without a written assignment) as a consequence of merger, consolidation or non-bankruptcy reorganization, and the subtenant shall execute documents reasonably satisfactory to Landlord to evidence that the sublease is subject to the terms and conditions of this Lease and that the subtenant shall perform and be bound by all the terms and conditions of this Lease (except payment of Monthly Base Rent and Rent Adjustments hereunder and other obligations which the sublease expressly provides are to be performed by Tenant as the sublessor) to the extent applicable to the space and period covered by the sublease; (ii) within ten (10) days after the effective date of such assignment or sublease, Tenant shall give notice to Landlord which notice shall include the full name and address of the assignee or subtenant, and a copy of all agreements executed between Tenant and the assignee or subtenant with respect to the Premises or part thereof, as may be the case; and (iii) within fifteen (15) days after Landlord’s written request, Tenant shall provide such reasonable documents or information which Landlord reasonably requests for the purpose of substantiating whether or not the assignment or sublease is to an Affiliate.
10.02 RECAPTURE
Except as provided in Section 10.01(e), Landlord shall have the option to exclude from the Premises covered by this Lease (“recapture”), the space proposed to be sublet or subject to the assignment, effective as of the proposed commencement date of such sublease or assignment. Tenant shall surrender possession of the space proposed to be subleased or subject to the assignment to Landlord on the effective date of recapture of such space from the Premises, such date being the Termination Date for such space. Effective as of the date of recapture of any portion of the Premises pursuant to this section, the Monthly Base Rent, Rentable Area of the Premises and Tenant’s Share shall be adjusted accordingly.
10.03 EXCESS RENT
Tenant shall pay Landlord on the first (1st) day of each month during the term of the sublease or assignment, fifty percent (50%) of the amount by which the sum of all rent and other consideration (direct or indirect) due from the subtenant or assignee for such month exceeds the sum of: (i) that portion of the Monthly Base Rent and Rent Adjustments due under this Lease for said month which is allocable to the space sublet or assigned; and (ii) the following costs and expenses for the subletting or assignment of such space: (1) brokerage commissions and attorneys’ fees and expenses, (2) the actual costs (amortized as provided in the last sentence of this Section 10.03) paid in making any improvements or substitutions in the Premises required by any sublease or assignment; and (3) “free rent” periods, costs of any inducements or concessions given to subtenant or assignee, moving costs, and other amounts in respect of such subtenant’s or assignee’s other leases or occupancy arrangements. All such costs and expenses shall be amortized over the term of the sublease or assignment pursuant to sound accounting principles.
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10.04 TENANT LIABILITY
In the event of any sublease or assignment, whether or not with Landlord’s consent, Tenant shall not be released or discharged from any liability, whether past, present or future, under this Lease, including any liability arising from the exercise of any renewal or expansion option, to the extent such exercise is expressly permitted by Landlord. Tenant’s liability shall remain primary, and in the event of default by any subtenant, assignee or successor of Tenant in performance or observance of any of the covenants or conditions of this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against said subtenant, assignee or successor. After any assignment, Landlord may consent to subsequent assignments or subletting of this Lease, or amendments or modifications of this Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto, and such action shall not relieve Tenant or any successor of Tenant of liability under this Lease. If Landlord grants consent to such sublease or assignment, Tenant shall pay all reasonable attorneys’ fees and expenses incurred by Landlord with respect to such assignment or sublease (not to exceed Two Thousand Five Hundred Dollars ($2,500.00) per request, provided that Tenant and, as applicable, the assignee, sublessee and transferee execute without material negotiation Landlord’s standard documents for consent to assignment, sublease or transfer). In addition, if Tenant has any options to extend the term of this Lease or to add other space to the Premises, such options shall not be available to any subtenant or assignee (other than an assignee pursuant to Section 10.01(e) above), directly or indirectly without Landlord’s express written consent, which may be withheld in Landlord’s sole discretion.
10.05 ASSUMPTION AND ATTORNMENT
If Tenant shall assign this Lease as permitted herein, the assignee shall expressly assume all of the obligations of Tenant hereunder in a written instrument satisfactory to Landlord and furnished to Landlord not later than fifteen (15) days prior to the effective date of the assignment. If Tenant shall sublease the Premises as permitted herein, Tenant shall, at Landlord’s option, within fifteen (15) days following any request by Landlord, obtain and furnish to Landlord the written agreement of such subtenant to the effect that the subtenant will attorn to Landlord and will pay all subrent directly to Landlord.
ARTICLE ELEVEN
DEFAULT AND REMEDIES
11.01 EVENTS OF DEFAULT
The occurrence or existence of any one or more of the following shall constitute a “Default” by Tenant under this Lease:
(i) Tenant fails to pay any installment or other payment of Rent including Rent Adjustment Deposits or Rent Adjustments within three (3) business days after the date when due (provided, however, that should Tenant fail to pay any installment or other payment of Rent when due Landlord shall provide written notice to Tenant with respect to the first two payment failures in any twelve month period and the same shall not constitute a Default unless Tenant fails to pay such sums within three (3) business days after written notice thereof);
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(ii) Tenant fails to observe or perform any of the other covenants, conditions or provisions of this Lease or the Workletter and fails to cure such default within thirty (30) days after written notice thereof to Tenant (except in connection with a failure to perform under Section 20.01 such thirty (30) day period shall not apply and the period shall be only five (5) days), unless the default involves a hazardous condition, which shall be cured forthwith or unless the failure to perform is a Default for which this Lease specifies there is no cure or grace period, provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot reasonably be cured within such thirty (30) day period, then such cure period shall be extended, but not in excess of an additional thirty (30) days, so long as Tenant diligently and continuously prosecutes the cure to completion;
(iii) the interest of Tenant in this Lease is levied upon under execution or other legal process;
(iv) a petition is filed by or against Tenant to declare Tenant bankrupt or seeking a plan of reorganization or arrangement under any Chapter of the Bankruptcy Act, or any amendment, replacement or substitution therefor, or to delay payment of, reduce or modify Tenant’s debts, which in the case of an involuntary action is not discharged within thirty (30) days;
(v) Tenant is declared insolvent by Law or any assignment of Tenant’s property is made for the benefit of creditors;
(vi) a receiver is appointed for Tenant or Tenant’s property, which appointment is not discharged within thirty (30) days;
(vii) any action taken by or against Tenant to reorganize or modify Tenant’s capital structure in a materially adverse way which in the case of an involuntary action is not discharged within thirty (30) days; or
(viii) upon the dissolution of Tenant.
11.02 LANDLORD’S REMEDIES
(a) A Default shall constitute a breach of the Lease for which Landlord shall have the rights and remedies set forth in this Section 11.02 and all other rights and remedies set forth in this Lease or now or hereafter allowed by Law, whether legal or equitable, and all rights and remedies of Landlord shall be cumulative and none shall exclude any other right or remedy.
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(b) With respect to a Default, at any time Landlord may terminate Tenant’s right to possession by written notice to Tenant stating such election. Upon the termination of Tenant’s right to possession pursuant to this Section 11.02, Tenant’s right to possession shall terminate and this Lease shall terminate, and Tenant shall remain liable as hereinafter provided. Upon such termination, Landlord shall have the right, subject to applicable Law, to re-enter the Premises and dispossess Tenant and the legal representatives of Tenant and all other occupants of the Premises by unlawful detainer or other summary proceedings, or otherwise as permitted by Law, regain possession of the Premises and remove their property (including their trade fixtures, personal property and those Tenant Additions which Tenant is required or permitted to remove under Article Twelve), but Landlord shall not be obligated to effect such removal, and such property may, at Landlord’s option, be stored elsewhere, sold or otherwise dealt with as permitted by Law, at the risk of, expense of and for the account of Tenant, and the proceeds of any sale shall be applied pursuant to Law. Landlord shall in no event be responsible for the value, preservation or safekeeping of any such property. Tenant hereby waives all claims for damages that may be caused by Landlord’s removing or storing Tenant’s personal property pursuant to this Section or Section 12.01, and Tenant hereby indemnifies, and agrees to defend, protect and hold harmless, the Indemnitees from any and all loss, claims, demands, actions, expenses, liability and cost (including attorneys’ fees and expenses) arising out of or in any way related to such removal or storage. Upon such written termination of Tenant’s right to possession and this Lease, Landlord shall have the right to recover damages for Tenant’s Default as provided herein or by Law, including the following damages provided by California Civil Code Section 1951.2:
(1) the worth at the time of award of the unpaid Rent which had been earned at the time of termination;
(2) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could reasonably have been avoided;
(3) the worth at the time of award of the amount by which the unpaid Rent for the balance of the term of this Lease after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; and
(4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenants failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The word “rent” as used in this Section 11.02 shall have the same meaning as the defined term Rent in this Lease. The “worth at the time of award” of the amount referred to in clauses (1) and (2) above is computed by allowing interest at the Default Rate. The worth at the time of award of the amount referred to in clause (3) above is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). For the purpose of determining unpaid Rent under clause (3) above, the monthly Rent reserved in this Lease shall be deemed to be the sum of the Monthly Base Rent, monthly storage space rent, if any, and the amounts last payable by Tenant as Rent Adjustments for the calendar year in which Landlord terminated this Lease as provided hereinabove.
(c) Even if Tenant is in Default and/or has abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant’s right to possession by written notice as provided in Section 11.02(b) above, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover Rent as it becomes due under this Lease. In such event, Landlord shall have all of the rights and remedies of a landlord under California Civil Code Section 1951.4 (lessor may continue Lease in effect after Tenant’s Default and abandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations), or any successor statute. During such time as Tenant is in Default, if Landlord has not terminated this Lease by written notice and if Tenant requests Landlord’s consent to an assignment of this Lease or a sublease of the Premises, subject to Landlord’s option to recapture pursuant to Section 10.02, Landlord shall not unreasonably withhold its consent to such assignment or sublease. Tenant acknowledges and agrees that the provisions of Article Ten shall be deemed to constitute reasonable limitations of Tenant’s right to assign or sublet. Tenant acknowledges and agrees that in the absence of written notice pursuant to Section 11.02(b) above terminating Tenant’s right to possession, no other act of Landlord shall constitute a termination of Tenant’s right to possession or an acceptance of Tenant’s surrender of the Premises, including acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord’s interest under this Lease or the withholding of consent to a subletting or assignment, or terminating a subletting or assignment, if in accordance with other provisions of this Lease.
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(d) In the event that Landlord seeks an injunction with respect to a breach or threatened breach by Tenant of any of the covenants, conditions or provisions of this Lease, Tenant agrees to pay the premium for any bond required in connection with such injunction.
(e) Tenant hereby waives any and all rights to relief from forfeiture, redemption or reinstatement granted by Law (including California Civil Code of Procedure Sections 1174 and 1179) in the event of Tenant being evicted or dispossessed for any cause or in the event of Landlord obtaining possession of the Premises by reason of Tenant’s Default or otherwise;
When this Lease requires giving or service of a notice of Default or of a failure of Tenant to observe or perform any covenant, condition or provision of this Lease which will constitute a Default unless Tenant so observes or performs within any applicable cure period, and so long as the notice given or served provides Tenant the longer of any applicable cure period required by this Lease or by statute, then the giving of any equivalent or similar statutory notice, including any equivalent or similar notices required by California Code of Civil Procedure Section 1161 or any similar or successor statute, shall replace and suffice as any notice required under this Lease. When a statute requires service of a notice in a particular manner, service of that notice (or a similar notice required by this Lease) in the manner required by Article Twenty-four shall replace and satisfy the statutory service—of—notice procedures, except that any notice of unlawful detainer required by California Code of Civil Procedure Section 1161 or any similar or successor statute shall be served as required by Code of Civil Procedure Section 1162 or any similar or successor statute, and for purposes of Code of Civil Procedure Section 1162 or any similar or successor statute, Tenant’s “place of residence” and “usual place of business” shall mean the address specified by Tenant for notice pursuant to Section 1.01 of this Lease, as changed by Tenant pursuant to Article Twenty-four of this Lease.
(f) The voluntary or other surrender or termination of this Lease, or a mutual termination or cancellation thereof, shall not work a merger and shall terminate all or any existing assignments, subleases, subtenancies or occupancies permitted by Tenant, except if and as otherwise specified in writing by Landlord.
(g) No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant, and no exercise by Landlord of its rights pursuant to Section 25.15 to perform any duty which Tenant fails timely to perform, shall impair any right or remedy or be construed as a waiver. No provision of this Lease shall be deemed waived by Landlord unless such waiver is in a writing signed by Landlord. The waiver by Landlord of any breach of any provision of this Lease shall not be deemed a waiver of any subsequent breach of the same or any other provision of this Lease.
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11.03 ATTORNEY’S FEES
Tenant shall be liable for, and shall pay upon demand, all costs and expenses, including reasonable attorneys’ fees, incurred by Landlord in enforcing Tenant’s performance of its obligations under this Lease, or resulting from Tenant’s Default (regardless of whether suit is initiated), or incurred by Landlord in any litigation, negotiation or transaction in which Tenant causes Landlord, without Landlord’s fault, to become involved or concerned.
11.04 BANKRUPTCY
The following provisions shall apply in the event of the bankruptcy or insolvency of Tenant:
(a) In connection with any proceeding under Chapter 7 of the Bankruptcy Code where the trustee of Tenant elects to assume this Lease for the purposes of assigning it, such election or assignment, may only be made upon compliance with the provisions of (b) and (c) below, which conditions Landlord and Tenant acknowledge to be commercially reasonable. In the event the trustee elects to reject this Lease then Landlord shall immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee.
(b) Any election to assume this Lease under Chapter 11 or 13 of the Bankruptcy Code by Tenant as debtor-in-possession or by Tenant’s trustee (the “Electing Party”) must provide for:
The Electing Party to cure or provide to Landlord adequate assurance that it will cure all monetary defaults under this Lease within fifteen (15) days from the date of assumption and it will cure all nonmonetary defaults under this Lease within thirty (30) days from the date of assumption. Landlord and Tenant acknowledge such condition to be commercially reasonable.
(c) If the Electing Party has assumed this Lease or elects to assign Tenant’s interest under this Lease to any other person, such interest may be assigned only if the intended assignee has provided adequate assurance of future performance (as herein defined), of all of the obligations imposed on Tenant under this Lease.
For the purposes hereof, “adequate assurance of future performance” means that Landlord has ascertained that each of the following conditions has been satisfied:
(i) The assignee has submitted a current financial statement, certified by its chief financial officer, which shows a net worth and working capital in amounts sufficient to assure the future performance by the assignee of Tenant’s obligations under this Lease; and
(ii) Landlord has obtained consents or waivers from any third parties which may be required under a lease, mortgage, financing arrangement, or other agreement by which Landlord is bound, to enable Landlord to permit such assignment.
(d) Landlord’s acceptance of rent or any other payment from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, the requirement of Landlord’s consent, Landlord’s right to terminate this Lease for any transfer of Tenant’s interest under this Lease without such consent, or Landlord’s claim for any amount of Rent due from Tenant.
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11.05 LANDLORD’S DEFAULT
Landlord shall be in default hereunder in the event Landlord has not begun and pursued with reasonable diligence the cure of any failure of Landlord to meet its obligations hereunder within thirty (30) days after the receipt by Landlord of written notice from Tenant of the alleged failure to perform. In no event shall Tenant have the right to terminate or rescind this Lease as a result of Landlord’s default as to any covenant or agreement contained in this Lease. Tenant hereby waives such remedies of termination and rescission and hereby agrees that Tenant’s remedies for default hereunder and for breach of any promise or inducement shall be limited to a suit for damages and/or injunction. In addition, Tenant hereby covenants that, prior to the exercise of any such remedies, it will give the Mortgagee notice and a reasonable time to cure any default by Landlord.
ARTICLE TWELVE
SURRENDER OF PREMISES
12.01 IN GENERAL
Upon the Termination Date, Tenant shall surrender and vacate the Premises immediately and deliver possession thereof to Landlord in a clean, good and tenantable condition, ordinary wear and tear, and damage caused by Landlord excepted. Tenant shall deliver to Landlord all keys to the Premises. Tenant shall remove from the Premises all movable personal property of Tenant and Tenant’s trade fixtures, including, subject to Section 6.04, cabling for any of the foregoing. Tenant shall be entitled to remove such Tenant Additions which at the time of their installation Landlord and Tenant agreed may be removed by Tenant. Tenant shall also remove such other Tenant Additions as required by Landlord, including any Tenant Additions containing Hazardous Material. Tenant immediately shall repair all damage resulting from removal of any of Tenant’s property, furnishings or Tenant Additions, shall close all floor, ceiling and roof openings and ‘shall restore the Premises to a tenantable condition as reasonably determined by Landlord. If any of the Tenant Additions which were installed by Tenant involved the lowering of ceilings, raising of floors or the installation of specialized wall or floor coverings or lights, then Tenant shall also be obligated to return such surfaces to their condition prior to the commencement of this Lease. Tenant shall also be required to close any staircases or other openings between floors. Notwithstanding any of the foregoing to the contrary, if so requested by Tenant in writing (and prominently in all capital and bold lettering which also states that such request is pursuant to Section 12.01 of the Lease) at the time Tenant requests approval of any Tenant Work (or any changes thereto) or subsequent Tenant Alterations, Landlord shall advise Tenant at the time of Landlord’s approval of such Tenant Work (or any changes thereto) or Tenant Alterations as to whether Landlord will require that such Tenant Work or Tenant Alterations be removed by Tenant from the Premises; provided, however, regardless of the foregoing, in any event, Landlord may require removal of any Tenant Additions containing Hazardous Material and all Tenant’s trade fixtures, and, subject to Section 6.03, cabling and wiring installed for Tenant’s personal property or trade fixtures. Notwithstanding anything to the contrary in this Lease, Tenant shall not be required to remove the Restroom Work at the expiration or earlier termination of this Lease. In the event possession of the Premises is not delivered to Landlord when required hereunder, or if Tenant shall fail to remove those items described above, Landlord may (but shall not be obligated to), at Tenant’s expense, remove any of such property and store, sell or otherwise deal with such property as provided in Section 11.02(b), including the waiver and indemnity obligations provided in that Section, and undertake, at Tenant’s expense, such restoration work as Landlord deems necessary or advisable.
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12.02 LANDLORD’S RIGHTS
Upon the Termination Date, Tenant shall surrender and vacate the Premises immediately and deliver possession thereof to Landlord in a clean, good and tenantable condition, ordinary wear and tear, and damage caused by Landlord (including, without limitation, damage resulting from Landlord’s failure to satisfy its maintenance obligations hereunder), casualty and condemnation excepted. Tenant shall also reimburse Landlord for all costs and expenses incurred by Landlord in removing any of Tenant Additions and in restoring the Premises to the condition required by this Lease at the Termination Date.
ARTICLE THIRTEEN
HOLDING OVER
Tenant shall pay Landlord the greater of (i) one hundred fifty percent (150%) of the monthly Rent payable for the month immediately preceding the holding over (including increases for Rent Adjustments which Landlord may reasonably estimate) or, (ii) one hundred fifty percent (150%) of the fair market rental value of the Premises as reasonably determined by Landlord for each month or portion thereof that Tenant retains possession of the Premises, or any portion thereof, after the Termination Date (without reduction for any partial month that Tenant retains possession). Tenant shall also pay all damages sustained by Landlord by reason of such retention of possession. The provisions of this Article shall not constitute a waiver by Landlord of any re-entry rights of Landlord and Tenant’s continued occupancy of the Premises shall be as a tenancy in sufferance.
ARTICLE FOURTEEN
DAMAGE BY FIRE OR OTHER CASUALTY
14.01 SUBSTANTIAL UNTENANTABILITY
(a) If any fire or other casualty (whether insured or uninsured) renders all or a substantial portion of the Premises, the Building or the Project untenantable, Landlord shall, with reasonable promptness after the occurrence of such damage, estimate the length of time that will be required to substantially complete the repair and restoration and shall by notice advise Tenant of such estimate (“Landlord’s Notice”). If Landlord estimates that the amount of time required to substantially complete such repair and restoration will exceed two hundred forty (240) days from the date such damage occurred, then Landlord, or Tenant, if all or a substantial portion of the Premises is rendered untenantable, shall have the right to terminate this Lease as of the date of such damage upon giving written notice to the other at any time within twenty (20) days after delivery of Landlord’s Notice, provided that if Landlord so chooses, Landlord’s Notice may also constitute such notice of termination. If Landlord has the right to terminate this Lease pursuant to this Section 14.01, Landlord agrees to exercise such right in a nondiscriminatory fashion among leases affecting the Building. Consideration of the following factors in arriving at its decision shall not be deemed discriminatory: length of term remaining on this Lease, time needed to repair and restore, costs of repair and restoration not covered by insurance proceeds, Landlord’s plans to repair and restore common areas serving the Premises, Landlord’s plans for repair and restoration of the Building, and other relevant factors of Landlord’s decision as long as they are applied to Tenant in the same manner as other tenants.
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(b) Tenant acknowledges that Landlord shall be entitled to the full proceeds of any insurance coverage, whether carried by Landlord or Tenant, for damages to the Premises, except for those proceeds (“Tenant’s Personal Property Insurance Proceeds”) of Tenant’s insurance of its own personal property and equipment which would be removable by Tenant at the Termination Date. All such insurance proceeds (other than Tenant’s Personal Property Insurance Proceeds) shall be payable to Landlord whether or not the Premises are to be repaired and restored, provided, however, if this Lease is not terminated and the parties proceed to repair and restore Tenant Additions at Tenant’s cost, to the extent Landlord received proceeds of Tenant’s insurance covering Tenant Additions, such proceeds shall be applied to reimburse Tenant for its cost of repairing and restoring Tenant Additions.
(c) Notwithstanding anything to the contrary herein set forth: (i) Landlord shall have no duty pursuant to this Section to repair or restore any portion of any Tenant Additions or to expend for any repair or restoration of the Premises or Building or Project amounts in excess of insurance proceeds payable and available for repair or restoration, and if such proceeds are insufficient Landlord shall have the right to terminate this Lease upon giving written notice to Tenant within a reasonable time after determining such proceeds will be insufficient; and (ii) Tenant shall not have the right to terminate this Lease pursuant to this Section if any damage or destruction was caused by the act or neglect of Tenant, its agent or employees. Whether or not the Lease is terminated pursuant to this Article Fourteen, in no event shall Tenant be entitled to any compensation or damages for loss of the use of the whole or any part of the Premises or for any inconvenience or annoyance occasioned by any such damage, destruction, rebuilding or restoration of the Premises or the Building or access thereto, except as provided in Section 14.03 below.
(d) Unless this Lease is terminated as provided in the preceding subparagraphs, Landlord shall proceed with reasonable promptness to repair and restore the Premises to its condition as existed prior to such casualty, subject to reasonable delays for insurance adjustments and Force Majeure delays, and also subject to zoning Laws and building codes then in effect. Landlord shall have no liability to Tenant, and Tenant shall not be entitled to terminate this Lease if such repairs and restoration are not in fact completed within the time period estimated by Landlord so long as Landlord shall proceed with reasonable diligence to complete such repairs and restoration.
(e) In addition, Tenant shall have the right to terminate this Lease if: (a) a substantial portion of the Premises has been damaged by fire or other casualty and such damage cannot reasonably be repaired (as reasonably determined by Landlord pursuant to a notice given to Tenant within sixty (60) days following the casualty) within one hundred twenty (120) days after the date of such casualty; (b) there is less than fifteen (15) months of the Term remaining on the date of such casualty; (c) the casualty was not caused by the gross negligence or willful misconduct of Tenant or its agents, employees or contractors; and (d) Tenant provides Landlord with written notice of its intent to terminate within fifteen (15) days after the Landlord’s notice is delivered to Tenant pursuant to subclause (a) above.
(f) Any repair or restoration of the Premises performed by Tenant shall be in accordance with the provisions of Article Nine hereof.
14.02 INSUBSTANTIAL UNTENANTABILITY
If the Premises or the Building is damaged by a casualty but neither is rendered substantially untenantable and Landlord estimates that the time to substantially complete the repair or restoration will not exceed two hundred forty (240) days from the date such damage occurred, then Landlord shall proceed to repair and restore the Building or the Premises other than Tenant Additions, with reasonable promptness, unless such damage is to the Premises and occurs during the last six (6) months of the Term, in which event either Tenant or Landlord shall have the right to terminate this Lease as of the date of such casualty by giving written notice thereof to the other within twenty (20) days after the date of such casualty. Notwithstanding the foregoing, Landlord’s obligation to repair shall be limited in accordance with the provisions of Section 14.01 above.
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14.03 RENT ABATEMENT
If all or any part of the Premises are rendered untenantable by fire or other casualty and this Lease is not terminated, Monthly Base Rent and Rent Adjustments shall abate for that part of the Premises which is untenantable on a per diem basis from the date of the casualty until Landlord has Substantially Completed the repair and restoration work in the Premises which it is required to perform, provided, that as a result of such casualty, Tenant does not occupy the portion of the Premises which is untenantable during such period. The foregoing rent abatement shall not apply in the event the Premises are rendered untenantable by reason of a fire or other casualty caused in whole or in part by the negligence or willful act of Tenant or its agents, employees, contractors or invitees if such abatement would adversely affect Landlord’s or Tenant’s ability to collect under any of its insurance policies providing coverage for rental or business interruptions.
14.04 WAIVER OF STATUTORY REMEDIES
The provisions of this Lease, including this Article Fourteen, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, the Premises or the Property or any part of either, and any Law, including Sections 1932(2), 1933(4), 1941 and 1942 of the California Civil Code, with respect to any rights or obligations concerning damage or destruction shall have no application to this Lease or to any damage to or destruction of all or any part of the Premises or the Property or any part of either, and are hereby waived.
ARTICLE FIFTEEN
EMINENT DOMAIN
15.01 TAKING OF WHOLE OR SUBSTANTIAL PART
In the event the whole or any substantial part of the Premises, the Building or the Project is taken or condemned by any competent authority for any public use or purpose (including a deed given in lieu of condemnation) and is thereby rendered untenantable, this Lease shall terminate as of the date title vests in such authority, and Monthly Base Rent and Rent Adjustments shall be apportioned as of the Termination Date. Notwithstanding anything to the contrary herein set forth, in the event the taking is temporary (for less than the remaining term of the Lease), Landlord may elect either (i) to terminate this Lease or (ii) permit Tenant to receive the entire award attributable to the Premises in which case Tenant shall continue to pay Rent and this Lease shall not terminate.
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15.02 TAKING OF PART
In the event a part of the Building or the Premises is taken or condemned by any competent authority (or a deed is delivered in lieu of condemnation) and this Lease is not terminated, the Lease shall be amended to reduce or increase, as the case may be, the Monthly Base Rent and Tenant’s Proportionate Share to reflect the Rentable Area of the Premises or Building, as the case may be, remaining after any such taking or condemnation. Landlord, upon receipt and to the extent of the award in condemnation (or proceeds of sale) shall make necessary repairs and restorations to the Premises (exclusive of Tenant Additions) and to the Building to the extent necessary to constitute the portion of the Building not so taken or condemned as a complete architectural and economically efficient unit. Notwithstanding the foregoing, if as a result of any taking, or a governmental order that the grade of any street or alley adjacent to the Building is to be changed and such taking or change of grade makes it necessary or desirable to substantially remodel or restore the Building or Project or prevents the economical operation of the Building or Project, Landlord shall have the right to terminate this Lease upon ninety (90) days prior written notice to Tenant.
15.03 COMPENSATION
Landlord shall be entitled to receive the entire award (or sale proceeds) from any such taking, condemnation or sale without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant’s interest, if any, in such award; provided, however, Tenant shall have the right separately to pursue against the condemning authority a separate award in respect of the loss, if any, to Tenant Additions paid for by Tenant without any credit or allowance from Landlord so long as there is no diminution of Landlord’s award as a result.
ARTICLE SIXTEEN
INSURANCE
16.01 TENANT’S INSURANCE
Tenant, at Tenant’s expense, agrees to maintain in force, with a company or companies acceptable to Landlord, during the Term: (a) Commercial General Liability Insurance on a primary basis and without any right of contribution from any insurance carried by Landlord covering the Premises on an occurrence basis against all claims for personal injury, bodily injury, death and property damage, including contractual liability covering the indemnification provisions in this Lease. Such insurance shall be for such limits that are reasonably required by Landlord from time to time but not less than a combined single limit of Five Million and No/100 Dollars ($5,000,000.00); provided that such limit may be satisfied with a base policy together with an umbrella policy; (b) Workers’ Compensation and Employers’ Liability Insurance to the extent required by and in accordance with the Laws of the State of California; (c) “All Risks” property insurance in an amount adequate to cover the full replacement cost of all Tenant Additions to the Premises, equipment, installations, fixtures and contents of the Premises in the event of loss; (d) In the event a motor vehicle is to be used by Tenant in connection with its business operation from the Premises, Comprehensive Automobile Liability Insurance coverage with limits of not less than Three Million and No/100 Dollars ($3,000,000.00) combined single limit coverage against bodily injury liability and property damage liability arising out of the use by or on behalf of Tenant, its agents and employees in connection with this Lease, of any owned, non-owned or hired motor vehicles; provided that such limit may be satisfied with a base policy together with an umbrella policy; and (e) such other insurance or coverages as Landlord reasonably requires.
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16.02 FORM OF POLICIES
Each policy referred to in 16.01 shall satisfy the following requirements. Each policy shall (i) name Landlord and the Indemnitees as additional insureds (except Tenant’s property insurance for which Landlord will be named as a loss payee in respects to the Tenant Improvements which become part of the Building, and Workers’ Compensation and Employers’ Liability Insurance), (ii) be issued by one or more responsible insurance companies licensed to do business in the State of California reasonably satisfactory to Landlord, (iii) where applicable, provide for deductible amounts satisfactory to Landlord and not permit co-insurance, (iv) shall provide that such insurance may not be canceled or amended without thirty (30) days’ prior written notice to the Landlord, and (v) each policy of “All-Risks” property insurance shall provide that the policy shall not be invalidated should the insured waive in writing prior to a loss, any or all rights of recovery against any other party for losses covered by such policies. Tenant shall deliver to Landlord, certificates of insurance and at Landlord’s request, copies of all policies and renewals thereof to be maintained by Tenant hereunder, not less than ten (10) days prior to the Commencement Date. Tenant shall use good faith commercially reasonable efforts to deliver to Landlord, certificates of insurance and at Landlord’s request, copies of all renewals of such policies not less than ten (10) days prior to the expiration date of each policy, and in all events shall deliver such copies of such renewals prior to the expiration date of each policy.
16.03 LANDLORD’S INSURANCE
Landlord agrees to purchase (or cause to be purchased) and keep in full force and effect (or cause to be kept in effect) during the Term hereof, including any extensions or renewals thereof, insurance under policies issued by insurers of recognized responsibility, qualified to do business in the State of California on the Building in amounts not less than the greater of eighty (80%) percent of the then full replacement cost (without depreciation) of the Building (above foundations and excluding Tenant Additions to the Premises) or an amount sufficient to prevent Landlord from becoming a co-insurer under the terms of the applicable policies, against fire and such other risks as may be included in standard forms of all risk coverage insurance reasonably available from time to time. Landlord agrees to maintain in force during the Term, Commercial General Liability Insurance covering the Building on an occurrence basis against all claims for personal injury, bodily injury, death and property damage. Such insurance shall be for a combined single limit of Five Million and No/100 Dollars ($5,000,000.00). Neither Landlord’s obligation to carry such insurance nor the carrying of such insurance shall be deemed to be an indemnity by Landlord with respect to any claim, liability, loss, cost or expense due, in whole or in part, to Tenant’s negligent acts or omissions or willful misconduct. Without obligation to do so, Landlord may, in its sole discretion from time to time, carry insurance in amounts greater and/or for coverage additional to the coverage and amounts set forth above.
16.04 WAIVER OF SUBROGATION
(a) Landlord agrees that, if obtainable at no, or minimal, additional cost (or at a cost that Tenant agrees to pay), and so long as the same is permitted under the laws of the State of California, it will include in its “All Risks” policies appropriate clauses pursuant to which the insurance companies (i) waive all rights of subrogation against Tenant with respect to losses payable under such policies and/or (ii) agree that such policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policies.
(b) Tenant agrees to include, if obtainable at no, or minimal, additional cost (or at a cost that Landlord agrees to pay), and so long as the same is permitted under the laws of the State of California, in its “All Risks” insurance policy or policies on Tenant Additions to the Premises, whether or not removable, and on Tenant’s furniture, furnishings, fixtures and other property removable by Tenant under the provisions of this Lease appropriate clauses pursuant to which the insurance company or companies (i) waive the rights of subrogation against Landlord and/or any tenant of space in the Building with respect to losses payable under such policy or policies and/or (ii) agree that such policy or policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policy or policies. If Tenant is unable to obtain in such policy or policies either of the clauses described in the preceding sentence, Tenant shall, if legally possible and without necessitating a change in insurance carriers, have Landlord named in such policy or policies as an additional insured. If Landlord shall be named as an additional insured in accordance with the foregoing, Landlord agrees to endorse promptly to the order of Tenant, without recourse, any check, draft, or order for the payment of money representing the proceeds of any such policy or representing any other payment growing out of or connected with said policies, and Landlord does hereby irrevocably waive any and all rights in and to such proceeds and payments.
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(c) Provided that Landlord’s right of full recovery under its policy or policies aforesaid is not adversely affected or prejudiced by the waiver contained in the remaining provisions of this sentence, Landlord hereby waives any and all right of recovery which it might otherwise have against Tenant, its servants, agents and employees, for loss or damage occurring to the Real Property and the fixtures, appurtenances and equipment therein, except Tenant Additions, to the extent the same is coverable by Landlord’s insurance required under this Lease (even if Landlord fails to carry such required insurance), notwithstanding that such loss or damage may result from the negligence or fault of Tenant, its servants, agents or employees. Provided that Tenant’s right of full recovery under its aforesaid policy or policies is not adversely affected or prejudiced by the waiver contained in the remaining provisions of this sentence, Tenant hereby waives any and all right of recovery which it might otherwise have against Landlord, its servants, and employees and against every other tenant of the Real Property who shall have executed a similar waiver in favor of Tenant as set forth in this Section 16.04 (c) for loss or damage to Tenant Additions, whether or not removable, and to Tenant’s furniture, furnishings, fixtures and other property removable by Tenant under the provisions hereof to the extent the same is coverable by Tenant’s insurance required under this Lease (even if Tenant fails to carry such required insurance), notwithstanding that such loss or damage may result from the negligence or fault of Landlord, its servants, agents or employees, or such other tenant and the servants, agents or employees thereof. Notwithstanding anything to the contrary in this Lease, this Section 16.04(c) shall apply in the case of any claim, loss or damage occurring to the Real Property and the fixtures, appurtenances and equipment therein (except Tenant Additions), to the extent the same is coverable by Landlord’s insurance required under this Lease; provided, however, Landlord shall retain its rights of recovery under this Lease in the case of any claim, loss or damage resulting from (i) the gross negligence or intentional or reckless misconduct of Tenant, its employees, agents (except for contractors as set forth in (ii)), licensees, subtenants, or invitees, and (ii) the acts or omissions of any contractor or sub-contractor of Tenant.
(d) Landlord and Tenant hereby agree to advise the other promptly if the clauses to be included in their respective insurance policies pursuant to subparagraphs (a) and (b) above cannot be obtained on the terms hereinbefore provided and thereafter to furnish the other with a certificate of insurance or copy of such policies showing the naming of the other as an additional insured. Landlord and Tenant hereby also agree to notify the other promptly of any cancellation or change of the terms of any such policy which would affect such clauses or naming. All such policies which name both Landlord and Tenant as additional insureds shall, to the extent obtainable, contain agreements by the insurers to the effect that no act or omission of any additional insured will invalidate the policy as to the other additional insureds.
16.05 NOTICE OF CASUALTY
Tenant shall give Landlord notice in case of a fire or accident in the Premises promptly after Tenant is aware of such event.
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ARTICLE SEVENTEEN
WAIVER OF CLAIMS AND INDEMNITY
17.01 WAIVER OF CLAIMS
To the extent permitted by Law, Tenant releases the Indemnitees from, and waives all claims for, damage to person or property sustained by the Tenant or any occupant of the Premises or the Property resulting directly or indirectly from any existing or future condition, defect, matter or thing in and about the Premises or the Property, or any part of either, or any equipment or appurtenance therein, or resulting from any accident in or about the Premises or the Property, or resulting directly or indirectly from any act or neglect of any tenant or occupant of the Property or of any other person, including Landlord’s agents and servants, except to the extent caused by the willful and wrongful act of any of the Indemnitees. If any such damage, whether to the Premises or the Property or any part of either, or whether to Landlord or to other tenants in the Property, results from any act or neglect of Tenant, its employees, servants, agents, contractors, invitees or customers, Tenant shall be liable therefor and Landlord may, at Landlord’s option, repair such damage and Tenant shall, upon demand by Landlord, as payment of additional Rent hereunder, reimburse Landlord within ten (10) days of demand for the total cost of such repairs, in excess of amounts, if any, paid to Landlord under insurance covering such damages. Tenant shall not be liable for any such damage caused by its acts or neglect if Landlord or a tenant has recovered the full amount of the damage from proceeds of insurance policies and the insurance company has waived its right of subrogation against Tenant.
17.02 INDEMNITY BY TENANT
To the extent permitted by Law, Tenant hereby indemnifies, and agrees to protect, defend and hold the Indemnitees harmless, against any and all actions, claims, demands, liability, costs and expenses, including attorneys’ fees and expenses for the defense thereof, arising from Tenant’s occupancy of the Premises, from the undertaking of any Tenant Additions or repairs to the Premises, from the conduct of Tenant’s business on the Premises, or from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed pursuant to the terms of this Lease, or from any willful act or negligence of Tenant, its agents, contractors, servants, employees, customers or invitees, in or about the Premises or the Property or any part of either. In case of any action or proceeding brought against the Indemnitees by reason of any such claim, upon notice from Landlord, Tenant covenants to defend such action or proceeding by counsel chosen by Landlord, in Landlord’s sole discretion. Landlord reserves the right to settle, compromise or dispose of any and all actions, claims and demands related to the foregoing indemnity. The foregoing indemnity shall not operate to relieve Indemnitees of liability to the extent such liability is caused by the willful and wrongful act of Indemnitees. Further, the foregoing indemnity is subject to and shall not diminish any waivers in effect in accordance with Section 16.04 by Landlord or its insurers to the extent of amounts, if any, paid to Landlord under its “All-Risks” property insurance.
17.03 WAIVER OF CONSEQUENTIAL DAMAGES
To the extent permitted by law, Tenant hereby waives and releases the Indemnitees from any consequential damages, compensation or claims for inconvenience or loss of business, rents or profits as a result of any injury or damage, whether or not caused by the willful and wrongful act of any of the Indemnitees.
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ARTICLE EIGHTEEN
RULES AND REGULATIONS
18.01 RULES
Tenant agrees for itself and for its subtenants, employees, agents, and invitees to comply with the rules and regulations listed on Exhibit C attached hereto and with all modifications and additions thereto which Landlord may make from time to time in writing. If there is a conflict between this Lease and any rules and regulations enacted after the date of this Lease, the terms of this Lease shall control.
18.02 ENFORCEMENT
Nothing in this Lease shall be construed to impose upon the Landlord any duty or obligation to enforce the rules and regulations as set forth on Exhibit C or as hereafter adopted, or the terms, covenants or conditions of any other lease as against any other tenant, and the Landlord shall not be liable to the Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees.
ARTICLE NINETEEN
LANDLORD’S RESERVED RIGHTS
Subject to Section 7.02(b), Landlord shall have the following rights exercisable without notice to Tenant and without liability to Tenant for damage or injury to persons, property or business and without being deemed an eviction or disturbance of Tenant’s use or possession of the Premises or giving rise to any claim for offset or abatement of Rent: (1) to change the Project’s name or street address upon thirty (30) days’ prior written notice to Tenant; (2) to install, affix and maintain all signs on the exterior and/or interior of the Building or Project (excluding Tenant’s signage in the Premises); (3) to designate and/or approve prior to installation, all types of signs, window shades, blinds, drapes, awnings or other similar items, and all internal lighting that may be visible from the exterior of the Premises; (4) upon reasonable notice to Tenant, to display the Premises to prospective purchasers at reasonable hours at any time during the Term and to prospective tenants at reasonable hours during the last twelve (12) months of the Term; (5) to grant to any party the exclusive right to conduct any business or render any service in or to the Building or Project, provided such exclusive right shall not operate to prohibit Tenant from using the Premises for the purpose permitted hereunder; (6) to change the arrangement and/or location of entrances or passageways, doors and doorways, corridors, elevators, stairs, washrooms or public portions of the Building or Project, and to close entrances, doors, corridors, elevators or other facilities, provided that such action shall not materially and adversely interfere with Tenant’s access to the Premises or the Building; (7) to have access for Landlord and other tenants of the Project to any mail chutes and boxes located in or on the Premises as required by any applicable rules of the United States Post Office; and (8) to close the Project after Standard Operating Hours, except that Tenant and its employees and invitees shall be entitled to admission at all times, under such regulations as Landlord prescribes for security purposes.
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ARTICLE TWENTY
ESTOPPEL CERTIFICATE
20.01 IN GENERAL
Within fifteen (15) days after request therefor by Landlord, Mortgagee or any prospective mortgagee or owner, Tenant agrees as directed in such request to execute an Estoppel Certificate in recordable form, binding upon Tenant, certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, a description of such modifications and that this Lease as modified is in full force and effect); (ii) the dates to which Rent has been paid; (iii) that Tenant is in the possession of the Premises if that is the case; (iv) that Landlord is not in default under this Lease, or, if Tenant believes Landlord is in default, the nature thereof in detail; (v) that Tenant has no offsets or defenses to the performance of its obligations under this Lease (or if Tenant believes there are any offsets or defenses, a full and complete explanation thereof); (vi) that the Premises have been completed in accordance with the terms and provisions hereof, that Tenant has accepted the Premises and the condition thereof and of all improvements thereto and has no claims against Landlord or any other party with respect thereto; (vii) that if an assignment of rents or leases has been served upon the Tenant by a Mortgagee, Tenant will acknowledge receipt thereof and agree to be bound by the provisions thereof; (viii) that Tenant will give to the Mortgagee copies of all notices required or permitted to be given by Tenant to Landlord; and (ix) to any other information reasonably requested.
20.02 ENFORCEMENT
In the event that Tenant fails to deliver an Estoppel Certificate within three (3) business days after written notice that the same is past due, then such failure shall be a Default for which there shall be no additional cure or grace period. In addition to any other remedy available to Landlord, Landlord may impose a charge equal to $500.00 for each day that Tenant fails to deliver an Estoppel Certificate.
ARTICLE TWENTY-ONE
INTENTIONALLY OMITTED
ARTICLE TWENTY-TWO
REAL ESTATE BROKERS
Tenant represents that, except for the broker(s) listed in Section 1.01(15), Tenant has not dealt with any real estate broker, sales person, or finder in connection with this Lease, and no such person initiated or participated in the negotiation of this Lease, or showed the Premises to Tenant. Landlord represents that, except for the broker(s) listed in Section 1.01(15), Landlord has not dealt with any real estate broker, sales person, or finder in connection with this Lease, and no such person initiated or participated in the negotiation of this Lease, or showed the Premises to Tenant. Landlord and Tenant each hereby agrees to indemnify, protect, defend and hold the other party, harmless from and against any and all liabilities and claims for commissions and fees arising out of a breach of the foregoing representation. Landlord agrees to pay any commission to which Landlord’s Broker listed in Section 1.01(15) is entitled in connection with this Lease pursuant to Landlord’s written agreement with such broker. Landlord and Tenant agree that any commission payable to Tenant’s Broker shall be paid by Tenant except to the extent Tenant’s Broker and Landlord’s Broker have entered into a separate agreement between themselves to share the commission paid to Landlord’s Broker by Landlord
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ARTICLE TWENTY-THREE
MORTGAGEE PROTECTION
23.01 SUBORDINATION AND ATTORNMENT
This Lease is and shall be expressly subject and subordinate at all times to (i) any ground or underlying lease of the Real Property, now or, provided the applicable ground lessor tenders a commercially reasonable non-disturbance agreement to Tenant, hereafter existing, and all amendments, extensions, renewals and modifications to any such lease, and (ii) the lien of any mortgage or trust deed now or, provided the Mortgagee tenders a commercially reasonable non-disturbance agreement to Tenant, hereafter encumbering fee title to the Real Property and/or the leasehold estate under any such lease, and all amendments, extensions, renewals, replacements and modifications of such mortgage or trust deed and/or the obligation secured thereby, unless such ground lease or ground lessor, or mortgage, trust deed or Mortgagee, expressly provides or elects that the Lease shall be superior to such lease or mortgage or trust deed. If any such mortgage or trust deed is foreclosed (including any sale of the Real Property pursuant to a power of sale), or if any such lease is terminated, upon request of the Mortgagee or ground lessor, as the case may be, Tenant shall attorn to the purchaser at the foreclosure sale or to the ground lessor under such lease, as the case may be, provided, however, that such purchaser or ground lessor shall not be (i) bound by any payment of Rent for more than one (1) month in advance except payments in the nature of security for the performance by Tenant of its obligations under this Lease; (ii) subject to any offset, defense or damages arising out of a default of any obligations of any preceding Landlord; or (iii) bound by any amendment or modification of this Lease made without the written consent of the Mortgagee or ground lessor; or (iv) liable for any security deposits not actually received in cash by such purchaser or ground lessor. This subordination shall be self-operative and no further certificate or instrument of subordination need be required by any such Mortgagee or ground lessor. In confirmation of such subordination, however, Tenant shall execute promptly any reasonable certificate or instrument that Landlord, Mortgagee or ground lessor may request. Upon request by such successor in interest, Tenant shall execute and deliver reasonable instruments confirming the attornment provided for herein.
23.02 MORTGAGEE PROTECTION
Tenant agrees to give any Mortgagee or ground lessor, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has received notice (by way of service on Tenant of a copy of an assignment of rents and leases, or otherwise) of the address of such Mortgagee or ground lessor. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Mortgagee or ground lessor shall have an additional thirty (30) days after receipt of notice thereof within which to cure such default or if such default cannot be cured within that time, then such additional notice time as may be necessary, if, within such thirty (30) days, any Mortgagee or ground lessor has commenced and is diligently pursuing the remedies necessary to cure such default (including commencement of foreclosure proceedings or other proceedings to acquire possession of the Real Property, if necessary to effect such cure). Such period of time shall be extended by any period within which such Mortgagee or ground lessor is prevented from commencing or pursuing such foreclosure proceedings or other proceedings to acquire possession of the Real Property by reason of Landlord’s bankruptcy. Until the time allowed as aforesaid for Mortgagee or ground lessor to cure such defaults has expired without cure, Tenant shall have no right to, and shall not, terminate this Lease on account of default. Except as expressly provided in Rider 2, this Lease may not be modified or amended so as to reduce the Rent or shorten the Term, or so as to adversely affect in any other respect to any material extent the rights of the Landlord, nor shall this Lease be canceled or surrendered, without the prior written consent, in each instance, of the ground lessor or the Mortgagee.
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ARTICLE TWENTY-FOUR
NOTICES
(a) All notices, demands or requests provided for or permitted to be given pursuant to this Lease must be in writing and shall be personally delivered, sent by Federal Express or other reputable overnight courier service, or mailed by first class, registered or certified United States mail, return receipt requested, postage prepaid.
(b) All notices, demands or requests to be sent pursuant to this Lease shall be deemed to have been properly given or served by delivering or sending the same in accordance with this Section, addressed to the parties hereto at their respective addresses listed in Sections 1.01(2) and (3).
(c) Notices, demands or requests sent by mail or overnight courier service as described above shall be effective upon deposit in the mail or with such courier service. However, the time period in which a response to any such notice, demand or request must be given shall commence to run from (i) in the case of delivery by mail, the date of receipt on the return receipt of the notice, demand or request by the addressee thereof, or (ii) in the case of delivery by Federal Express or other overnight courier service, the date of acceptance of delivery by an employee, officer, director or partner of Landlord or Tenant. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given, as indicated by advice from Federal Express or other overnight courier service or by mail return receipt, shall be deemed to be receipt of notice, demand or request sent. Notices may also be served by personal service upon any officer, director or partner of Landlord or Tenant, and shall be effective upon such service.
(d) By giving to the other party at least thirty (30) days written notice thereof, either party shall have the right from time to time during the term of this Lease to change their respective addresses for notices, statements, demands and requests, provided such new address shall be within the United States of America.
ARTICLE TWENTY-FIVE
OFAC
Landlord advises Tenant hereby that the purpose of this Article is to provide to the Landlord information and assurances to enable Landlord to comply with the law relating to OFAC.
Tenant hereby represents, warrants and covenants to Landlord, either that (i) Tenant is regulated by the SEC, FINRA or the Federal Reserve (a “Regulated Entity”) or (ii) neither Tenant nor any person or entity that directly or indirectly (a) controls Tenant or (b) has an ownership interest in Tenant of twenty-five percent (25%) or more, appears on the list of Specially Designated Nationals and Blocked Persons (“OFAC List”) published by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury.
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If, in connection with this Lease, there is one or more Guarantors of Tenant’s obligations under this Lease, then Tenant further represents, warrants and covenants either that (i) any such Guarantor is a Regulated Entity or (ii) neither Guarantor nor any person or entity that directly or indirectly (a) controls such Guarantor or (b) has an ownership interest in such Guarantor of twenty-five percent (25%) or more, appears on the OFAC List.
Tenant covenants that during the term of this Lease to provide to Landlord information reasonably requested by Landlord including without limitation, organizational structural charts and organizational documents which Landlord may deem to be necessary (“Tenant OFAC Information”) in order for Landlord to confirm Tenant’s continuing compliance with the provisions of this Article. Tenant represents and warrants that the Tenant OFAC Information it has provided or to be provided to Landlord or Landlord’s Broker in connection with the execution of this Lease is true and complete.
ARTICLE TWENTY-SIX
MISCELLANEOUS
26.01 LATE CHARGES
(a) The Monthly Base Rent, Rent Adjustments and Rent Adjustment Deposits shall be due when and as specifically provided above. Except for such payments and late charges described below, which late charge shall be due when provided below (without notice or demand), and except as otherwise expressly provided in this Lease, all other payments required hereunder to Landlord shall be paid within ten (10) business days after Landlord’s demand therefor. All Rent and charges, except late charges, not paid when due shall bear interest from the date due until the date paid at the Default Rate in effect on the date such payment was due.
(b) In the event Tenant is more than five (5) days late in paying any installment of Rent due under this Lease, Tenant shall pay Landlord a late charge equal to five percent (5%) of the delinquent installment of Rent; provided, however, that no late charge shall apply to the first instance of a late payment in each calendar year that is cured within five (5) days after Landlord’s written demand therefor. The parties agree that (i) such delinquency will cause Landlord to incur costs and expenses not contemplated herein, the exact amount of which will be difficult to calculate, including the cost and expense that will be incurred by Landlord in processing each delinquent payment of rent by Tenant, (ii) the amount of such late charge represents a reasonable estimate of such costs and expenses and that such late charge shall be paid to Landlord for each delinquent payment in addition to all Rent otherwise due hereunder. The parties further agree that the payment of late charges and the payment of interest provided for in subparagraph (a) above are distinct and separate from one another in that the payment of interest is to compensate Landlord for its inability to use the money improperly withheld by Tenant, while the payment of late charges is to compensate Landlord for its additional administrative expenses in handling and processing delinquent payments.
(c) Payment of interest at the Default Rate and/or of late charges shall not excuse or cure any default by Tenant under this Lease, nor shall the foregoing provisions of this Article or any such payments prevent Landlord from exercising any right or remedy available to Landlord upon Tenant’s failure to pay Rent when due, including the right to terminate this Lease.
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26.02 NO JURY TRIAL; VENUE; JURISDICTION
To the extent permitted by Law, each party hereto (which includes any assignee, successor, heir or personal representative of a party) shall not seek a jury trial, hereby waives trial by jury, and hereby further waives any objection to venue in the County in which the Building is located, and agrees and consents to personal jurisdiction of the courts of San Francisco County, California, in any action or proceeding or counterclaim brought by any party hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant’s use or occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy under any statute, emergency or otherwise, whether any of the foregoing is based on this Lease or on tort law, and the courts of San Francisco County shall have exclusive jurisdiction over all such matters. No party will seek to consolidate any such action in which a jury has been waived with any other action in which a jury trial cannot or has not been waived. It is the intention of the parties that these provisions shall be subject to no exceptions. By execution of this Lease the parties agree that this provision may be filed by any party hereto with the clerk or judge before whom any action is instituted, which filing shall constitute the written consent to a waiver of jury trial pursuant to and in accordance with Section 631 of the California Code of Civil Procedure. No party has in any way agreed with or represented to any other party that the provisions of this Section will not be fully enforced in all instances. The provisions of this Section shall survive the expiration or earlier termination of this Lease.
26.03 DEFAULT UNDER OTHER LEASE
It shall be a Default under this Lease if Tenant or any Affiliate holding any other lease with Landlord for premises in the Building defaults under such lease and as a result thereof such lease is terminated or terminable.
26.04 OPTION
This Lease shall not become effective as a lease or otherwise until executed and delivered by both Landlord and Tenant. The submission of the Lease to Tenant does not constitute a reservation of or option for the Premises, but when executed by Tenant and delivered to Landlord, the Lease shall constitute an irrevocable offer by Tenant in effect for fifteen (15) days to lease the Premises on the terms and conditions herein contained.
26.05 TENANT AUTHORITY
Landlord and Tenant each represents and warrants to the other party that it has full authority and power to enter into and perform its obligations under this Lease, that the person executing this Lease is fully empowered to do so, and that no consent or authorization is necessary from any third party. Landlord may request that Tenant provide Landlord evidence of Tenant’s authority.
26.06 ENTIRE AGREEMENT
This Lease, the Exhibits and Rider(s) attached hereto contain the entire agreement between Landlord and Tenant concerning the Premises and there are no other agreements, either oral or written, and no other representations or statements, either oral or written, on which Tenant has relied. This Lease shall not be modified except by a writing executed by Landlord and Tenant.
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26.07 MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE
If Mortgagee of Landlord requires a modification of this Lease which shall not result in any increased cost or expense to Tenant or in any other substantial and adverse change in the rights and obligations of Tenant hereunder, then Tenant agrees that the Lease may be so modified.
26.08 EXCULPATION
Tenant agrees, on its behalf and on behalf of its successors and assigns, that any liability or obligation of Landlord in connection with this Lease shall only be enforced against Landlord’s equity interest in the Property up to a maximum of Five Million Dollars ($5,000,000.00) and in no event against any other assets of the Landlord, or Landlord’s officers or directors or partners, and that any liability of Landlord with respect to this Lease shall be so limited and Tenant shall not be entitled to any judgment in excess of such amount.
26.09 ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of a lesser amount than any installment or payment of Rent due shall be deemed to be other than on account of the amount due, and no endorsement or statement on any check or any letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such installment or payment of Rent or pursue any other remedies available to Landlord. No receipt of money by Landlord from Tenant after the termination of this Lease or Tenant’s right of possession of the Premises shall reinstate, continue or extend the Term. Receipt or acceptance of payment from anyone other than Tenant, including an assignee of Tenant, is not a waiver of any breach of Article Ten, and Landlord may accept such payment on account of the amount due without prejudice to Landlord’s right to pursue any remedies available to Landlord.
26.10 LANDLORD’S OBLIGATIONS ON SALE OF BUILDING
In the event of any sale or other transfer of the Building, Landlord shall transfer any Security Deposit or Letter of Credit then held by Landlord to such transferee and Landlord shall be entirely freed and relieved of all agreements and obligations of Landlord hereunder accruing or to be performed after the date of such sale or transfer, and any remaining liability of Landlord with respect to this Lease shall be limited to Five Million Dollars ($5,000,000.00) and Tenant shall not be entitled to any judgment in excess of such amount.
26.11 BINDING EFFECT
Subject to the provisions of Article Ten, this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and permitted assigns.
26.12 CAPTIONS
The Article and Section captions in this Lease are inserted only as a matter of convenience and in no way define, limit, construe, or describe the scope or intent of such Articles and Sections.
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26.13 TIME; APPLICABLE LAW; CONSTRUCTION
Time is of the essence of this Lease and each and all of its provisions. This Lease shall be construed in accordance with the Laws of the State of California. If more than one person is a party to this Lease as Tenant, the obligations hereunder imposed shall be joint and several. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each item, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by Law. Wherever the term “including” or “includes” is used in this Lease, it shall have the same meaning as if followed by the phrase “but not limited to. The language in all parts of this Lease shall be construed according to its normal and usual meaning and not strictly for or against either Landlord or Tenant.
26.14 ABANDONMENT
In the event Tenant vacates or abandons the Premises but is otherwise in compliance with all the terms, covenants and conditions of this Lease, Landlord shall (i) have the right to enter into the Premises in order to show the space to prospective tenants, (ii) have the right to reduce the services provided to Tenant pursuant to the terms of this Lease to such levels as Landlord reasonably determines to be adequate services for an unoccupied premises and (iii) during the last six (6) months of the Term, have the right to prepare the Premises for occupancy by another tenant upon the end of the Term. Tenant expressly acknowledges that in the absence of written notice pursuant to Section 11.02(b) or pursuant to California Civil Code Section 1951.3 terminating Tenant’s right to possession, none of the foregoing acts of Landlord or any other act of Landlord shall constitute a termination of Tenant’s right to possession or an acceptance of Tenant’s surrender of the Premises, and the Lease shall continue in effect.
26.15 LANDLORD’S RIGHT TO PERFORM TENANT’S DUTIES
If Tenant fails timely to perform any of its duties under this Lease, Landlord shall have the right (but not the obligation), to perform such duty on behalf and at the expense of Tenant without prior notice to Tenant, and all sums expended or expenses incurred by Landlord in performing such duty shall be deemed to be additional Rent under this Lease and shall be due and payable upon demand by Landlord.
26.16 SECURITY SYSTEM
Landlord shall not be obligated to provide or maintain any security patrol or security system. Landlord shall not be responsible for the quality of any such patrol or system which may be provided hereunder or for damage or injury to Tenant, its employees, invitees or others due to the failure, action or inaction of such patrol or system.
26.17 NO LIGHT, AIR OR VIEW EASEMENTS
Any diminution or shutting off of light, air or view by any structure which may be erected on lands of or adjacent to the Project shall in no way affect this Lease or impose any liability on Landlord.
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26.18 RECORDATION
Neither this Lease, nor any notice nor memorandum regarding the terms hereof, shall be recorded by Tenant. Any such unauthorized recording shall be a Default for which there shall be no cure or grace period. Tenant agrees to execute and acknowledge, at the request of Landlord, a memorandum of this Lease, in recordable form.
26.19 SURVIVAL
The waivers of the right of jury trial, the other waivers of claims or rights, the releases and the obligations of Tenant under this Lease to indemnify, protect, defend and hold harmless Landlord and/or Indemnitees shall survive the expiration or termination of this Lease, and so shall all other obligations or agreements which by their terms survive expiration or termination of the Lease.
26.20 EXHIBITS OR RIDERS
All Exhibits, Riders and/or addenda referred to in this Lease as an Exhibit, Rider, or addenda hereto, or attached hereto, are hereby incorporated into and made a part of this Lease.
26.21 ELECTRICAL USAGE INFORMATION
If Tenant is billed directly by a public utility with respect to Tenant’s electrical usage at the Premises, then, upon request, Tenant shall provide monthly electrical utility usage for the Premises to Landlord for the period of time requested by Landlord (in electronic or paper format) or, at Landlord’s option, provide any written authorization or other documentation required for Landlord to request information regarding Tenant’s electricity usage with respect to the Premises directly from the applicable utility company.
26.22 DISCLOSURE REGARDING CERTIFIED ACCESS SPECIALIST
Pursuant to California Civil Code Section 1938, Landlord hereby notifies Tenant that as of the date of this Lease, the Premises has not undergone inspection by a “Certified Access Specialist” (“CASp”) to determine whether the Premises meet all applicable construction-related accessibility standards under California Civil Code Section 55.53. Landlord hereby discloses pursuant to California Civil Code Section 1938 as follows: “A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.” Landlord and Tenant hereby acknowledge and agree that in the event that Tenant elects to perform a CASp inspection of the Premises hereunder (the “Inspection”), such Inspection shall be (a) performed at Tenant’s sole cost and expense, (b) limited to the Premises and (c) performed by a CASp who has been approved or designated by Landlord prior to the Inspection. Any Inspection must be performed in a manner which minimizes the disruption of business activities in the Building, and at a time reasonably approved by Landlord. Landlord reserves the right to be present during the Inspection. Tenant agrees to: (i) promptly provide to Landlord a copy of the report or certification prepared by the CASp inspector upon request (the “Report”), (ii) keep the information contained in the Report confidential, except to the extent required by Law, or to the extent disclosure is needed in order to complete any necessary modifications or improvements required to comply with all applicable accessibility standards under state or federal Law, as well as any other repairs, upgrades, improvements, modifications or alterations required by the Report or that may be otherwise required to comply with applicable Laws or accessibility requirements (the “Access Improvements”). If Tenant elects to perform an Inspection, Tenant shall be solely responsible for the cost of Access Improvements to the Premises or the Building necessary to correct any such violations of construction-related accessibility standards identified by such Inspection as required by Law, which Access Improvements may, at Landlord’s option, be performed in whole or in part by Landlord at Tenant’s expense, payable as additional rent within ten (10) days following Landlord’s demand.
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ARTICLE TWENTY-SEVEN
HAZARDOUS SUBSTANCES DISCLOSURE
California law requires landlords to disclose to tenants the existence of certain hazardous substances. Accordingly, Tenant is hereby notified of the existence of asbestos containing materials (“ACM”). Certain areas of the Building contain ACM, but these areas are generally inaccessible to tenants, such as machinery rooms, inside of sealed walls and above suspended ceilings. Tenant agrees not to expose or disturb any ACM unless Landlord has given Tenant prior written consent thereto and Tenant complies with all Laws and the Building’s written procedures for handling ACM. Tenant may obtain a copy of the Building’s written procedures for handling asbestos from the Building office.
IN WITNESS WHEREOF, this Lease has been executed as of the date set forth in Section 1.01(4) hereof.
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LANDLORD: |
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METROMILE, INC., |
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425 MKT REIT, LLC, |
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a Delaware corporation |
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a Delaware limited liability company |
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/s/ Carrie Dolan |
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/s/ Leland Low |
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Carrie Dolan |
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Leland Low |
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CFO |
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(Chairman of Board, President or Vice President) |
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Authorized Signatory |
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/s/ Jason Altieri |
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Jason Altieri |
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Secretary |
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49
EXHIBIT A
PLAN OF PREMISES
Exhibit A – Page 1
EXHIBIT B
WORK LETTER AGREEMENT
(TENANT BUILD)
This Workletter Agreement (“Workletter”) is attached to and a part of a certain Office Lease by and between 425 MKT REIT, LLC, a Delaware limited liability company, as Landlord, and METROMILE, INC., a Delaware corporation, as Tenant, for the Premises (the “Lease”). Terms used herein and not defined herein shall have the meaning of such terms as defined elsewhere in the Lease. For purposes of this Workletter, references to “State” and “City” shall mean the State and City in which the Building is located.
1. AS IS Condition; Delivery.
Landlord shall deliver the Premises broom clean in its current “as built” configuration with existing build-out of the tenant space, with the Premises and the Building (including the “Base Building”, as defined below) in their AS IS condition, without any express or implied representations or warranties of any kind by Landlord, its brokers, manager or agents, or the employees of any of them; and Landlord shall not have any obligation to construct or install any tenant improvements or alterations or to pay for any such construction or installation except to the extent expressly provided in this Workletter. For purposes hereof, the “Base Building” (sometimes also referred to as the “Base Building Work”) shall mean the improvements made and work performed during the Building’s initial course of construction and modifications thereto, excluding all original and modified build-outs of any tenant spaces.
Tenant shall notify Landlord in writing within thirty (30) days after the later of Substantial Completion of the Landlord Work or when Tenant takes possession of the Premises of any defects in the Premises or in the materials or workmanship furnished by Landlord in completing the Landlord Work or failure of the Landlord Work to be in accordance with the Construction Drawings (“Defects”). Except for Defects stated in such notice and Latent Defects (defined below) of which Tenant gives Landlord notice within ninety (90) days after Substantial Completion of Landlord Work, Tenant shall be conclusively deemed to have accepted the Premises “AS IS” in the condition existing on the date Tenant first takes possession, and to have waived all claims relating to the condition of the Premises. Landlord shall proceed diligently to correct the Defects stated in such notice unless Landlord disputes the existence of any such Defects. In the event of any dispute as to the existence of any such defects, the reasonable decision of Landlord’s architect shall be final and binding on the parties. For purposes of this Lease, the “Latent Defects” shall mean Defects which were not discoverable by reasonable inspection when the thirty (30) day notice was due. No agreement of Landlord to alter, remodel, decorate, clean or improve the Premises or the Real Property and no representation regarding the condition of the Premises or the Real Property has been made by or on behalf of Landlord to Tenant, except as may be specifically stated in this Lease or in the Workletter.
2. Landlord Work.
Notwithstanding any of the foregoing to the contrary, subject to delays caused by Force Majeure (defined below) or Tenant Delay, Landlord, at Landlord’s sole cost and expense, shall perform the “Landlord Work” (defined below) and deliver the Premises to Tenant no later than the Projected Delivery Date (as defined Rider 2) in the “Delivery Condition”. “Delivery Condition” shall mean the work set forth on Exhibit B-1 hereto (“Landlord Work”), shall be Substantially Complete, and the Premises shall be in broom-clean condition with respect to Landlord Work, but Landlord shall not be obligated to do any clean-up or refuse removal related to construction of Tenant Work. For purposes of this Workletter, “Force Majeure” shall mean any accident, casualty, act of God, war or civil commotion, terrorism, strike or labor troubles, or any cause whatsoever beyond the reasonable control of Landlord, including, without limitation, water shortages, energy shortages or governmental preemption in connection with an act of God, a national emergency, or by reason of law, or by reason of the conditions of supply and demand which have been or are affected by act of God, war or other emergency.
Exhibit B – Page 1
3. Tenant’s Plans.
3.1. Description. At its expense, Tenant shall employ:
(i) one or more architects approved by Landlord (which approval shall not be unreasonably withheld, conditioned or delayed) and licensed by the State (“Tenant’s Architect”) to prepare architectural drawings and specifications for all layout and Premises improvements not included in, or requiring any change or addition to, the AS IS condition or Landlord Work (Ware Malcom, if used by Tenant as Tenant’s Architect, is consented to by Landlord);
(ii) either of: (a) one or more engineers approved by Landlord (which approval shall not be unreasonably withheld, conditioned or delayed) and licensed by the State (“Tenant’s Engineers”) to prepare mechanical, plumbing, sprinkler and electrical working drawings and specifications for all Premises improvements not included in, or requiring any change or addition to, the AS IS condition or Landlord Work (if any), or (b) the engineers designated by Landlord in response to a request from Tenant (“Landlord’s Mechanical Engineer”, “Landlord’s Plumbing Engineer”, “Landlord’s Sprinkler Engineer” and “Landlord’s Electrical Engineer”) to prepare mechanical and electrical working drawings and specifications for all Premises improvements not included in, or requiring any change or addition to the AS IS condition or Landlord Work (if any); and
(iii) the structural engineer designated by Landlord and licensed by the State to prepare structural working drawings and specifications for all Premises improvements not included in, or requiring any change or addition to the AS IS condition or Landlord Work (if any) (Holmes Structures, as structural engineer, is hereby approved by Landlord).
All such drawings and specifications are referred to herein as “Tenant’s Plans”. Tenant’s Plans shall be in form and detail sufficient to secure all applicable governmental approvals. Tenant’s Architect shall be responsible for coordination of all engineering work for Tenant’s Plans and shall coordinate with any consultants of Tenant (the use of which is subject to Landlord’s consent, which consent shall not be unreasonably withheld, conditioned or delayed), and Landlord’s space planner or architect to assure the consistency of Tenant’s Plans with the Base Building Work and Landlord Work (if any).
Exhibit B – Page 2
Tenant shall pay Landlord, within ten (10) business days of receipt of each invoice from Landlord, the cost incurred by Landlord for Landlord’s architects and engineers to review Tenant’s Plans for consistency of same with the Base Building Work and Landlord Work; provided, however, that the foregoing cost shall not exceed Seven Thousand Five Hundred Dollars ($7,500.00) if Tenant utilizes Landlord’s engineers to prepare Tenant’s Plans. Tenant’s Plans shall also include the following:
(a) Final Space Plan: The “Final Space Plan” for the Premises shall include a full and accurate description of room titles, floor loads, alterations to the Base Building or Landlord Work (if any) or requiring any change or addition to the AS IS condition, and the dimensions and location of all partitions, doors, aisles, plumbing (and furniture and equipment to the extent same affect floor loading). The Final Space Plan shall (i) be compatible with the design, construction, systems and equipment of the Base Building and Landlord Work; (ii) comply with the requirements of Landlord and comply with the requirements of the owners(s) of other condominium units applicable to the Common Areas and/or Project Areas (collectively, (i) and (ii) may be referred to as “Building Standards”), (iii) comply with Laws, (iv) be capable of logical measurement and construction, and (v) contain all such information as may be required for the preparation of the Mechanical and Electrical Working Drawings and Specifications (including, without limitation, a capacity and usage report, from Landlord’s engineers pursuant to Section 3.1(b). below, for all mechanical and electrical systems in the Premises). Prior to submission to Landlord, the Final Space Plan shall have been reviewed and approved by the City Building and Fire Departments, and shall be on file with the Building Department, registered with a preliminary plan check number.
(b) Mechanical, Plumbing, Sprinkler and Electrical Working Drawings and Specifications: Tenant shall employ engineers approved by Landlord ( which approval shall not be unreasonably withheld, conditioned or delayed) to prepare Mechanical, Plumbing, Sprinkler and Electrical Working Drawings and Specifications showing complete plans for electrical, life safety, automation, plumbing, water, and air cooling, ventilating, heating and temperature control to the extent the Tenant Work would impact, modify or add to any of such systems. Tenant shall employ Landlord’s Mechanical Engineer, Landlord’s Plumbing Engineer, Landlord’s Sprinkler Engineer and Landlord’s Electrical Engineer to prepare a capacity and usage report (“Capacity Report”) for all mechanical, plumbing, sprinkler and electrical systems in the Premises.
(c) Issued for Construction Documents: The “Issued for Construction Documents” shall consist of all drawings (1/8” scale) and specifications necessary to construct all Premises improvements including, without limitation, architectural and structural working drawings and specifications and Mechanical and Electrical Working Drawings and Specifications and all applicable governmental authorities plan check corrections.
3.2. Approval by Landlord. Tenant’s Plans and any revisions thereof shall be subject to Landlord’s approval, which approval or disapproval:
(i) shall not be unreasonably withheld, provided however, that Landlord may disapprove Tenant’s Plans in its sole and absolute discretion if they (a) adversely affect the structural integrity of the Building at the Project, (b) adversely affect any of the Building Systems (as defined below), the Common Areas, Project Areas, or any other tenant space (whether or not currently occupied), (c) fail to fully comply with Laws, (d) affect the exterior appearance of the Building at the Project, or (e) provide for improvements which do not meet or exceed the Building Standards. Building Systems collectively shall mean the structural, electrical, mechanical (including, without limitation, heating, ventilating and air conditioning), plumbing, fire and life-safety (including, without limitation, fire protection system and any fire alarm), communication, utility, gas (if any), security (if any), and elevator systems in the Building.
(ii) shall not be delayed beyond ten (10) business days with respect to initial submissions and major change orders (those which impact Building Systems or any other item listed in subpart (i) of Section 3.2 above) and beyond five (5) business days with respect to required revisions and any other change orders.
Exhibit B – Page 3
If Landlord disapproves of any of Tenant’s Plans, Landlord shall advise Tenant of what Landlord disapproves in reasonable detail. After being so advised by Landlord, Tenant shall submit a redesign, incorporating the revisions required by Landlord, for Landlord’s approval. The approval procedure shall be repeated as necessary until Tenant’s Plans are ultimately approved. During the foregoing approval procedure, Landlord shall notify Tenant of the extent to which Tenant will be responsible for removing the Tenant Work, or any portion thereof, on or before the Termination Date. Approval by Landlord shall not be deemed to be a representation or warranty by Landlord with respect to the safety, adequacy, correctness, efficiency or compliance with Laws of Tenant’s Plans. Tenant shall be fully and solely responsible for the safety, adequacy, correctness and efficiency of Tenant’s Plans and for the compliance of Tenant’s Plans with any and all Laws. Landlord shall advise Tenant at the time of Landlord’s approval of such Tenant Work as to whether the Tenant Work can remain in the Premises following the expiration or earlier termination of this Lease; provided, however, regardless of the foregoing, in any event, Landlord may require removal of (a) any Tenant Additions containing Hazardous Material, (b) all Tenant’s trade fixtures, and (c) subject to Section 6.03 of the Lease, cabling and wiring installed for Tenant’s personal property or trade fixtures. Notwithstanding the foregoing, it is agreed that other than the items in subclauses (a), (b) and (c) in the preceding sentence, Tenant shall have no obligation to remove any standard office improvements such as gypsum board, partitions, ceiling grids and tiles, fluorescent lighting panels, Building standard doors and non-glued down carpeting.
3.3. Landlord Cooperation. Landlord shall cooperate with Tenant and make good faith efforts to coordinate Landlord’s construction review procedures to expedite the planning, commencement, progress and completion of Tenant Work. Landlord shall complete its review of each stage of Tenant’s Plans and any revisions thereof and communicate the results of such review within the time periods set forth in Section 3.2 above.
3.4. City Requirements. Tenant shall submit Tenant’s Plans simultaneously to Landlord for approval and to the San Francisco Building and Fire Departments for approval by all applicable governmental authorities. Any changes in Tenant’s Plans which are made in response to requirements of the applicable governmental authorities and/or changes which affect the Base Building Work shall be immediately submitted to Landlord for Landlord’s review and approval.
3.5. “As-Built” Drawings and Specifications. A CADD-DXF diskette file and a set of mylar reproducibles of all “as-built” drawings and specifications of the Premises (reflecting all field changes and including, without limitation, architectural, structural, mechanical and electrical drawings and specifications) prepared by Tenant’s Architect and Engineers or by Contractors (defined below) shall be delivered by Tenant at Tenant’s expense to the Landlord within thirty (30) days after completion of the Tenant Work. If Landlord has not received such drawings and diskette(s) within thirty (30) days, Landlord may give Tenant written notice of such failure. If Tenant does not produce the drawings and diskette(s) within ten (10) days after Landlord’s written notice, Landlord may, at Tenant’s sole cost which may be deducted from the Allowance, produce the drawings and diskette(s) using Landlord’s personnel, managers, and outside consultants and contractors. Landlord shall receive an hourly rate reasonable for such production.
3.6. Lender’s Certificate. Tenant shall cause Tenant’s Architect to provide to Landlord’s lender(s), within ten (10) business days after request of Landlord, a certificate, in form and substance satisfactory to such lender(s), certifying that, as of the date of the certificate, Tenant Work and its use fully comply with all Laws in effect at the time Tenant took occupancy.
Exhibit B – Page 4
4. Tenant Work.
4.1. Tenant Work Defined. All tenant improvement work required by the Issued for Construction Documents (including, without limitation, any approved changes, additions or alterations pursuant to Section 7 below) is referred to in this Workletter as “Tenant Work” (and all improvements so required and resulting therefrom may sometimes in the Lease, or otherwise, be referred to as “Tenant Improvements”).
4.2. Tenant to Construct. Tenant shall construct all Tenant Work pursuant to this Workletter, and except to the extent modified by or inconsistent with express provisions of this Workletter, pursuant with the provisions of the terms and conditions of Article Nine of the Lease, governing Tenant Alterations (except to the extent modified by this Workletter) and all such Tenant Work shall be considered “Tenant Alterations” for purposes of the Lease. All Tenant Work by or on behalf of Tenant shall be performed in compliance with the 425 Market Street Tenant Construction Standards and in accordance with the Conditions for Construction and Asbestos Procedures.
4.3. Construction Contract. All contracts and subcontracts for Tenant Work shall include any terms and conditions reasonably required by Landlord.
4.4. Contractor. Tenant shall select one or more contractors to perform the Tenant Work, who shall be subject to Landlord’s prior written approval (which approval shall not be unreasonably withheld, conditioned or delayed) (“Contractor”).
4.5. Division of Landlord Work and Tenant Work. Tenant Work is defined in Section 4.1 above and Landlord Work is defined in Section 2.
4.6. Access & Services. Landlord shall provide without charge to Tenant, the Contractor, its subcontractors, Tenant’s Architect, Tenant’s Engineers, Tenant’s consultants and their respective employees normal Building security, access to and use of the loading dock, utilities and HVAC, toilet facilities, freight elevators or other normal Building services, to the extent they are compatible with construction in progress, during the design and construction period for Tenant Work, so long as the Contractor, its subcontractors, Tenant’s Architect, Tenant’s Engineers, Tenant’s consultants perform their work during Standard Operating Hours at times arranged in advance with and approved by the manager of the Building or Project. Notwithstanding the foregoing agreement not to charge Tenant for such expenses, Tenant understands and agrees that such expenses, whether incurred for Tenant or other tenants in the Building are part of Operating Expenses. To the extent Tenant’s move-in, and any of the foregoing activities do not occur during Standard Operating Hours, Tenant shall pay for Landlord’s expenses incurred as reasonably calculated by Landlord in providing such after hours services (including, without limitation, elevator). All stocking of Tenant’s construction materials for Tenant Work shall be as provided in Section 8.7 below.
Exhibit B – Page 5
5. Tenant’s Expense; Allowance.
Tenant shall pay for all Tenant Work, including, without limitation, the costs of design thereof, whether or not all such costs are included in the “Permanent Improvement Costs” (defined below). Subject to the terms and conditions of this Workletter, Tenant shall apply the “Allowance” (defined below) to payment of the Permanent Improvement Costs. The term “Permanent Improvement Costs” shall mean the actual and reasonable costs of construction of that Tenant Work which constitutes permanent improvements to the Premises, actual and reasonable costs of design thereof, costs incurred by Landlord for Landlord’s architects and engineers pursuant to Section 3.1, and Landlord’s construction administration fee (referred to in Section 8.12 below), and shall exclude costs of “Tenant’s FF& E” (defined below). For purposes of this Workletter, “Tenant’s FF& E” shall mean furniture, furnishings, telephone systems, computer systems, equipment, any other personal property or fixtures, and installation thereof. Landlord shall provide Tenant a tenant improvement allowance (“Allowance”) in the amount of Eighty Dollars ($80.00) per square foot of Rentable Area of the Premises. The Allowance shall be used solely to reimburse Tenant for the Permanent Improvement Costs; provided, however, that out of such total Allowance, no more than the amount equal to Ten Dollars ($10.00) per square foot of Rentable Area of the Premises (the “Design Allowance Portion”) may be used to reimburse Tenant’s reasonable costs of design, space planning, consultants and construction drawings and specifications, Tenant’s relocation costs and Landlord’s construction management fee. If within twelve (12) months after the Commencement Date, Tenant does not utilize one hundred percent (100%) of the Allowance for Permanent Improvement Costs and submit full and complete application(s) for disbursement thereof pursuant to Section 6 below, Tenant shall have no right to the unused portion of the Allowance.
In addition to the Allowance, Landlord shall provide Tenant an allowance (“Restroom Allowance”) in the amount of up to Three Hundred Twenty-Five Thousand Dollars (($325,000.00) solely to reimburse Tenant for the reasonable costs of design, engineering, and installing ADA compliant restrooms in the Premises (the “Restroom Work”). The Restroom Allowance shall be allocable solely towards the costs and expenses reasonably and actually incurred by Tenant for the Restroom Work and shall be disbursed in the same manner as the Allowance. The terms and conditions of this Lease as applicable to Tenant’s construction of the Tenant Work shall apply also to Tenant’s construction of the Restroom Work. If within twelve (12) months after the Commencement Date, Tenant does not utilize one hundred percent (100%) of the Restroom Allowance for costs of the Restroom Work and submit full and complete application(s) for disbursement thereof pursuant to Section 6 below, Tenant shall have no right to the unused portion of the Restroom Allowance.
In addition to the Allowance and the Restroom Allowance, Landlord shall provide Tenant an allowance (“Window Allowance”) in the amount of up to Thirty-Five Thousand Dollars ($35,000.00) solely to reimburse Tenant for the reasonable costs of purchasing and installing window treatments in the Premises (the “Window Work”). The Window Allowance shall be allocable solely towards the costs and expenses reasonably and actually incurred by Tenant for the Window Work and shall be disbursed in the same manner as the Allowance. The terms and conditions of this Lease as applicable to Tenant’s construction of the Tenant Work shall apply also to Tenant’s construction of the Window Work. If within twelve (12) months after the Commencement Date, Tenant does not utilize one hundred percent (100%) of the Window Allowance for costs of the Window Work and submit full and complete application(s) for disbursement thereof pursuant to Section 6 below, Tenant shall have no right to the unused portion of the Window Allowance.
Provided Tenant is not in default after the expiration of applicable cure periods, Landlord shall provide Tenant with an allowance (the “Space Planning Allowance”) in an amount not to exceed Three Thousand Nine Hundred Twenty Four and 00/100 Dollars ($3,924.00) (i.e. $0.15 per rentable square foot in the Premises) to be applied toward preparation of the initial space plan for the Tenant Improvements in the Premises (the “Space Planning Costs”). Landlord shall disburse the Space Planning Allowance, or applicable portion thereof, to Tenant within forty-five (45) days after receipt of paid invoices from Tenant with respect to Tenant’s actual Space Planning Costs. However, in no event shall Landlord have any obligation to disburse any portion of the Space Planning Allowance after the date which is twelve (12) months after the Commencement Date.
Exhibit B – Page 6
6. Application and Disbursement of the Allowance.
6.1. Tenant shall prepare a budget for all Tenant Work, including the Permanent Improvement Costs and all other costs of the Tenant Work (“Budget”), which Budget shall be subject to the reasonable approval of Landlord. Such Budget shall be supported by a guaranteed maximum price construction contract and such other documentation as Landlord may require to evidence the total costs. Further, prior to any disbursement of the Allowance by Landlord, Tenant shall pay and disburse its own funds for all that portion of the Permanent Improvement Costs equal to the sum of (i) the Permanent Improvement Costs in excess of the Allowance (the “Over-Allowance Amount”); plus (ii) the amount of “Landlord’s Retention” (defined below). “Landlord’s Retention” shall mean an amount equal to ten percent (10%) of the Allowance, which Landlord shall retain out of the Allowance and shall not be obligated to disburse unless and until after Tenant has completed the Tenant Work and complied with Section 6.4 below. No disbursement of the Allowance shall be made unless Tenant has provided Landlord with (a) bills and invoices covering all labor and material expended and used, (b) an affidavit from Tenant stating that all of such bills and invoices have either been paid in full by Tenant or are due and owing, and all such costs qualify as Permanent Improvement Costs, (c) contractors affidavit covering all labor and materials expended and used, (d) Tenant, contractors and architectural completion affidavits (as applicable), and (e) valid mechanics’ lien releases and waivers pertaining to any completed portion of the Tenant Work which shall be conditional or unconditional, as applicable, all as provided pursuant to Section 6.2 and 6.4 below.
6.2. Upon Tenants full compliance with the provisions of Section 6, and if Landlord determines that there are no applicable or claimed stop notices (or any other statutory or equitable liens of anyone performing any of Tenant Work or providing materials for Tenant Work) or actions thereon, Landlord shall disburse the applicable portion of the Allowance as follows:
(a) In the event of conditional releases, to the respective contractor, subcontractor, vendor, or other person who has provided labor and/or services in connection with the Tenant Work, upon the following terms and conditions: (i) such costs are included in the Budget, are Permanent Improvement Costs, are covered by the Allowance, and Tenant has completed and delivered to Landlord a written request for payment, in form reasonably approved by Landlord, setting forth the exact name of the contractor, subcontractor or vendor to whom payment is to be made and the date and amount of the bill or invoice, (ii) the request for payment is accompanied by the documentation set forth in Section 6.1; and (iii) Landlord, or Landlord’s appointed agent, has inspected and approved the work for which Tenant seeks payment; or
(b) In the event of unconditional releases, directly to Tenant upon the following terms and conditions: (i) Tenant seeks reimbursement for costs of Tenant Work which have been paid by Tenant, are included in the Budget, are Permanent Improvement Costs, and are covered by the Allowance; (ii) Tenant has completed and delivered to Landlord a request for payment, in form reasonably approved by Landlord, setting forth the name of the contractor, subcontractor or vendor paid and the date of payment, (iii) the request for payment is accompanied by the documentation set forth in Section 6.1.; and (iv) Landlord, or Landlord’s appointed agent, has inspected and approved the work for which Tenant seeks reimbursement.
Exhibit B – Page 7
6.3. Tenant shall provide Landlord with the aforementioned documents once per month and payment shall be made by Landlord within thirty (30) days following the date on which such documentation is provided.
6.4. Prior to Landlord disbursing the Landlord’s Retention to Tenant, Tenant shall submit to Landlord the following items within thirty (30) days after completion of the Tenant Work: (i) “As Built” drawings and specifications pursuant to Section 3.5 above, (ii) all unconditional lien releases from all general contractor(s) and subcontractor(s) performing work, (iii) a “Certificate of Completion” prepared by Tenant’s Architect, (iv) a final budget with supporting documentation detailing all costs associated with the Permanent Improvement Costs; and (v) all the items listed in the close-out checklist pursuant to the 425 Market Street Tenant Construction Standards, including, but not limited to a signed-off permit card, waste manifests, operating manuals and warranties.
6.5. If, following completion of the Tenant’s Work and Landlord’s disbursement of all amounts requested by Tenant in accordance with this Section 6, the Allowance has not been completed exhausted (e.g., as a result of Tenant’s payment of the Over-Allowance Amount), then within ten (10) days following Tenant’s request, Landlord shall disburse to Tenant the lesser of (i) the remaining Allowance that has not been disbursed (as evidenced by the documents submitted by Tenant in accordance with the disbursement procedure described in Sections 6.2 and 6.4 above), or (ii) the total amount paid by Tenant for the Tenant Work in excess of the amount of the Allowance actually disbursed by Landlord.
7. Changes, Additions or Alterations.
If Tenant desires to make any non-de minimis change, addition or alteration or desires to make any change, addition or alteration to any of the Building Systems after approval of the Issued for Construction Documents, Tenant shall prepare and submit to Landlord plans and specifications with respect to such change, addition or alteration. Any such change, addition or alteration shall be subject to Landlord’s approval in accordance with the provisions of Section 3.2 of this Workletter. Tenant shall be responsible for any submission to and plan check and permit requirements of the applicable governmental authorities.
8. Miscellaneous.
8.1. Scope. Except as otherwise set forth in the Lease, this Workletter shall not apply to any space added to the Premises by Lease option or otherwise.
8.2. Electrical: The Building electrical system allows a Tenant improvement design as follows:
(a) Lighting: A maximum of 1.5 watts of connected load per square foot of Usable Area within the Premises for Building standard lighting.
(b) Power: A maximum of 5 watts of connected load per square foot of Usable Area within the Premises for all outlets and other power requirements (exclusive of the standard heating, ventilating and air conditioning of the Building System).
Exhibit B – Page 8
8.3. Tenant Work shall include (at Tenant’s expense) for all of the Premises:
(a) Building approved lighting sensor controls as necessary to meet applicable Laws;
(b) Building Standard fluorescent fixtures in all Building office areas;
(c) Building Standard meters for each of electricity and chilled water used by Tenant shall be connected to the Building’s system and shall be tested and certified prior to Tenant’s occupancy of the Premises by a State certified testing company;
(d) Building Standard ceiling systems (including tile and grid) and;
(e) Building Standard air conditioning distribution and Building Standard air terminal units.
8.4. Sprinklers. Subject to any terms, conditions and limitations set forth herein, Landlord shall provide an operative sprinkler system consisting of mains, laterals, and heads “AS IS” on the date of delivery of the Premises to Tenant. Tenant shall pay for piping distribution, drops and relocation of, or additional, sprinkler system heads and Building firehose or firehose valve cabinets, if Tenant’s Plans and/or any applicable Laws necessitate such.
8.5. Floor Loading. Floor loading capacity is 100 lbs. per square foot (80 lbs. live load plus 20 lbs. for partitions, ceiling and doors). Tenant may exceed floor loading capacity with Landlord’s consent, at Landlord’s sole discretion and must, at Tenant’s sole cost and expense, reinforce the floor as required for such excess loading.
8.6. Work Stoppages. If any work on the Real Property other than Tenant Work is delayed, stopped or otherwise affected by construction of Tenant Work, Tenant shall immediately take those actions necessary or desirable to eliminate such delay, stoppage or effect on work on the Real Property other than Tenant Work.
8.7. Freight Elevator & Stocking of Material & Supplies. The Building contains two (2) freight elevator(s). All stocking of materials and supplies shall be done by Tenant’s contractor using only the freight elevator outside of Standard Operating Hours for the Building by prior arrangement and approval of the manager of the Building or Project. Tenant or its Contractor shall reserve the use of a freight elevator for such purpose with the Building manager, at times available for such purpose and upon reasonable advance notice and in accordance with any rules, regulations and guidelines of Landlord with respect to tenant improvement work. Tenant shall pay Landlord Landlord’s prevailing charge to provide such freight elevator use outside of Standard Operating Hours.
8.8. Life Safety. It is agreed that Tenant (or Contractor) shall employ the services of Landlord’s approved Building fire and life-safety subcontractor for all fire and life-safety work at the Building.
8.9. Locks. Tenant agrees to purchase from Landlord or its agent all cylinders and keys used in locks used in the Premises.
Exhibit B – Page 9
8.10. Authorized Representatives. Tenant has designated David Gonzales of Avison Young to act as Tenant’s representative with respect to the matters set forth in this Workletter. In the event that and for so long as more than one individual is so designated, notices or requests from Landlord shall be sufficiently given or delivered if given or delivered to either individual, each individual is hereby authorized to act individually and alone, and each shall have full authority and responsibility to act on behalf of Tenant as required in this Workletter. Tenant may add or delete authorized representatives upon five (5) business days notice to Landlord.
8.11. Access to Premises. After Landlord has recovered possession of the Premises from any prior Tenant, prior to delivery of possession to Tenant and during the period any Landlord Work is being performed, Tenant and its architects, engineers, consultants, and contractors shall have access at reasonable times and upon advance notice and coordination with the Building management, to the Premises for the purpose of inspecting Landlord Work, if any, and planning Tenant Work. Such access shall not in any manner interfere with Landlord Work, if any. Such access, and all acts and omissions in connection with it, shall be subject to and governed by all other provisions of the Lease, including, without limitation, Tenant’s indemnification obligations, insurance obligations, etc, except for the payment of Base Rent and additional Rent. To the extent that such access by Tenant delays the Substantial Completion of the Landlord Work, such delay shall be a Tenant Delay and the Landlord Work shall be deemed Substantially Complete on the date such Landlord Work would have been completed but for such access.
8.12. Fee. Landlord shall receive a fee equal to Thirty-Five Thousand Dollars ($35,000.00) in connection with the construction of the Tenant Work. Such fee is in addition to Tenant’s reimbursement of costs incurred by Landlord pursuant to other provisions hereof, including, without limitation, for Landlord’s architects and engineers to review Tenant’s Plans.
8.13. Unions. Tenant shall utilize union contractors and/or subcontractors.
9. Force and Effect.
The terms and conditions of this Workletter shall be construed to be a part of the Lease and shall be deemed incorporated in the Lease by this reference. Should any inconsistency arise between this Workletter and the Lease as to the specific matters which are the subject of this Workletter, the terms and conditions of this Workletter shall control.
Exhibit B – Page 10
EXHIBIT B-1
TO WORKLETTER AGREEMENT
LANDLORD WORK
Landlord Work shall mean the following work, to be performed by Landlord’s contractor(s):
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Demolish all existing tenant improvements on the seventh floor, including but not limited to the restrooms; |
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Abatement of the asbestos-containing construction materials in all accessible areas, including the fireproofing above the ceiling near the existing break room/kitchen area and egress stairway #1 at the north side of the floor, in accordance with the Building’s standard procedures and applicable Law. |
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Maintain existing HVAC service to the premises including the main loop and primary duct, VAV boxes and fan coil units. The HVAC system distribution to accommodate Tenant’s use and occupancy is the Tenant’s responsibility; |
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Repair and patch, as necessary, any core, columns and exterior walls with damaged areas and holes, as determined by Landlord; |
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Provide electrical services to the floor necessary to provide a minimum of 5 watts per rentable square foot for Tenant’s convenience outlets and 1.5 watts per rentable square foot for Tenant’s lighting; and |
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Repair, level and patching of any holes and damaged areas in the floor, as reasonably determined by Landlord. |
Exhibit B- 1 – Page 1
EXHIBIT C
RULES AND REGULATIONS
As used here, all capitalized terms, including, for example, Premises, Landlord, Tenant, Building and Project, shall have the meanings set forth in the Lease of which these Rules and Regulations form a part.
1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, printed or affixed on or to any part of the outside or inside of the Building or Project or elsewhere on or within the Premises, except in the interior of the Premises, unless approved by the Landlord. Nothing shall be placed near the glass of any window, door, partition, or wall which may appear unsightly from outside the Project and no curtains, draperies, blinds, shutters, shades, screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with, any window in the Premises unless approved by the Landlord. In any event, where approved by the Landlord, all such items shall be installed inboard of the standard draperies provided for the Premises and shall in no way be visible from the exterior of the Project. The doors, windows, light fixtures and any lights or skylights that reflect or admit light into the halls or other places of the Building shall not be covered or obstructed.
2. Except for any food and/or beverage services and except for any vending machine services approved by the Landlord for operation in the Project, no part of the Premises shall be used to manufacture any commodity or to prepare or dispense any food or beverage, nor shall any cooking be done or permitted in or about the Premises, and no vending machine or machines of any description which dispense or sell any food, beverage or product shall be installed, maintained or operated in or about the Premises.
3. Nothing shall be done or permitted in or about the Premises, or brought or kept therein, which shall in any way increase the rate of or cause a cancellation of or otherwise affect any fire or other insurance upon the Building, the Project or any property kept therein, or conflict with any fire laws or regulations or with any insurance policy upon the Premises or any part thereof. Unless approved by the Landlord, no kerosene, gasoline or inflammable or combustible fluid or material shall be used or kept in or about the Premises; nor shall any method of heating or air conditioning be used for the Premises other than that supplied by the Landlord. The Tenant shall comply with all fire regulations that may be approved by the Landlord. In the event any use or activity shall lead to an increase in fire or other insurance premiums payable on the insurance obtained by the Landlord, or insurance covering Project Areas for which the Building pays a share, or insurance procured by an individual tenant, the party causing such increase shall be liable for payment of the same to the Landlord, the owners of the Project or such individual tenant, as the case may be. The party so charged with increasing premium costs shall have the right to contest the validity of such increase.
4. Nothing shall be done or permitted in or about the Premises which shall in any way obstruct or interfere with the use of the Premises for their intended purposes, or obstruct or interfere with the rights of any Tenant or occupant of the Project, or injure or annoy them, nor shall the Premises or any part thereof be used for any immoral, unlawful, disorderly or extra-hazardous purpose, or for lodging or sleeping, nor shall any nuisance be caused, maintained or permitted in or about the Premises. With the exception of “service” or “assistive” animals (as defined by The Americans With Disabilities Act, the Fair Employment and Housing Act or other applicable Law) (“Service Animals”), no animals, reptiles or birds are permitted in the Building or a tenant’s premises at any time. Any animal (other than a Service Animal) whose sole function is to provide comfort or emotional support are not permitted in the Building, except to the extent required by applicable Law.
Exhibit C – Page 1
5. The floors of the Building shall not be overloaded, nor shall any safe or other heavy object be installed in the Premises without sufficient provision being made for the proper distribution of the weight thereof.
6. Tenant shall not install any radio or television antenna, loudspeaker or any other device on the exterior of the office building of which the Building is a part.
7. Tenant shall keep its Premises in a good state of preservation and cleanliness. It shall not allow anything whatever to fall from the windows or doors of the Premises, nor shall it sweep or throw from the Premises any dirt or other substance into any of the corridors or halls, elevators, ventilators or elsewhere in the Building or the Project. Refuse shall be placed in containers in such manner and at such times and places as may be directed by the Landlord, the manager of the Building or Project, or its agents.
8. The sidewalks, entrances, elevators, vestibules, stairways, corridors, halls, landings and fire exits must not be obstructed or encumbered or used for any purpose other than ingress and egress to and from the Premises, the Building and the Project.
9. Tenant and occupants shall not cause or permit any disturbing noises or objectionable odors to be produced upon or to emanate from the Premises.
10. Water closets and other water apparatus in the Building shall not be used for any purpose other than those for which they were designed, nor shall any sweepings, rubbish, rags or other articles be thrown into same. Any damage resulting from misuse of any water closets or other apparatus in the Premises shall be repaired and paid for by Tenant.
11. No vehicle belonging to a Tenant or to an employee, licensee, invitee, contractor, agent, client or visitor of a Tenant or occupant shall be parked in such manner as to impede or prevent ready access by any other vehicle to any entrance to or exit from the Building, Project or parking garage.
12. Tenant and occupants and employees, licensees, invitees, contractor, agents, clients or visitors shall not at any time or for any reason whatsoever enter upon or attempt to enter upon the roof of the office building of which the Building is a part.
13. Canvassing, soliciting and peddling in or about the Premises shall be prohibited and Tenant and occupants of the Premises shall cooperate to prevent the same.
14. Unless approved by the Landlord, no hand trucks, except those equipped with rubber tires and side guards, shall be used in or about the Project, and no other carts or vehicles of any kind shall be used in or about the Building except for those which are permitted to be used in the Project’s parking garage.
15. No furniture, freight, or equipment of any kind shall be brought into or received in the Project or carried in the elevators, except at such time and in such manner as shall be approved by the Landlord or by the manager of the Building or Project.
Exhibit C – Page 2
16. The bulletin board or directory of the Project shall be used exclusively for the display of the names and locations of the tenants and occupants of the Project, and Landlord reserves the right to exclude any other names therefrom, to limit the number of names associated with particular occupants of the Building to be identified thereon, and to charge for names associated with such occupants at rates applicable to all occupants of the Building.
17. Tenant shall see that the exterior doors of its Premises are closed and securely locked on Saturdays, Sundays and legal holidays and not later than 7:00 P.M. of each other day. Tenant shall exercise care and caution that all water faucets or water apparatus are entirely shut off before Tenant or its employees leave the Premises, and that all utilities, electricity, gas or air, shall likewise be carefully shut off so as to prevent waste or damage.
18. Tenant shall comply with such security measures and procedures as may be approved by Landlord for the operation of the Building and the conduct of business therein.
19. Complaints regarding services or operation of the Building shall be made in writing to Landlord or the manager of the Building.
20. All work performance by or on behalf of Tenant shall be performed in compliance with the 425 Market Street Tenant Construction Standards and in accordance with the Conditions for Construction and Asbestos Procedures.
21. These rules and regulations and any consent or approval given hereunder may be added to, amended or repealed at any time by Landlord.
Exhibit C – Page 3
EXHIBIT D
FAIR MARKET RENTAL RATE
1. Definition of Fair Market Rental Rate. “Fair Market Rental Rate” shall mean the Monthly Base Rent equal to the monthly base rental per rentable square foot which a tenant would pay and which a willing landlord would accept for space comparable to the Premises in the Building and in other buildings of class A standards in the financial district of San Francisco, California (the “Applicable Market”) for the period for which such rental is to be paid and for a lease on terms substantially similar to those of the Lease (including, without limitation, those applicable to Taxes, Operating Expenses and exclusions, but also considering so-called net and triple net leases, and leases utilizing operating expense stops or base years, and making appropriate adjustment between such leases and this Lease, as described below), based on prevailing market conditions in the Applicable Market at the time such determination is made (“Comparable Transactions”). Without limiting the generality of the foregoing, Comparable Transactions shall be for a term similar to the term of tenancy and for space comparable in use, floor levels, view and orientation, square footage and location within the Building and in the Applicable Market as the transaction for which Fair Market Rental Rate is being determined; however, leases of unusual or odd shaped spaces shall not be considered. In any determination of Fair Market Rental Rate, the stated or contract monthly net or base rental in Comparable Transactions shall be appropriately adjusted to take into account the different terms and conditions prevailing in such transactions and those present in the Lease, including, without limitation: (a) the extent to which average annual expenses and taxes per rentable square foot payable by tenants in Comparable Transactions vary from those payable by Tenant under the Lease, and so, for example, if the Lease provides for payment of Rent Adjustments and/or certain Operating Expenses on the basis of increases over a base year, then the rate of Monthly Base Rent under the Lease shall be based upon a step-up to change the calendar year which serves as the base year for calculation of the base for such Operating Expenses for the Option Term to be the full calendar year in which the Option Term commences, and such step-up shall be considered in the determination of the Fair Market Rental Rate; (b) tenant improvements, value of existing tenant improvements, the concessions, if any, being given by landlords in Comparable Transactions, such as parking charge abatement, free rent or rental abatement applicable after substantial completion of any tenant improvements (and no adjustment shall be made for any free or abated rent during any construction periods), loans at below-market interest rates, moving allowances, space planning allowances, lease takeover payments and work allowances, as compared to any tenant improvement, refurbishment or repainting allowance given to Tenant under the Lease for the space for which Fair Market Rental Rate is being determined; (c) the brokerage commissions, fees and bonuses payable by landlords in Comparable Transactions (whether to tenant’s agent, such landlord or any person or entity affiliated with such landlord), as compared to any such amounts payable by Landlord to the broker(s) identified with respect to the transaction for which Fair Market Rental Rate is being determined; (d) the time value of money; (e) any material difference between the definition of rentable area and the ratio of project rentable to useable square feet in Comparable Transactions, as compared to such figures applicable to the space for which Fair Market Rental Rate is being determined; and (f) the extent to which charges for parking by tenants in Comparable Transactions vary from those payable by Tenant under the Lease.
Exhibit D – Page 1
2. Sealed Estimates. In the event the Lease requires Fair Market Rental Rate to be determined in accordance with this Exhibit, Landlord and Tenant shall meet within ten (10) business days thereafter and each simultaneously submit to the other in a sealed envelope its good faith estimate of Fair Market Rental Rate (the “Estimates”). If the higher Estimate is not more than one hundred five percent (105%) of the lower Estimate, then Fair Market Rental Rate shall be the average of the two Estimates. If such simultaneous submission of Estimates does not occur within such ten (10) business day period, then either party may by notice to the other designate any reasonable time within five (5) business days thereafter and any reasonable place at or near the Building for such meeting to take place. In the event only one party submits an Estimate at that meeting, such Estimate shall be Fair Market Rental. In the event neither party submits an Estimate at that meeting, the transaction for which Fair Market Rental Rate is being determined shall be deemed cancelled and of no further force or effect.
3. Selection of Arbitrators. If the higher Estimate is more than one hundred five percent (105%) of the lower Estimate, then either Landlord or Tenant may, by written notice to the other within five (5) business days after delivery of Estimates at the meeting, require that the disagreement be resolved by arbitration. In the event neither party gives such notice, the transaction for which Fair Market Rental Rate is being determined shall be deemed cancelled and of no further force or effect. Within five (5) business days after such notice, the parties shall select as arbitrators three (3) mutually acceptable independent MAI appraisers with experience in real estate activities, including at least five (5) years experience in appraising office space in financial district of San Francisco, California (“Qualified Appraisers”). If the parties cannot timely agree on such arbitrators, then within the following five (5) business days, each shall select and inform the other party of one (1) Qualified Appraiser and within a third period of five (5) business days, the two appraisers (or if only one (1) has been duly selected, such single appraiser) shall select as arbitrators a panel of three additional Qualified Appraisers, which three arbitrators shall proceed to determine Fair Market Rental Rate pursuant to Section 4 of this Exhibit. Both Landlord and Tenant shall be entitled to present evidence supporting their respective positions to the panel of three arbitrators.
4. Arbitration Procedure. Once a panel of arbitrators has been selected as provided above, then as soon thereafter as practicable each arbitrator shall select one of the two Estimates as the one which, in its opinion, is closer to Fair Market Rental Rate. Upon an Estimate’s selection by two (2) of the arbitrators, it shall be the applicable Fair Market Rental Rate and such selection shall be binding upon Landlord and Tenant. If the arbitrators collectively determine that expert advice is reasonably necessary to assist them in determining Fair Market Rental Rate, then they may retain one or more qualified persons, including but not limited to legal counsel, brokers, architects or engineers, to provide such expert advice. The party whose Estimate is not chosen by the arbitrators shall pay the costs of the arbitrators and any experts retained by the arbitrators. Any fees of any counsel or expert engaged directly by Landlord or Tenant, however, shall be borne by the party retaining such counsel or expert.
5. Rent Pending Determination of Fair Market Rental Rate. In the event that the determination of Fair Market Rental Rate has not been concluded prior to commencement of the applicable rental period for the applicable space for which the Fair Market Rental Rate is being determined, Tenant shall pay Landlord Monthly Base Rent and Rent Adjustment Deposits as would apply under Landlord’s Estimate pursuant to Section 2 of this Exhibit until the Fair Market Rental Rate is determined. In the event that the Fair Market Rental Rate subsequently determined is different from the amount paid for the applicable period, then within thirty (30) days after such determination, Tenant shall pay Landlord any greater amounts due and Landlord shall credit Tenant (against the next Monthly Base Rent installments due) for any reduction in the amounts due.
Exhibit D – Page 2
EXHIBIT E
TRANSACTIONAL COSTS
Exhibit E – Page 1
EXHIBIT F
FORM OF LETTER OF CREDIT
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FOR INTERNAL IDENTIFICATION PURPOSES ONLY |
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Our No. _______________ Other _______________ |
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Applicant __________________________________ |
TO: |
425 MKT REIT, LLC |
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c/o Metlife Real Estate |
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[Address] |
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Attention: Director, EIM |
IRREVOCABLE LETTER OF CREDIT NO. _______________
We hereby establish this irrevocable Letter of Credit in favor of the aforesaid addressee (“Beneficiary”) for drawings up to United States $ effective immediately. This Letter of Credit is issued, presentable and payable at our office at [issuing bank’s address in City specified by Landlord] and expires with our close of business on _______________, 20_.
The term “Beneficiary” includes any successor by operation of law of the named Beneficiary including, without limitation, any liquidator, rehabilitator, receiver or conservator.
We hereby undertake to promptly honor your sight draft(s) drawn on us, indicating our Credit No. ______________, for all or any part of this Credit if presented at our office specified in paragraph one on or before the expiry date or any automatically extended expiry date.
Except as expressly stated herein, this undertaking is not subject to any agreement, condition or qualification. The obligation of [issuing bank] under this Letter of Credit is the individual obligation of [issuing bank], and is in no way contingent upon reimbursement with respect thereto.
It is a condition of this Letter of Credit that it is deemed to be automatically extended without amendment for one (1) year from the expiry date hereof, or any future expiration date, unless at least thirty (30) days prior to an expiration date we notify you by registered mail that we elect not to consider this Letter of Credit renewed for any such additional period.
This Letter of Credit is transferable by the Beneficiary and by any successive transferees at no charge or cost to Beneficiary or any transferee. Transfers of this Letter of Credit are subject to receipt of Beneficiary’s (and subsequently, transferee’s) instructions in the form attached hereto as Schedule 1 accompanied by the original Letter of Credit and amendments(s) if any.
Exhibit F – Page 1
This Letter of Credit is subject to and governed by the Laws of the State of New York and the 2007 revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 600) and, in the event of any conflict, the Laws of the State of New York will control. If this Credit expires during an interruption of business as described in article 36 of said Publication 600, the bank hereby specifically agrees to effect payment if this Credit is drawn against within thirty (30) days after the resumption of business.
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Very truly yours, |
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[issuing bank] |
Exhibit F – Page 2
Schedule 1 to Letter of Credit
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Attention: |
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Re: Irrevocable Letter of Credit No. _______________
Ladies & Gentlemen:
The undersigned acknowledges receipt of your advice No. _______________ of a credit issued in our favor, the terms of which are satisfactory. We now irrevocably transfer the said credit and all amendments and extensions thereof, if any, to:
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[Name of Transferee] |
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[Address] |
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You are to inform the transferee of this transfer and such transferee shall have sole rights as beneficiary under the credit, including any amendments, extension or increases thereof, without notice to or further assent from us.
This transfer is at no charge or cost to Beneficiary or the transferee.
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Very truly yours, |
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Beneficiary |
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By: |
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Acknowledged and agreed by Bank [then current issuer of Letter of Credit]:
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(Bank — then current issuer of Letter of Credit) |
Exhibit F – Page 3
RIDER 1
COMMENCEMENT DATE AGREEMENT
425 MKT REIT, LLC (“Landlord”), and METROMILE, INC., a Delaware corporation (“Tenant”), have entered into a certain Office Lease dated as of _______________, 2019 (the “Lease”).
WHEREAS, Landlord and Tenant wish to confirm and memorialize the Commencement Date and Expiration Date of the Lease as provided for in the Lease;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein and in the Lease, Landlord and Tenant agree as follows:
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Unless otherwise defined herein, all capitalized terms shall have the same meaning ascribed to them in the Lease. |
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The Commencement Date (as defined in the Lease) of the Lease is _______________. |
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The Expiration Date (as defined in the Lease) of the Lease is _______________. |
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Tenant hereby confirms the following: |
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That it has accepted possession of the premises pursuant to the terms of the Lease; |
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That the Landlord Work, if any, is Substantially Complete; and |
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That the Lease is in full force and effect. |
5. Except as expressly modified hereby, all terms and provisions of the Lease are hereby ratified and confirmed and shall remain in full force and effect and binding on the parties hereto.
6. The Lease and this Commencement Date Agreement contain all of the terms, covenants, conditions and agreements between the Landlord and the Tenant relating to the subject matter herein. No prior other agreements or understandings pertaining to such matters are valid or of any force and effect.
Rider 1 – Page 1
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425 MKT REIT, LLC, |
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a ___________________ |
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a Delaware limited liability company |
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Rider 1 – Page 2
RIDER 2
ADDITIONAL PROVISIONS
This Rider 2 (“Rider”) is attached to and a part of a certain Office Lease dated as of _______________, 2019 , by 425 MKT REIT, LLC, as Landlord, and METROMILE, INC., a Delaware corporation (for purposes of this Rider, “Metromile”), as Tenant, for the Premises as described therein (the “Lease”).
SECTION 1. DEFINED TERMS; FORCE AND EFFECT
Capitalized terms used in this Rider shall have the same meanings set forth in the Lease except as otherwise specified herein and except for terms capitalized in the ordinary course of punctuation. This Rider forms a part of the Lease. Should any inconsistency arise between this Rider and any other provision of the Lease as to the specific matters which are the subject of this Rider, the terms and conditions of this Rider shall control.
SECTION 2. CONDITION OF PREMISES; DELIVERY; CONSTRUCTION PERIOD; COMMENCEMENT DATE; TERM
2.1. Projected Delivery Date; Delivery Date; Commencement Date: Tenant’s Obligations During Construction Period; Term.
(a) Landlord shall tender to Tenant possession of the Premises in the condition specified in the Workletter no later than August 1, 2019 (the “Projected Delivery Date”). On the date Landlord actually tenders to Tenant possession of the Premises (the “Delivery Date”), all the terms and conditions of the Leases shall apply, and Tenant shall observe and perform all such terms and conditions, except as otherwise expressly provided in this Rider. During the period (the “Construction Period”) from the Delivery Date until the Commencement Date (defined below), in recognition of Tenant’s construction and installations in, and preparation of, the Premises for the use and occupancy permitted by this Lease: (i) Tenant shall not be obligated to pay Monthly Base Rent, Rent Adjustment Deposits or Rent Adjustments; and (ii) Landlord shall not be obligated to provide services or utilities except if and to the extent expressly provided in Section 4 of the Workletter. The Term of this Lease shall be as shown in Section 1.01(5) of the Basic Lease Provisions and the “Commencement Date” of the Term shall be four (4) months after the Delivery Date.
(b) Within thirty (30) days following the occurrence of the Commencement Date, upon request by Landlord, Tenant and Landlord shall enter into an agreement (which is attached to this Lease as Rider 1) confirming the Commencement Date and the Expiration Date. If Tenant fails to respond to such agreement within ten (10) business days following Landlord’s request, then the Commencement Date and the Expiration Date shall be the dates designated by Landlord in such agreement.
Rider 2 – Page 1
2.2. Failure to Deliver Possession. If Landlord shall be unable to give possession of the Premises on the Projected Delivery Date by reason of the following: (i) the holding over or retention of possession of any tenant, tenants or occupants, or (ii) the Landlord Work, if any, is not Substantially Complete, or (iii) for any other reason, then Landlord shall not be subject to any liability for the failure to give possession on said date. Under such circumstances, by operation of Section 2.1 above, the Delivery Date and Commencement Date are automatically adjusted and determined in relation to the date Landlord actually tenders possession of the Premises to Tenant in the condition required under this Lease. No such failure to deliver possession on the originally scheduled Projected Delivery Date shall affect the validity of this Lease or the obligations of the Tenant hereunder. Notwithstanding any of the foregoing provisions to the contrary, if Landlord has not tendered possession of the Premises on or before September 1, 2019 (the “Outside Completion Date”), Tenant shall be entitled to a rent abatement following the Commencement Date of $5,734.58 for every day in the period beginning on the Outside Completion Date and ending on the Commencement Date; provided, however, that the Outside Completion Date shall be delayed by the number of days that Landlord’s delivery of the Premises to Tenant is delayed due Tenant Delays, and Force Majeure delays, if any.
SECTION 3. OPTION TO EXTEND.
(a) Landlord hereby grants Tenant a single option to extend the Term of the Lease for an additional period of five (5) years (such period may be referred to as the “Option Term”), as to the entire Premises as it then exists, upon and subject to the terms and conditions of this Section (the “Option To Extend”), and provided that at the time of exercise of such option (and each Option, if more than one Option is granted): (i) Tenant must be conducting regular, active, ongoing business in, and be in occupancy (and occupancy by a subtenant, licensee or other party permitted or suffered by Tenant shall not satisfy such condition) of the entire Premises; and (ii) there has been no material adverse change in Tenant’s financial position from such position as of the date of execution of the Lease, as certified by Tenant’s independent certified public accountants, and as supported by Tenant’s certified financial statements, copies of which shall be delivered to Landlord with Tenant’s written notice exercising its right hereunder. Without limiting the generality of the foregoing, Landlord may reasonably conclude there has been a material adverse change if Tenant’s independent certified public accountants do not certify there has been no such change.
(b) Tenant’s election (the “Election Notice”) to exercise the Option To Extend must be given to Landlord in writing no earlier than the date which is fifteen (15) months prior to the Expiration Date and no later than the date which is twelve (12) months prior to the Expiration Date (the “Exercise Window”). If Tenant either fails or elects not to exercise the Option to Extend by not timely giving its Election Notice, then the Option to Extend shall be null and void, including, if more than one Option is granted, the then applicable Option to Extend and all further Options to Extend.
(c) The Option Term shall commence immediately after the expiration of the preceding Term of the Lease. Tenant’s leasing of the Premises during the Option Term shall be upon and subject to the same terms and conditions contained in the Lease except that (i) Tenant shall pay the “Option Term Rent”, defined and determined in the manner set forth in the immediately following Subsection; (ii) the Security Deposit shall be increased to an amount that is the same percentage or proportion of Option Term Rent as the prior amount of Security Deposit was in relation to Rent for the Term prior to the Option Term, but in no event shall the Security Deposit be decreased; and (iii) Tenant shall accept the Premises in its “as is” condition without any obligation of Landlord to repaint, remodel, repair, improve or alter the Premises or to provide Tenant any allowance therefor, except to the extent tenants leasing space in Comparable Transactions receive an allowance pursuant to the definition of Fair Market Rental Rate defined in Exhibit D hereto, provided, however, Landlord by notice given to Tenant within thirty (30) days after final determination of the Fair Market Rental Rate, may elect to provide, in lieu of such allowance for alterations to the Premises, a rent credit equal to the amount of the allowance that would have otherwise been given, credited toward the rents applicable only to the Premises and due starting after such rent obligation commences. If Tenant timely and properly exercises the Option To Extend, references in the Lease to the Term shall be deemed to mean the preceding Term as extended by the Option Term unless the context clearly requires otherwise.
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(d) The Option Term Rent shall mean the sum of the Monthly Base Rent at the Fair Market Rental Rate (as defined in Exhibit D) plus Rent Adjustments and/or certain Operating Expenses (if applicable, based upon a step-up to change the base year or base amount for calculation of Operating Expenses in connection with determination of the Fair Market Rental Rate) plus other charges pursuant to the Lease payable to Landlord. The determination of Fair Market Rental Rate and Option Term Rent shall be made by Landlord, in the good faith exercise of Landlord’s business judgment. Within forty-five (45) days after Tenant’s exercise of the Option To Extend, Landlord shall notify Tenant of Landlord’s determination of the Fair Market Rental Rate and Option Term Rent for the Premises. Tenant may, within fifteen (15) days after receipt thereof, deliver to Landlord a written notice either: (i) accepting Landlord’s determination, in which case the extension shall be effective and binding (subject to Subsection (f) below) at the accepted rate; or (ii) setting forth Tenant’s good faith estimate, in which case Landlord and Tenant will promptly confer and attempt to agree upon the Fair Market Rental Rate and Option Term Rent. Tenant’s failure to timely deliver such notice within such fifteen (15) day period shall be deemed its cancellation of the Option. In the event Tenant has delivered notice setting forth Tenant’s different estimate, but no agreement in writing between Tenant and Landlord on Fair Market Rental Rate and Option Term Rent is reached within thirty (30) days after Landlord’s receipt of Tenant’s estimate, the Fair Market Rental Rate shall be determined in accordance with the terms of Exhibit D. Notwithstanding any of the foregoing to the contrary, at no time during the Option Term shall the Option Term Rent be less than the “Preceding Rent” (defined below). The Preceding Rent shall mean the sum of the Monthly Base Rent payable by Tenant under this Lease calculated at the rate applicable for the last full month of the Term preceding the Option Term plus the Rent Adjustments payable by Tenant under the Lease (if applicable, using the base year for calculation of Base Operating Expenses applicable for the last full month of the Term preceding the Option Term), plus other charges pursuant to the Lease payable to Landlord. To the extent that Tenant pays directly the utility or service provider for utilities or services which Tenant is to obtain directly pursuant to the Lease, Tenant shall continue to pay such amounts, but such amounts shall not be counted as part of the Preceding Rent or the Fair Market Rental Rate as used herein. Further, in the event that Landlord notifies Tenant that the Option Term Rent shall equal the Preceding Rent, such determination shall be conclusive and binding to set the Preceding Rent as the Option Term Rent for the Option Term, Tenant shall not be entitled to dispute or contest such determination, and the extension shall be effective and binding (subject to Subsection (f) below).
(e) Promptly after final determination of the Fair Market Rental Rate, Landlord shall prepare a memorandum confirming the specific dates, amounts and terms of the extension for the Option Term in accordance with the terms and conditions of this Option to Extend, in the form of an amendment to the Lease, and Tenant shall execute such amendment within five (5) business days after Landlord and Tenant agree to the form of the proposed amendment and Landlord shall execute it promptly after Tenant. Notwithstanding any of the foregoing to the contrary, the failure of Landlord to prepare such amendment or of either party to execute an amendment shall not affect the validity and effectiveness of the extension for the Option Term in accordance with the terms and conditions of this Option to Extend.
(f) Upon the occurrence of any of the following events, Landlord shall have the option, exercisable at any time prior to commencement of the Option Term, to terminate all of the provisions of this Section with respect to the Option to Extend, whereupon any prior or subsequent exercise of this Option to Extend shall be of no force or effect:
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(i) Tenant’s failure to timely exercise or timely to perform the Option to Extend in strict accordance with the provisions of this Section.
(ii) The existence at the time Tenant exercises the Option to Extend or at the commencement of the Option Term of a Default on the part of Tenant under the Lease or of any state of facts which with the passage of time or the giving of notice, or both, would constitute such a Default.
(iii) Tenant’s third Default under the Lease during the thirty-six (36) month period immediately preceding the Exercise Window, notwithstanding that all such Defaults may subsequently be cured.
(g) Without limiting the generality of any provision of the Lease, time shall be of the essence with respect to all of the provisions of this Section.
(h) This Option to Extend is personal to Metromile and may not be used by, and shall not be transferable or assignable (voluntarily or involuntarily) to any person or entity other than a Permitted Transferee which is an assignee of the Lease and which has satisfied the requirements of Sections 10.01 and 10.05 of this Lease.
SECTION 4. TERMINATION OPTION.
(a) Grant of Option; Exercise; Early Termination Date. Landlord hereby grants Tenant the option (the “Termination Option”) to advance the Expiration Date of the Term as to the entire Premises, and not less than the entire Premises, upon and subject to all of the terms, covenants and conditions set forth below. This Termination Option shall be exercisable only by written notice (“Termination Notice”) given by Tenant to Landlord no later than the last day of the seventy-second (72nd) full calendar month of the Term. Provided that such notice is duly given and all the terms, covenants and conditions of this Termination Option are satisfied and performed, the Termination Option shall advance the Expiration Date of the Term to the date which is the end of the eighty-fourth (84th)full calendar month of the Term (the “Early Termination Date”).
(b) Termination Fee. Tenant shall pay Landlord the Termination Fee (defined below) in immediately available funds and without any deduction or offset whatsoever. The Termination Fee shall be payable concurrently with Tenant’s delivery of the Termination Notice to Landlord. The Termination Fee is the amount which the parties have negotiated and agreed upon as a fee or compensation which is intended as their fair estimate of losses and damages which are difficult to calculate and which Landlord is likely to sustain due to the corresponding advance of the Expiration Date, including the unamortized portion of any concessions, commissions, allowances and other expenses incurred by Landlord in connection with the Premises leased by Tenant under the Lease, and Landlord’s loss of future rent in connection therewith. Such amount shall be Landlord’s earned fee and liquidated damages for such estimated losses and damages, whether such losses and damages in fact are greater or less than the applicable amount of the Termination Fee. The Termination Fee shall mean and consist of the following:
(i) the amount equal to the sum of four (4) months of Monthly Base Rent at the rate that would have been applicable during months eighty-five (85) through and including eighty-eight (88) of the Term; plus
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(ii) the amount equal to the unamortized portion as of the Early Termination Date of the “Transactional Costs” (as defined below) plus interest at the rate of eight percent (8%) per annum, amortized on a straight line basis: (1) over the Term with respect to Transactional Costs applicable to the initial Premises, and (2) over the Term remaining if and when space is added to the Premises after the Execution Date with respect to Transactional Costs applicable to such space. As used herein, “Transactional Costs” means all costs paid or incurred by Landlord with respect to the Premises (both the initial Premises and any space added after the Execution Date) for leasing commissions, any allowances provided by Landlord to Tenant and any construction costs paid or incurred by Landlord for improvements or alterations, and legal fees incurred in connection with the Lease. A partial schedule of the Transactional Costs setting forth those applicable to the initial Premises is shown on Exhibit E to this Lease.
(c) Conditions Precedent. Upon the occurrence of any of the following events, this Termination Option shall not be available and shall automatically terminate without notice and cease to be of any force or effect:
(i) Tenant’s failure to give notice of exercise of the Termination Option or failure to pay Landlord the full amount of the Termination Fee in accordance with this Termination Option.
(ii) The existence at the time of exercise of the Termination Option or on or prior to the Early Termination Date of an uncured Default by Tenant under the Lease.
In any of such events, Landlord shall have available all rights and remedies provided under the Lease without being limited in any way by the Termination Option. Further, in the event there exists an uncured Default by Tenant under the Lease for any reason whatsoever prior to or after the exercise or purported exercise of the Termination Option, Landlord shall have available all rights and remedies provided under the Lease without being limited in any way by the Termination Option.
(d) Obligations Until Early Termination Date; Proration. All of the terms, covenants and conditions of the Lease shall remain in full force and effect with respect to the Premises up to and including the Early Termination Date, except as otherwise provided in this Termination Option. In addition to payment of the Termination Fee, Tenant shall continue to pay all rents and charges (including utilities), including, without limitation, Monthly Base Rent, Tenant’s Share of Operating Expenses and Taxes, and other charges as they become due and payable under the Lease for the Premises up to and including the Early Termination Date. Such rents and charges shall be prorated, billed and payable as provided under the Lease, in the same manner as if the Early Termination Date was the regularly scheduled Expiration Date of the Term. No later than 11:59 p.m. on the Early Termination Date, Tenant shall vacate and deliver to Landlord exclusive possession of the Premises pursuant to the same provisions and requirements of the Lease that apply upon the Expiration Date or Termination Date.
(e) Certain Changes in Lease After Exercise. Upon and after Tenant’s exercise of the Termination Option, all of the terms, covenants and conditions of the Lease shall continue to apply except the Option to Extend shall automatically terminate without notice and shall be of no further force or effect.
(f) Holding Over. In the event that Tenant fails to vacate and deliver exclusive possession of the Premises to Landlord by the Early Termination Date as required under this Termination Option, then such holding over as to the Premises shall be upon and subject to all the terms, covenants and conditions of the Lease applicable to a holding over, including, without limitation, Article Thirteen of the Lease.
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(g) No Release. Notwithstanding any provision of the foregoing to the contrary, neither the grant of this Termination Option nor the acceptance by Landlord of the surrender of the Premises shall in any way:
(i) be deemed to excuse or release Tenant from any obligation or liability with respect to the Premises (including, without limitation, any obligation or liability under provisions of the Lease to indemnify, defend and hold harmless Landlord or other parties, or with respect to any breach or breaches of the Lease by Tenant) which obligation or liability (x) first arises on or prior to the date on which Tenant delivers to Landlord possession of the Premises or (y) arises out of or is incurred in connection with events or other matters which took place on or prior to such date, or
(ii) affect any obligation under the Lease which by its terms is to survive the expiration or sooner termination of the Lease.
(h) Option Personal. The Termination Option is personal to Metromile and may not be used by, and shall not be transferable or assignable (voluntarily or involuntarily) to any person or entity other than a Permitted
Transferee which is an assignee of the Lease and which has satisfied the requirements of Sections 10.01 and 10.05 of this Lease.
SECTION 5. LETTER OF CREDIT
(a) If Tenant elects pursuant to Section 5(c) of the Lease, Tenant may, at Tenant’s sole cost and expense, provide Landlord with the “Letter of Credit” as a substitute for the cash Security Deposit otherwise required under this Lease, and for the full and faithful performance by Tenant of each and every term, provision, covenant, and condition of this Lease (if Tenant substitutes the Letter of Credit for the Security Deposit, references herein to the “Security” shall mean the Letter of Credit). If Tenant Defaults under this Lease, then Landlord may use, apply, or retain the whole or any part of the Security for the payment of any Rent not paid when due, for the cost of repairing such damage, for the cost of cleaning the Premises, for the payment of any other sum which Landlord by reason of Tenant’s Default, including for compensation of Landlord for any other loss or damage to Landlord occasioned by Tenant’s Default, including, but not limited to, any loss of future Rent and any damage or deficiency in the reletting of the Premises (whether such loss, damages or deficiency accrue before or after summary proceedings or other reentry by Landlord) and the amount of the unpaid past Rent, future Rent loss, and all other losses, costs and damages, that Landlord would be entitled to recover if Landlord were to pursue recovery under Section 11.02(b) or (c) of this Lease or California Civil Code Section 1951.2 or 1951.4 (and any supplements, amendments, replacements and substitutions thereof and therefor from time to time). If Landlord so uses, applies or retains all or part of the Security, Tenant shall within five (5) business days after demand pay or deliver to Landlord in immediately available funds the sum necessary to replace the amount used, applied or retained, except as specified in (d) below. The Security (except any amount retained for application by Landlord as provided herein) shall be returned or paid over to Tenant no later than ninety (90) days after the latest of: (i) the Termination Date; (ii) the removal of Tenant from the Premises; (iii) the surrender of the Premises by Tenant to Landlord in accordance with this Lease; or (iv) the date Rent Adjustments owed pursuant to this Lease have been computed by Landlord and paid by Tenant. Provided, however, in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder.
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(b) The Security, whether in the form of cash, Letter of Credit and/or Letter of Credit Proceeds (defined below), shall not be deemed an advance rent deposit or an advance payment of any kind, or a measure of Landlord’s damages with respect to Tenant’s failure to perform, nor shall any action or inaction of Landlord with respect to it or its use or application be a waiver of, or bar or defense to, enforcement of any right or remedy of Landlord. Landlord shall not be required to keep the Security separate from its general funds and shall not have any fiduciary duties or other duties (except as set forth in this Section) concerning the Security. Tenant shall not be entitled to any interest on the Security. In the event of any sale, lease or transfer of Landlord’s interest in the Building, Landlord shall have the right to transfer the Security, or balance thereof, to the vendee, transferee or lessee and any such transfer shall release Landlord from all liability for the return of the Security. Tenant thereafter shall look solely to such vendee, transferee or lessee for the return or payment of the Security. Tenant shall not assign or encumber or attempt to assign or encumber the Security or any interest in it and Landlord shall not be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance, and regardless of one or more assignments of this Lease, Landlord may return the Security to the original Tenant without liability to any assignee. Tenant hereby waives any and all rights of Tenant under the provisions of Section 1950.7 of the California Civil Code, and any and all rights of Tenant under all provisions of law, now or hereafter enacted, regarding security deposits.
(c) If Tenant fails timely to perform any obligation under this Section 5, such breach shall constitute a Default by Tenant under this Lease without any right to or requirement of any further notice or cure period under any other Article of this Lease, except such notice and cure period expressly provided under this Section 5.
(d) As used herein, “Letter of Credit” shall mean an unconditional, irrevocable sight draft letter of credit issued, presentable and payable at the office of a major national bank a location acceptable to Landlord, in its sole discretion, which major national bank shall also be satisfactory to Landlord in its sole discretion (the “Bank”), naming Landlord as beneficiary, in an amount equal to Two Million Seven Hundred Thirty-One Thousand Forty-Seven and No/100 Dollars ($2,731,047.00). The Letter of Credit shall provide: (i) that Landlord may make partial and multiple draws thereunder, up to the face amount thereof, and that Landlord may draw upon the Letter of Credit up to the full amount thereof, as determined by Landlord, and the Bank will pay to Landlord the amount of such draw upon receipt by the Bank of a sight draft signed by Landlord without requirement for any additional documents or statements by Landlord; and (ii) that, in the event of assignment or other transfer of either Landlord’s interest in this Lease or of any interest in Landlord (including, without limitation, consolidations, mergers, reorganizations or other entity changes), the Letter of Credit shall be freely transferable by Landlord, without charge and without recourse, to the assignee or transferee of such interest and the Bank shall confirm the same to Landlord and such assignee or transferee. The Letter of Credit shall be in the form attached as Exhibit F hereto or in another form and substance acceptable to Landlord, in its sole discretion. Landlord may (but shall not be required to) draw upon the Letter of Credit and use the proceeds therefrom (the “Letter of Credit Proceeds”) or any portion thereof in any manner Landlord is permitted to use the Security under this Section 5. In the event Landlord draws upon the Letter of Credit and elects not to terminate the Lease, but to use the Letter of Credit Proceeds, then within ten (10) business days after Landlord gives Tenant written notice specifying the amount of the Letter of Credit Proceeds so utilized by Landlord, Tenant shall immediately deliver to Landlord an amendment to the Letter of Credit or a replacement Letter of Credit in an amount equal to one hundred percent (100%) of the then-required amount of the Letter of Credit. Tenant’s failure to deliver such amendment or replacement of the Letter of Credit to Landlord within ten (10) business days after Landlord’s notice shall constitute a Default by Tenant under this Lease. The Letter of Credit shall have an initial term of no longer than one (1) year, shall be “evergreen”, and shall be extended, reissued or replaced by Tenant, in each case at least thirty (30) days prior to its expiration in a manner that fully complies with the requirements of this Section 5, so that in all events the Letter of Credit required hereunder shall be in full force and effect continuously until the date (the “L/C Expiration Date”) for return of the Security described in Subsection (a) above. No more often than once per year, Landlord shall have the right to require Tenant to deliver to Landlord, on fifteen (15) days prior notice, a replacement Letter of Credit on the same terms and conditions set forth in this Section 5, in the event that Landlord determines, in its good faith judgment, that the issuing Bank is no longer satisfactory to remain as the issuer of the Letter of Credit. Any advice from the issuer that it intends to withdraw or not extend the Letter of Credit prior to any scheduled annual expiration or the L/C Expiration Date shall entitle the Landlord to immediately draw upon the Letter of Credit.
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(e) Notwithstanding anything to the contrary contained herein, Landlord agrees that the Letter of Credit held as part of the Security pursuant to this Section may be reduced annually by an amount equal to the Reduction Amount (as defined below) (a “Reduction”) upon satisfaction of the Reduction Conditions (as defined below) but in no event shall any Reduction occur earlier than the first (1st) day of the thirty-seventh (37th) full calendar month of the Term, nor shall the amount of the Letter of Credit held by Landlord be less than Four Hundred Sixty-Eight Thousand Eight Hundred Twenty-Nine and 70/100 Dollars ($468,829.70). The Reduction is expressly subject to the following conditions (the “Reduction Conditions”): (i) on the date on which such Reduction is to be granted there exists no act or omission on the part of Tenant which, with the passage of time or the giving of notice, or both would constitute a default of Tenant, in which event the right to that Reduction is waived (until the default is timely cured); (ii) on or immediately after the date on which a Reduction is to be granted (provided Tenant has qualified for same pursuant to this Section), Tenant has delivered to Landlord an acceptable (pursuant to this Section) substitute Letter of Credit or amendment to the existing Letter of Credit in such appropriately reduced amount, (iii) as of the date of the applicable Reduction, Tenant has demonstrated positive EBITDA for the immediately preceding four (4) consecutive calendar quarters as evidenced by Tenant’s Financial Information (as defined below). Landlord agrees, in the instance of such substitute Letter of Credit, to surrender the replaced Letter of Credit promptly after receipt of the substitute. Concurrent with Tenant’s delivery of its request for a Reduction, Tenant shall deliver to Landlord for its review Tenant’s financial statements prepared in accordance with generally accepted accounting principles and audited by a public accounting firm reasonably acceptable to Landlord, and any other financial information reasonably requested by Landlord evidencing Tenant’s full satisfaction of the Reduction Conditions (“Tenant’s Financial Information”). As used herein, the “Reduction Amount” equals an amount equal to the then existing Letter of Credit amount, divided by the number of years (or partial years) remaining in the Term (for purposes of this calculation, the Term shall be deemed 120 months) as of the effective date of such Reduction (which shall be determined by dividing the number of calendar months remaining in the initial Lease Term by 12, rounded to two decimal places (5 or more one-thousandths shall be rounded up to the next one-hundredth). For example, assuming that the first effective date of the Reduction occurs on the 38th month of the Lease Term and that the Reduction Conditions have been satisfied, the Reduction Amount shall be Three Hundred Ninety-Four Thousand Six Hundred Fifty-Nine and 97/100 Dollars ($394,659.97), calculated by dividing $2,731,047.00 by 6.92 years).
SECTION 6. PARKING. Parking is subject to Tenant’s entry into the applicable, separate parking agreement with Landlord and the parking garage operator for the Building, in form and substance satisfactory to them. Subject to such agreement, Tenant shall be provided with the right to lease a total of three (3) stalls during the Term, at the then applicable monthly rates, as such rates change from time to time.
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Exhibit 10.16
April 16, 2021
Regi Vengalil
I am pleased to offer you a full-time position with Metromile, Inc. (the “Company” as its Chief Financial Officer commencing on or before May 24, 2021.
Duties and Responsibilities. You will report to the CEO of the Company. You shall have such job duties and responsibilities commensurate with and customary for your position, which duties may change from time-to-time as the Company’s business needs and market conditions change.
Compensation. You will be paid a starting salary of $375,000 per year (less required deductions and withholdings), which will be paid semi-monthly in accordance with the Company’s normal payroll procedures. Your position is considered “exempt” for purposes of state and federal wage-and-hour laws, which means you are not eligible for overtime pay.
Sign-on Bonus. Metromile will pay to you a one-time bonus of $50,000 (the “Sign-On Bonus”), less applicable tax withholdings, payable in the first semi-monthly payroll following your employment start date with the Company. The bonus may be used at your own discretion and will be considered taxable income. You will earn, and be permitted to retain, the full amount of the Bonus if you remain employed by the Company on your one-year anniversary of your employment start date with the Company, subject to the terms of this section. By signing below, you acknowledge and agree that should your employment with the Company terminate prior to your one-year anniversary for any reason, other than your death or disability, termination for Cause or for Good Reason, you will be required to repay the Company the full amount of the Bonus. Your signature below authorizes the Company, to the fullest extent permitted by law, to make deductions from any payment you are owed (including your final paycheck) to repay all or a portion of the sign-on Bonus. You agree that, if such deductions do not fully cover the repayment of the sign-on Bonus that is owed to the Company under this section, you will pay the Company the remaining balance within 90 days of your termination of employment.
Benefits. You will be eligible to participate in the Company’s Flexible Time Away policy as outlined in the employee handbook. In addition, as a regular, full-time employee of the Company, you will be eligible to participate in the employee benefit plans and programs currently and hereafter maintained by the Company and generally available to similarly situated senior employees of the Company. Your participation in such plans and programs is subject in each case to the terms and conditions of the plan or program in question, including any eligibility requirements for the plan or program.
At-Will Employment. Your employment with the Company is at will. This means that either you or the Company may terminate your employment at any time, for any reason. Should you choose to resign, the Company appreciates you providing two weeks’ written notice of your resignation.
Restricted Stock Units. If you decide to join the Company, it will be recommended to our Board of Directors (“Board”) that the Company grant you the equity awards below, subject to the Board’s approval. For purposes of determining the number of shares subject to grants denominated in dollars, the number of shares will be determined by dividing the dollar value of the grant by the volume weighted average pricing of the shares of the Company’s common stock on the Nasdaq Stock Market for the 30-calendar day period preceding your start date, rounded down to the nearest whole share.
(a) Time-Based Restricted Stock Units. A time-based restricted stock unit award (“Time-Based RSUs”) valued at $2,500,000 granted under the Metromile, Inc. 2021 Equity Incentive Plan (the “Plan”). The Time-Based RSUs shall be subject to time-based vesting, with a vesting commencement date corresponding to your start date with the Company. The grant shall be satisfied annually over four (4) years following the grant date, with 25% of the shares vesting in the quarter corresponding to the first anniversary of your hire date and the remaining 75% vesting quarterly thereafter, in all cases subject to your continued employment with the Company on each such vesting date.
(b) Performance-Based Restricted Stock Units. A performance-based vesting restricted stock unit award valued at $2,500,000 granted under the Plan (the “Performance-Based RSUs”). The Performance- shall vest as set forth on Exhibit A, and shall have a term of five years (from the grant date of such Performance-Based RSUs).
The Time-Based RSUs and Performance-Based RSUs shall provide for an automatic sell-to-cover arrangement in respect of applicable withholding taxes following the first release of shares from the Lockup (as defined in Exhibit A). Shares in respect of any vested portion of the Time-Based RSUs and Performance-Based RSUs shall be delivered to you as soon as reasonably practicable following the applicable vesting date but in no
event later than two and one-half months after the end of the calendar year following the calendar year in which such Time-Based RSUs or Performance-Based RSUs, as applicable, vest. The Time-Based RSUs and Performance-Based RSUs shall also be subject to the provisions of the Plan and the applicable award agreement, provided, however, that the Company’s standard forms shall be revised to provide that any clawbacks for RSUs adopted by the Company shall be limited to those required to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law.
No right to any RSU or shares is earned or accrued until such time that vesting occurs, and the grant does not confer any right to continued vesting (except as provided herein) or employment.
Background Check and Form I-9. The Company reserves the right to conduct background checks on all of its potential employees. Your job offer, therefore, is contingent on your consent to such background check and your clearance of the check. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated.
Disclosure of Prior Relevant Agreements. You must disclose to the Company any and all agreements relating to your prior employment that may affect your eligibility to be employed by the Company or limit the manner in which you may be employed. It is the Company’s understanding that any such agreements will not prevent you from performing the duties of your position, and you represent that such is the case. Moreover, you agree that, during the term of your employment with the Company, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of your employment, and you will not engage in any other activities that conflict with your obligations to the Company, other than your service on the board of directors of Porch and your involvement with not-for-profit, industry, professional and educational activities to the extent they do not materially interfere with your responsibilities to the Company or your ability to obtain appropriate required clearance from a regulatory body. Similarly, you agree not disclose any third party confidential information to the Company, including that of your former employer. You further agree that you will not use any such information in performing your duties for the Company.
Agreement to Abide by Company Policies. As a Company employee, you will be expected to abide by the Company’s policies, rules, and standards. You will be required to sign an acknowledgment that you have read and understand the Company’s policies and rules of conduct which are included in the Company Handbook (which the Company will soon distribute).
At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement (“Confidential Information and Arbitration Agreement”). As a condition of your employment, you will be required to sign and comply with the Company’s At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement which requires, among other provisions, the assignment of patent rights to any invention made during your employment at the Company, and non-disclosure of Company proprietary information. As set forth more fully in the Confidential Information and Arbitration Agreement, in the event of any dispute or claim relating to or arising out of our employment relationship, you and the Company agree that (i) any and all disputes between you and the Company shall be fully and finally resolved by binding arbitration, (ii) you are waiving any and all rights to a jury trial (but all court remedies will be available in arbitration), (iii) all disputes shall be resolved by a neutral arbitrator who shall issue a written opinion, (iv) the arbitration shall provide for adequate discovery, and (v) the Company shall pay all the arbitration fees, except an amount equal to the filing fees you would have paid had you filed a complaint in a court of law. Please note that we must receive your executed Confidential Information and Arbitration Agreement before your first day of employment.
Severance in the Event of Qualifying Termination Absent a Change of Control. If, at any time, the Company terminates your employment without Cause (other than as a result of your death or disability) or you resign for Good Reason (either such termination referred to as a “Qualifying Termination”), provided such termination or resignation constitutes a Separation from Service (as defined under Treasury Regulation Section 1.409A-1(h), without regard to any alternative definition thereunder, a “Separation from Service”), then subject to Sections below titled “Limitation on Severance Benefits / Clawback and Recovery”, “Conditions to Receipt of Severance Benefits and Accelerated Vesting” and “Return of Company Property” below and your continued compliance with the terms of this Agreement (including without limitation the Confidentiality Agreement), the Company will provide you with the following severance benefits (the “Non-CIC Severance Benefits”):
(a) Cash Severance. The Company will pay you, as cash severance, twelve (12) months of your base salary in effect as of your Separation from Service date, less standard payroll deductions and tax withholdings (the “Severance”). The Severance will be paid in installments in the form of continuation of your base salary payments, paid on the Company’s ordinary payroll dates, commencing on the Company’s first regular payroll date that is more than sixty (60) days following your Separation from Service date, and shall be for any accrued base salary for the sixty (60)-day period plus the period from the sixtieth (60th) day until the regular payroll date, if applicable, and all salary continuation payments thereafter, if any, shall be made on the Company’s regular payroll dates.
(b) COBRA Severance. The Company will continue to pay the cost of your health care coverage in effect at the time of your Separation from Service for a maximum of twelve (12) months, either by reimbursing you for or paying directly (at the Company’s discretion) your COBRA premiums to continue such coverage (the “COBRA Severance”). The Company’s obligation to pay the COBRA Severance on your behalf will cease if you obtain health care coverage from another source (e.g., a new employer or spouse’s benefit plan), unless otherwise prohibited by applicable law. You must notify the Company within two (2) weeks if you obtain coverage from a new source. This payment of COBRA Severance by the Company would not expand or extend the maximum period of COBRA coverage to which you would otherwise be entitled under applicable law. Notwithstanding the above, if the Company determines in its sole discretion that it cannot provide the foregoing COBRA Severance without potentially violating applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the Company shall in lieu thereof provide to you a taxable monthly payment in an amount equal to the monthly COBRA premium that you would be required to pay to continue your group health coverage in effect on the date of your termination (which amount shall be based on the premium for the first month of COBRA coverage), which payments shall be made on the last day of each month regardless of whether you elect COBRA continuation coverage and shall end on the earlier of (x) the date upon which you obtain other coverage or (y) the last day of the twelfth (12th) calendar month following your Separation from Service date.
Severance in the Event of Qualifying Termination in Connection with a Change of Control. In the event of a Qualifying Termination that occurs within three (3) months prior to or within twelve (12) months following the closing of a Change of Control (as defined below), provided such Qualifying Termination constitutes a Separation from Service, then subject to Sections below “Limitation on Severance Benefits / Clawback and Recovery”, “Conditions to Receipt of Severance Benefits and Accelerated Vesting” and “Return of Company Property” and your continued compliance with the terms of this Agreement (including without limitation the Confidentiality Agreement), then the Company will provide you with the following severance benefits (the “CIC Severance Benefits”): (i) the Severance in the form and as set forth in Section above titled “Severance in the Event of Qualifying Termination Absent a Change of Control” (ii) the COBRA Severance, in the form and as set forth in Section above titled “Severance in the Event of Qualifying Termination Absent a Change of Control”; and (iii) the Company shall accelerate the vesting of any then-unvested Time-Based RSUs such that one hundred percent (100%) of such shares shall be deemed satisfied as of your Separation from Service date (the “Accelerated Vesting”).
Limitation on Severance Benefits / Clawback and Recovery. Under no circumstances will you be able to receive both the Non-CIC Severance Benefits and the CIC Severance Benefits. Any and all Non-CIC Severance Benefits and CIC Severance Benefits provided under this Agreement will be subject to recoupment in accordance with any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. In addition, the Board may impose such other clawback, recovery or recoupment provisions as the Board determines necessary to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law, including but not limited to a reacquisition right in respect of previously acquired shares of common stock of the Company or other cash or property upon the occurrence of a termination of employment for Cause.
Resignation Without Good Reason; Termination for Cause; Death or Disability. If, at any time, you resign your employment without Good Reason, or the Company terminates your employment for Cause, or if either party terminates your employment as a result of your death or disability, you will receive your base salary accrued through your last day of employment, as well as any unused vacation (if applicable) accrued through your last day of employment. Under these circumstances, you will not be entitled to any other form of compensation from the Company, including any Non-CIC Severance Benefits, CIC Severance Benefits, or Accelerated Vesting, as applicable, other than your rights to the vested portion of your Options or RSUs for the common stock of the Company, as the case may be, and any other rights to which you are entitled under the Company’s benefit programs.
Conditions to Receipt of Severance Benefits and Accelerated Vesting. Prior to and as a condition to your receipt of the Non-CIC Severance Benefits, the CIC Severance Benefits, or the Accelerated Vesting, you shall execute and deliver to the Company an effective release of claims in favor of and in a form acceptable to the Company (the “Release”) within the timeframe set forth therein, but not later than forty-five (45) days following your Separation from Service date, and allow the Release to become effective according to its terms (by not invoking any legal right to revoke it) within any applicable time period set forth therein (such latest permitted effective date, the “Release Deadline”).
Return of Company Property. Upon the termination of your employment for any reason, as a precondition to your receipt of the Non-CIC Severance Benefits, the CIC Severance Benefits, and the Accelerated Vesting, as applicable (if and as applicable), within five (5) business days after your Separation from Service Date (or earlier if requested by the Company), you must return to the Company all Company documents (and all copies thereof) and other Company property in your possession, custody or control, including, but not limited to, Company files, notes, financial and operational information, password and account information, customer lists and contact information, prospect information, product and services information, research and development information, drawings, records, plans, forecasts, pipeline reports, sales reports or other reports, payroll information, spreadsheets, studies, analyses, compilations of data, proposals, agreements, sales and marketing information, personnel information, specifications, code, software, databases, computer-recorded information, tangible property and equipment (including, but not limited to, computers, facsimile machines, mobile telephones, tablets, handheld devices, and servers), credit cards, entry cards, identification badges and keys, and any materials of any kind which contain or embody any proprietary or confidential information of the Company, and all reproductions thereof in whole or in part and in any medium, other than any document you would be required to retain by applicable law or produce in any investigation by a regulatory or governmental agency or court of competent jurisdiction. You further agree that you will make a diligent search to locate any such documents, property and information and return them to the Company within the timeframe provided above. You also must provide the Company all passwords, log-ins, administrative access, and any other information or access for and relating to any Company computer or other device that you have used to access or use the Company’s network, as well as any Company database or Company accounts with third parties which you established, administered, or to which you had access, and must terminate your access to such network and accounts and otherwise comply with any Company requests regarding all such access and accounts. In addition, if you have used any personal computer, server, or email system to receive, store, review, prepare or transmit any confidential or proprietary data, materials or information of the Company, then within five (5) business days after your Separation from Service date (or earlier if requested by the Company) you must provide the Company with a computer-useable copy of such information and permanently delete and expunge such confidential or proprietary information from those systems without retaining any reproductions (in whole or in part); and you agree to provide the Company access to that portion of your system containing or which contained such information, as requested, to verify that the necessary copying and deletion is done. If requested, you shall deliver to the Company a signed statement certifying compliance with this Section prior to the receipt of the Non-CIC Severance Benefits, the CIC Severance Benefits, or the Accelerated Vesting, as applicable.
Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
“Cause” for termination will mean your: (a) commission or conviction (including a guilty plea or plea of nolo contendere) of any felony or any other crime involving fraud, dishonesty or moral turpitude; (b) commission or attempted commission of or participation in a fraud or act of dishonesty or misrepresentation against the Company; (c) material breach of your duties to the Company; (d) intentional damage to any property of the Company causing material harm to the Company; (e) gross misconduct, or other material violation of Company policy that causes, or reasonably could be anticipated to cause, harm; (f) material violation of any written and fully executed contract or agreement between you and the Company, including without limitation, material breach of your Confidentiality Agreement, or of any Company policy, or of any statutory duty you owe to the Company The determination that a termination is for Cause shall be made by the Company in its sole discretion.
You shall have “Good Reason” for resigning from employment with the Company if any of the following actions are taken by the Company without your prior written consent: (a) a material reduction in your base salary (unless pursuant to a salary reduction program applicable generally to the Company’s similarly situated employees of not more than 25%) or reduction in your eligibility to the incentive equity grants noted above or for other bonuses and benefits; (b) a material reduction in your duties (including responsibilities and/or authorities) or title, provided, however, that a change in job position shall not be deemed a “material reduction” in and of itself unless your new duties are materially reduced from the prior duties; or (c) relocation of your principal place of employment to a place that increases your one-way commute by more than 25 miles as compared to your then-current principal place of
employment immediately prior to such relocation. In order to resign for Good Reason, you must provide written notice to the Board within 30 days after the first occurrence of the event giving rise to Good Reason setting forth the basis for your resignation, allow the Company at least 30 days from receipt of such written notice to cure such event, and if such event is not reasonably cured within such period, you must resign from all positions you then hold with the Company not later than 30 days after the expiration of the cure period.
Entire Agreement. This letter, along with the Confidential Information and Arbitration Agreement, the Plan and any applicable Plan award agreement, set forth the entire agreement between you and the Company regarding the terms of your employment. By signing below, you are agreeing to these terms, and you acknowledge and agree that you are not relying on any representations, promises or statements, oral or written, other than those contained in this letter and the Confidential Information and Arbitration Agreement. This letter, including, but not limited to, its at-will employment provision, may not be modified or amended except by a written agreement signed by the CEO of the Company and you. This offer of employment will terminate if it is not accepted, signed and returned by April 20, 2021.
To accept the Company’s offer, please sign and date this letter in the space provided below. We look forward to your acceptance of this offer and to working with you at Metromile, Inc.
Sincerely,
/s/ Dan Preston |
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Dan Preston, CEO |
ACCEPTED AND AGREED:
/s/ Regi Vengalil |
2021-04-16 |
May 24, 2021 |
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Regi Vengalil |
Date |
Anticipated Start Date |
Mailing Address: |
7557 Earl Ave NW Seattle, WA 98117 |
EXHIBIT A
PERFORMANCE-BASED RSU TERMS
Capitalized terms that are not otherwise defined in this Exhibit A or the corresponding agreement shall have the meanings set forth in the Plan.
The terms below shall apply to your Performance-Based RSUs subject to your Continuous Service through the applicable vesting date:
1) $416,666 of the value of the Performance-Based RSUs shall vest upon the date on which the Company first achieves an active number of “policies in force” greater than or equal to 250,000, as determined by the Board in its sole discretion.
2) $416,666 of the value of the Performance-Based RSUs shall vest upon the date on which the Company first achieves an active number of “policies in force” greater than or equal to 500,000, as determined by the Board in its sole discretion.
3) $833,334 of the value of the Performance-Based RSUs shall vest upon the date on which the Company first achieves a positive operating cashflow (excluding marketing expenses, device expenses, new business underwriting expenses and reinsurance expenses) for a period of at least one financial quarter, as determined by the Board in its sole discretion and based on the Company’s books and records.
4) $833,334 of the value of the Performance-Based RSUs shall all vest upon the achievement of a $25 per share price of the Company’s common stock for any twenty (20) Trading Days within any thirty (30) Trading Day period (the “Share-Based Milestone”). Notwithstanding the foregoing, the Share-Based Milestone shall be deemed satisfied as set forth in the table below in connection with a Change of Control (as defined in the Plan) that occurs prior to February 15, 2025 in connection with which the price per share shall be the per share value paid for all of the shares of each class of common stock of the Company or any successor entity in connection with a Change of Control as of the date thereof. In the event of a stock-for-stock acquisition, the value of the acquiror’s shares shall be valued based on the volume weighted average closing price over the 60-day period ending on and including the trading day occurring on the day prior to consummation of such Change of Control.
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Price per share |
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Percentage of
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At least $25 but less than $30 |
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33 |
% |
At least $30 but less than $35 |
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66 |
% |
At least $35 |
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100 |
% |
If the Share-Based Milestone is not met on or before February 15, 2025, all Performance-Based RSUs that are subject to the Share-Based Milestone will be forfeited. In the event of a Change of Control, the vesting conditions for all Performance-Based RSUs, other than the Performance-Based RSUs subject to the Share-Based Milestone (which shall vest in accordance with (4) above), shall be deemed to have been achieved as of the closing of such Change of Control in the proportion set forth in the table above (e.g. if the price per share is less than $25, none of the Performance-Based RSUs shall be deemed to have been achieved, if the price per share is $35 or more, all of the Performance-Based RSUs shall be deemed to have been achieved etc.).
Notwithstanding anything in this Exhibit A to the contrary, if vesting conditions for Performance-Based RSUs are otherwise met prior to the first release of shares from any applicable lockup agreement restricting shares of the Company’s common stock (the “Lockup”), the Performance-Based RSUs will not vest until following the first release of shares from the Lockup.
Any of the share amounts and share prices for Performance-Based RSUs shall be automatically adjusted in the event of stock splits, any extraordinary dividend or other extraordinary distribution, combinations and the like occurring prior to the date of grant.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption “Experts” in the Registration Statement (Form S-4) of Lemonade, Inc. and to the incorporation by reference therein of our report dated March 8, 2021, with respect to the consolidated financial statements of Lemonade, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 2020 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
New York, New York
December 13, 2021
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the use in the proxy statement/prospectus on Form S-4 of Lemonade, Inc. of our report dated March 30, 2021 (August 6, 2021 as to the effects of the reverse recapitalization described in Note 1 and subsequent events described in Note 19), relating to the consolidated financial statements of Metromile, Inc. and subsidiaries as of December 31, 2020 and 2019 and for the years then ended, and to the reference to our firm under the heading “Experts” in the proxy statement/prospectus, which is part of this Registration Statement.
/s/ Moss Adams LLP
San Francisco, CA
December 13, 2021
Exhibit 99.1
Consent of Allen & Company LLC
The Board of Directors
Metromile, Inc.
425 Market Street, #700
San Francisco, California 94105
Irving, Texas 75039
The Board of Directors:
We hereby consent to the inclusion of our opinion letter, dated November 8, 2021, to the Board of Directors of Metromile, Inc. (“Metromile”) as Annex B to, and reference to such opinion letter under the headings “SUMMARY — Opinion of Metromile’s Financial Advisor” and “THE MERGERS — Opinion of Metromile’s Financial Advisor” in, the proxy statement/prospectus relating to the proposed transaction involving Metromile and Lemonade, Inc. (“Lemonade”), which proxy statement/prospectus forms a part of the Registration Statement on Form S-4 of Lemonade (the “Registration Statement”). By giving such consent, we do not thereby admit that we are experts with respect to any part of such Registration Statement within the meaning of the term “expert” as used in, or that we come within the category of persons whose consent is required under, the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder.
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Very truly yours, |
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/s/ Allen & Company LLC |
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ALLEN & COMPANY LLC |
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December 14, 2021 |
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Exhibit 99.2
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VIEW MATERIALS & VOTE w SCAN TO METROMILE, INC. 425 MARKET STREET #700 SAN FRANCISCO, CALIFORNIA 94105 (888) 242-5204 VOTE BY INTERNET Before The Meeting - Go to www.proxyvote.com or scan the QR Barcode above Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 p.m. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. During The Meeting - Go to www.virtualshareholdermeeting.com/MILE2022SM You may attend the meeting via the Internet and vote during the meeting. Have the information that is printed in the box marked by the arrow available and follow the instructions. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 p.m. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: D63719-S37340 KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. METROMILE, INC. THE METROMILE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE FOLLOWING PROPOSALS: For Against Abstain ! ! ! 1. A proposal to adopt the Agreement and Plan of Merger, dated as of November 8, 2021 by and among Metromile, Inc. (“Metromile”), Lemonade, Inc. (“Lemonade”), Citrus Merger Sub A, Inc., a wholly owned subsidiary of Lemonade and Citrus Merger Sub B, LLC, a wholly owned subsidiary of Lemonade (such proposal, the “merger proposal”). ! ! ! 2. A proposal to approve the adjournment of the Metromile special meeting to another time and place to solicit additional proxies, if necessary or appropriate, if there are insufficient votes to approve the merger proposal. Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name by authorized officer. Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date |
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Important Notice Regarding the Availability of Proxy Materials for the Special Meeting: The Notice and Proxy Statement are available at www.proxyvote.com. D63720-S37340 METROMILE, INC. Special Meeting of Stockholders [ ] This proxy is solicited by the Board of Directors of Metromile, Inc. The undersigned stockholder(s) of Metromile, Inc. hereby appoint(s) Dan Preston and Regi Vengalil (the "Proxies") and each of them, as proxies, with power to act without the other and with power of substitution and hereby authorize(s) them to represent and to vote, as designated on the reverse side of this ballot, all of the shares of common stock $0.0001 par value per share of Metromile, Inc., (the "Shares") that the stockholder(s) is/are entitled to vote at the Special Meeting of Stockholders to be held at [ ] on [ ], virtually at www.virtualshareholdermeeting.com/MILE2022SM, and any adjournment or postponement thereof. THE SHARES REPRESENTED BY THIS PROXY, WHEN PROPERLY EXECUTED AND RETURNED IN A TIMELY MANNER, WILL BE VOTED UPON THE PROPOSALS LISTED ON THE REVERSE SIDE IN ACCORDANCE WITH THE INSTRUCTIONS GIVEN BY THE UNDERSIGNED, BUT IF THIS PROXY IS SIGNED AND RETURNED AND NO INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Special Meeting of Stockholders. Continued and to be signed on reverse side |