Lemonade, Inc. [LMND] Filings

10-Q 1 lmnd-20230930.htm 10-Q lmnd-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number: 001-39367

Lemonade, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware						32-0469673
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

5 Crosby Street, 3rd Floor New York, New York						10013
(Address of principal executive offices)						(Zip Code)

(844) 733-8666

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00001 par value per share	LMND	New York Stock Exchange
Warrants to Purchase Common Stock	LMND.WS	New York Stock Exchange American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 2, 2023, the registrant had 69,923,569 shares of common stock, $0.00001 par value per share, outstanding.

Table of Contents


		Page
	Cautionary Note Regarding Forward-Looking Statements	2
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2023 (Unaudited) and December 31, 2022	6
	Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022	7
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022	8
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2023 and 2022	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	52
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57
	Signatures	58

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the "Quarterly Report") contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this Quarterly Report, including without limitation statements regarding our future results of operations and financial position, our ability to attract, retain and expand our customer base, our ability to operate under and maintain our business model, our ability to maintain and enhance our brand and reputation, our ability to effectively manage the growth of our business, the effects of seasonal trends on our results of operations, our ability to attain greater value from each customer, our ability to compete effectively in our industry, the future performance of the markets in which we operate, our ability to maintain reinsurance contracts, the impact of the evolving conflict in Israel and surrounding region and the plans and objectives of management for future operations and capital expenditures are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms 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. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including:

•We have a history of losses and we may not achieve or maintain profitability in the future.

•Our success and ability to grow our business depend on retaining and expanding our customer base. If we fail to add new customers or retain current customers, our business, revenue, operating results and financial condition could be harmed.

•The "Lemonade" brand may not become as widely known as incumbents' brands or the brand may become tarnished.

•Denial of claims or our failure to accurately and timely pay claims could materially and adversely affect our business, financial condition, results of operations, and prospects.

•Our future revenue growth and prospects depend on attaining greater value from each user.

•The novelty of our business model makes its efficacy unpredictable and susceptible to unintended consequences.

•We could be forced to modify or eliminate our Giveback, which could undermine our business model and have a material adverse effect on our results of operations and financial condition.

•Our limited operating history makes it difficult to evaluate our current business performance, implementation of our business model, and our future prospects.

•We may not be able to manage our growth effectively.

•Intense competition in the segments of the insurance industry in which we operate could negatively affect our ability to attain or increase profitability.

•Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business. Furthermore, reinsurance subjects us to counterparty risk and may not be adequate to protect us against losses, which could have a material effect on our results of operations and financial condition.

•Failure to maintain our risk-based capital at the required levels could adversely affect the ability of our insurance subsidiaries to maintain regulatory authority to conduct our business.

•If we are unable to expand our product offerings, our prospects for future growth may be adversely affected.

•Our proprietary artificial intelligence algorithms may not operate properly or as we expect them to, which could cause us to write policies we should not write, price those policies inappropriately or overpay claims that are made by our customers. Moreover, our proprietary artificial intelligence algorithms may lead to unintentional bias and discrimination.

•Regulators may limit our ability to develop or implement our proprietary artificial intelligence algorithms, and/or may eliminate or restrict the confidentiality of our proprietary technology, which could have a material adverse effect on our financial condition and results of operations.

•New legislation or legal requirements may affect how we communicate with our customers, which could have a material adverse effect on our business model, financial condition, and results of operations.

•We rely on artificial intelligence, telematics, mobile technology and our digital platforms to collect data that we evaluate in pricing and underwriting our insurance policies, managing claims and customer support, and improving business processes, and any legal or regulatory requirements that prohibit or restrict our ability to collect or use this data could thus materially and adversely affect our business, financial condition, results of operations and prospects.

•We depend on search engines, social media platforms, digital app stores, content-based online advertising and other online sources to attract consumers to our website and our online app, which may be affected by third-party interference beyond our control and as we grow our customer acquisition costs will continue to rise.

•We may require additional capital to grow our business, which may not be available on terms acceptable to us or at all.

•Security incidents or real or perceived errors, failures or bugs in our systems, website or app could impair our operations, result in loss of personal customer information, damage our reputation and brand, and harm our business and operating results.

•We are periodically subject to examinations by our primary state insurance regulators, which could result in adverse examination findings and necessitate remedial actions. In addition, insurance regulators of other states in which we are licensed to operate may also conduct examinations or other targeted investigations, which may also result in adverse examination findings and necessitate remedial actions.

•We collect, process, store, share, disclose and use customer information and other data, and our actual or perceived failure to protect such information and data, respect customers' privacy or comply with data privacy and security laws and regulations could damage our reputation and brand and harm our business and operating results.

•We may be unable to prevent or address the misappropriation of our data.

•If we are unable to underwrite risks accurately and charge competitive yet profitable rates to our customers, our business, results of operations and financial condition will be adversely affected.

•Our product development cycles are complex and subject to regulatory approval, and we may incur significant expenses before we generate revenues, if any, from new products.

•Our expansion within the United States and any future international expansion strategy will subject us to additional costs and risks and our plans may not be successful.

•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 company’s common stock.

•The combined company may be exposed to increased litigation, which could have an adverse effect on our business and operations.

•The insurance business, including the market for renters, homeowners, pet and automobile insurance, is historically cyclical in nature, and we may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.

•We are subject to extensive insurance industry regulations.

•State insurance regulators impose additional reporting requirements regarding enterprise risk on insurance holding company systems, with which we must comply as an insurance holding company.

•Severe weather events and other catastrophes, including the effects of climate change and global pandemics, are inherently unpredictable and may have a material adverse effect on our financial results and financial condition.

•Climate risks, including risks associated with disruptions caused by the transition to a low-carbon economy, could adversely affect our business, results of operations and financial condition.

•Increasing scrutiny, actions and changing expectations from investors, clients, regulators and our employees with respect to environmental, social and governance ("ESG") matters may impose additional costs on us, impact our access to capital, or expose us to new or additional risks.

•We expect our results of operations to fluctuate on a quarterly and annual basis. In addition, our operating results and operating metrics are subject to seasonality and volatility, which could result in fluctuations in our quarterly revenues and operating results or in perceptions of our business prospects.

•We rely on data from our customers and third parties for pricing and underwriting our insurance policies, handling claims and maximizing automation, the unavailability or inaccuracy of which could limit the functionality of our products and disrupt our business.

•Our results of operations and financial condition may be adversely affected due to limitations in the analytical models used to assess and predict our exposure to catastrophe losses.

•Our actual incurred losses may be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition and results of operations.

•Our insurance subsidiaries are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

•We are subject to assessments and other surcharges from state guaranty funds, and mandatory state insurance facilities, which may reduce our profitability.

•As a public benefit corporation, our focus on a specific public benefit purpose and producing a positive effect for society may negatively impact our financial performance.

•Our directors have a fiduciary duty to consider not only our stockholders' interests, but also our specific public benefit and the interests of other stakeholders affected by our actions. If a conflict between such interests arises, there is no guarantee such a conflict would be resolved in favor of our stockholders.

•SoftBank has sole voting and dispositive voting control over approximately 17.1% of our common stock as of September 30, 2023. This concentration of voting control could limit the ability of our stockholders to influence the outcome of important transactions, including a change in control.

•We conduct certain of our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel and the region, including the evolving conflict in Israel and the surrounding region.

•The impact of the Customer Investment Agreement with General Catalyst is unpredictable, and the arrangement may not function as expected, and its failure to do so could materially and adversely impact our financial condition and results of operations.

•The factors described under the sections "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "Annual Report on Form 10-K") and in this Quarterly Report.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. In this Quarterly Report, unless we indicate otherwise or the context requires, "Lemonade," the “Company," "we," "our," "ours" and "us" refer to Lemonade, Inc. and its consolidated subsidiaries, including Lemonade Insurance Company, Lemonade Insurance Agency, LLC, and Metromile, LLC.

Table of contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEMONADE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions, except share and per share amounts)


	As of
	September 30,		December 31,
	2023		2022
	(Unaudited)
Assets
Investments
Fixed maturities available-for-sale, at fair value (amortized cost: $645.4 million and $673.5 million as of September 30, 2023 and December 31, 2022, respectively)	$	633.4	$	650.3
Short-term investments (cost: $73.4 million and $99.9 million as of September 30, 2023 and December 31, 2022, respectively)	73.4		99.8
Total investments	706.8		750.1
Cash, cash equivalents and restricted cash	238.1		286.5
Premium receivable, net of allowance for credit losses of $2.5 million and $2.7 million as of September 30, 2023 and December 31, 2022, respectively	223.2		179.6
Reinsurance recoverable	144.6		156.8
Prepaid reinsurance premium	197.6		164.5
Deferred acquisition costs	8.1		6.9
Property and equipment, net	17.4		19.6
Intangible assets	25.2		32.5
Goodwill	19.0		19.0
Other assets	67.6		75.2
Total assets	$	1,647.6	$	1,690.7

Liabilities and Stockholders' Equity
Unpaid loss and loss adjustment expense	$	255.1	$	256.2
Unearned premium	355.6		288.0
Trade payables	2.7		1.1
Funds held for reinsurance treaties	131.1		136.0
Deferred ceding commission	39.1		39.7
Ceded premium payable	36.3		18.4
Borrowings under financing agreement	7.7		—
Other liabilities and accrued expenses	93.1		84.5
Total liabilities	920.7		823.9
Commitments and Contingencies (Note 16)

Stockholders' equity
Common stock, $0.00001 par value, 200,000,000 shares authorized; 69,909,356 and 69,275,030 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	1,800.2		1,754.1
Accumulated deficit	(1,054.2)		(859.7)
Accumulated other comprehensive loss	(19.1)		(27.6)
Total stockholders' equity	726.9		866.8
Total liabilities and stockholders' equity	$	1,647.6	$	1,690.7

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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,
	2023		2022		2023		2022
Revenue
Net earned premium	$	86.6	$	50.6	$	231.3	$	109.2
Ceding commission income	16.7		16.9		51.4		46.4
Net investment income	7.0		2.6		17.6		4.7
Commission and other income	4.2		3.9		14.0		8.0
Total revenue	114.5		74.0		314.3		168.3

Expense
Loss and loss adjustment expense, net	75.9		53.3		215.4		105.8
Other insurance expense	15.1		12.1		43.7		30.9
Sales and marketing	24.4		35.8		77.4		111.1
Technology development	21.8		21.4		67.7		56.1
General and administrative	36.9		40.5		100.3		91.1
Total expense	174.1		163.1		504.5		395.0
Loss before income taxes	(59.6)		(89.1)		(190.2)		(226.7)
Income tax expense	1.9		2.3		4.3		7.4
Net loss	$	(61.5)	$	(91.4)	$	(194.5)	$	(234.1)

Other comprehensive loss, net of tax
Unrealized gain (loss) on investments in fixed maturities	2.9		(5.0)		10.1		(23.8)
Foreign currency translation adjustment	(1.0)		(1.5)		(1.6)		(8.1)
Comprehensive loss	$	(59.6)	$	(97.9)	$	(186.0)	$	(266.0)

Per share data:
Net loss per share attributable to common stockholders—basic and diluted	$	(0.88)	$	(1.37)	$	(2.80)	$	(3.69)

Weighted average common shares outstanding—basic and diluted	69,753,576		66,877,100		69,542,342		63,482,945

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

LEMONADE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in millions, except share amounts)

(Unaudited)


	Common Stock		Additional Paid-In Capital			Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Total Stockholders' Equity
		Shares			Amount

Balance as of December 31, 2022		69,275,030	$	—		$	1,754.1	$	(859.7)	$	(27.6)	$	866.8
Exercise of stock options and distribution of restricted stock units		174,318	—			0.1		—		—		0.1
Stock-based compensation		—	—			15.4		—		—		15.4
Net loss		—	—			—		(65.8)		—		(65.8)
Other comprehensive income		—	—			—		—		5.3		5.3
Balance as of March 31, 2023		69,449,348	$	—		$	1,769.6	$	(925.5)	$	(22.3)	$	821.8
Exercise of stock options and distribution of restricted stock units		218,828	—			0.3		—		—		0.3
Stock-based compensation		—	—			14.8		—		—		14.8
Net loss		—	—			—		(67.2)		—		(67.2)
Other comprehensive loss		—	—			—		—		1.3		1.3
Balance as of June 30, 2023		69,668,176	$	—		$	1,784.7	$	(992.7)	$	(21.0)	$	771.0
Exercise of stock options and distribution of restricted stock units		241,180	—			0.1		—		—		0.1
Stock-based compensation		—	—			15.4		—		—		15.4
Net loss		—	—			—		(61.5)		—		(61.5)
Other comprehensive loss		—	—			—		—		1.9		1.9
Balance as of September 30, 2023		69,909,356	$	—		$	1,800.2	$	(1,054.2)	$	(19.1)	$	726.9








Balance as of December 31, 2021	61,660,996	$	—	$	1,553.5	$	(561.9)	$	(3.4)	$	988.2

Exercise of stock options and distribution of restricted stock units	97,743	—		0.6		—		—		0.6
Stock-based compensation	—	—		14.1		—		—		14.1
Net loss	—	—		—		(74.8)		—		(74.8)
Other comprehensive loss	—	—		—		—		(15.4)		(15.4)
Balance as of March 31, 2022	61,758,739	$	—	$	1,568.2	$	(636.7)	$	(18.8)	$	912.7
Exercise of stock options and distribution of restricted stock units	108,838	—		0.4		—		—		0.4
Stock-based compensation	—	—		13.9		—		—		13.9
Net loss	—	—		—		(67.9)		—		(67.9)
Other comprehensive loss	—	—		—		—		(10.0)		(10.0)
Balance as of June 30, 2022	61,867,577	$	—	$	1,582.5	$	(704.6)	$	(28.8)	$	849.1
Issuance of common stock from acquisition of Metromile (Note 5)	6,901,934	—		137.7		—		—		137.7
Exercise of stock options and distribution of restricted stock units	350,835	—		2.3		—		—		2.3
Stock-based compensation	—	—		15.6		—		—		15.6
Net loss	—	—		—		(91.4)		—		(91.4)
Other comprehensive income	—	—		—		—		(6.5)		(6.5)
Balance as of September 30, 2022	69,120,346	$	—	$	1,738.1	$	(796.0)	$	(35.3)	$	906.8

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

Table of contents

LEMONADE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(194.5)	$	(234.1)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	15.2		6.8
Stock-based compensation	45.6		43.6
Amortization of discount on bonds	(1.3)		5.9
Provision for bad debt	6.0		6.4
Asset impairment charge	3.7		—
Changes in operating assets and liabilities:
Premium receivable	(49.6)		(49.8)
Reinsurance recoverable	12.2		(32.2)
Prepaid reinsurance premium	(33.1)		(32.1)
Deferred acquisition costs	(1.2)		(1.4)
Other assets	5.0		(5.1)
Unpaid loss and loss adjustment expense	(1.1)		46.5
Unearned premium	67.6		71.5
Trade payables	1.6		(0.3)
Funds held for reinsurance treaties	(4.9)		28.6
Deferred ceding commissions	(0.6)		6.5
Ceded premium payable	17.9		(5.8)
Other liabilities and accrued expenses	8.5		10.6
Net cash used in operating activities	(103.0)		(134.4)
Cash flows from investing activities:
Acquisition of business, net of cash acquired	—		98.8
Proceeds from short-term investments sold or matured	115.2		150.0
Proceeds from bonds sold or matured	300.0		90.0
Cost of short-term investments acquired	(71.5)		(118.3)
Cost of bonds acquired	(288.8)		(119.4)
Purchases of property and equipment	(6.8)		(7.5)
Net cash provided by investing activities	48.1		93.6
Cash flows from financing activities:
Proceeds from borrowings under financing agreement	9.3		—
Payments on borrowings under financing agreement	(1.6)		—
Proceeds from stock exercises	0.5		3.3
Net cash provided by financing activities	8.2		3.3
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(1.7)		(8.1)
Net decrease in cash, cash equivalents and restricted cash	(48.4)		(45.6)
Cash, cash equivalents and restricted cash at beginning of period	286.5		270.6
Cash, cash equivalents and restricted cash at end of period	$	238.1	$	225.0

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	0.6	$	3.4
Cash paid for interest expense on borrowings under financing agreement	$	0.1	$	—

Non-cash transactions:
Warrants assumed from acquisition of Metromile	$	—	$	0.8

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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, 2022 as included in the Company's Annual Report on Form 10-K (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 COVID-19 pandemic has caused national and global economic and financial market disruptions and may adversely impact the Company. Although the Company did not see a material impact on its results of operations for the three and nine months ended September 30, 2023 and year ended December 31, 2022 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. In addition, the evolving conflict in Israel and surrounding region has increased global economic and political uncertainty. There is still uncertainty regarding the extent to which the war and its broader macroeconomic implications will impact our operations in Israel. We will continue to evaluate the extent to which this may impact our business, financial condition, or results of operations.

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 and cash flows. The condensed consolidated balance sheet at December 31, 2022 was derived from audited annual financial statements and 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, 2022 as included 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 consolidated 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 recoverable on unpaid losses, intangible assets, and valuation allowance on deferred tax assets.

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, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022
Cash and cash equivalents	$	231.7	$	282.5
Restricted cash	6.4		4.0
Total cash, cash equivalents and restricted cash	$	238.1	$	286.5

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 primarily relates to security deposits for certain office leases. The Company also collects insurance policy premiums that it holds in a segregated cash account for transmittal to the underwriting carrier, or settlement of insurance related claims. The carrying value of restricted cash approximates fair value.

New Accounting Pronouncements

There are no new accounting standards not yet implemented that are expected to have a material effect on the Company's consolidated financial statements.

5. Acquisition of Metromile

On July 28, 2022 (the "Acquisition Date"), the Company completed its acquisition of Metromile, Inc. (“Metromile"), a leading digital insurance platform in the United States that offers real-time, personalized auto insurance policies by the mile (the "Metromile Acquisition"). The Company acquired 100% of Metromile's equity through an all-stock transaction based upon the exchange ratio of 0.05263 shares of Lemonade for each outstanding share of Metromile. As a result of the acquisition, Metromile stockholders received 6,901,934 shares of Lemonade's common stock, with minimal cash paid in lieu of fractional shares. In addition, upon closing of the Metromile Acquisition, the Company assumed all outstanding and unexercised options, and outstanding restricted stock units (collectively referred to as "replacement awards") as of the Acquisition Date, which were converted into corresponding awards using the same exchange ratio of 0.05263 and with substantially identical terms and conditions prior to the close of the Metromile Acquisition.

Fair value of consideration transferred for the Metromile Acquisition is as follows ($ in millions):


Metromile issued and outstanding stock exchanged for Lemonade common stock (1)	$	136.9
Contingent consideration (2)	—
Metromile vested awards exchanged for Lemonade awards (3)	0.8
Total Purchase Consideration	$	137.7

(1) The fair value of 6,901,934 shares issued and exchanged for Lemonade common stock was determined based on the closing price at acquisition date of $19.84, and includes a minimal amount of cash paid in lieu of fractional shares.

(2) Contingent consideration represents Metromile's contingently issuable shares that are convertible into Lemonade common stock in accordance with the exchange ratio as set forth in the merger agreement. In accordance with ASC 805-30-25-5, contingent consideration shall be recognized and measured at fair value as of the Acquisition Date. Given that the contingencies are not probable of being met within the contingency period, no fair value was assessed for these Metromile shares.

(3) Fair value of replacement awards related to services rendered prior to the Metromile Acquisition are included as part of purchase consideration. The unvested portion of fair value attributable to these replacement awards of $4.3 million comprised of $0.1 million for assumed options and $4.2 million for assumed restricted stock units ("RSUs"), and associated with future service will be recognized as expense over the future service period.

The Metromile Acquisition increased the Company's geographic footprint as a tech-enabled insurance provider and is expected to accelerate growth of the Lemonade car product, including other product offerings.

The Metromile Acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”). The purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair values at the Acquisition Date. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, and will not be deductible for tax purposes. Goodwill from this business combination is primarily attributable to synergies from future expected economic benefits, enhanced revenue growth from expanded capabilities and geographic presence, including cost savings from streamlined operations and enhanced operational efficiencies.

The following table presents the preliminary allocation of purchase consideration recorded on the condensed consolidated balance sheet as of the Acquisition Date ($ in millions):


Assets acquired
Fixed maturities, available for sale, at fair value	$	1.8
Short-term investments	64.2
Cash, cash equivalents and restricted cash	98.8
Premiums receivable	17.4
Reinsurance recoverable	14.5
Property and equipment	4.6
Value of business acquired ("VOBA")	1.7
Intangible assets - technology	28.0
Intangible assets - insurance licenses	7.5
Other assets	14.7
Total assets acquired	$	253.2
Liabilities assumed
Unpaid loss and loss adjustment expenses	$	84.4
Unearned premium	15.1
Trade payables	0.8
Ceded premium payable	12.0
Other liabilities and accrued expenses	22.2
Total liabilities assumed	$	134.5
Total identifiable net assets acquired	$	118.7
Total purchase consideration	$	137.7
Goodwill	$	19.0

Estimated fair values of assets acquired and liabilities assumed from Metromile are subject to change as we obtain additional information, and will be updated and finalized within the measurement period that will not extend beyond 12 months from the Acquisition Date.

The amounts, based on preliminary valuations and subject to final adjustment, allocated to intangible assets are as follows ($ in millions):


	Fair Value		Weighted-Average Useful Life
Technology	$	28.0	3 to 5 years
Insurance licenses	7.5		N/A
Total	$	35.5

The Company finalized the fair value valuation analysis of assets acquired and liabilities assumed and as a result no measurement period adjustments were recorded.

The results of operations for Metromile of $57.9 million of revenue and $24.7 million of net loss for the nine months ended September 30, 2023, and $15.1 million of revenue and $20.7 million of net loss from the date of the acquisition to the period ended September 30, 2022, have been included within the accompanying consolidated statements of operations and comprehensive loss.

The Company incurred transaction and integration costs of approximately $7.4 million for the three months ended September 30, 2022 and $8.4 million for the nine months ended September 30, 2022, and were included in "General and administrative expenses" within the Company’s consolidated statements of operations and comprehensive loss.

The following unaudited supplemental pro forma combined financial information presents the Company’s results of operations for the three and nine months ended September 30, 2022 as if the Metromile Acquisition had occurred on January 1, 2022. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the Company’s operating results that may have actually occurred had the Metromile Acquisition been completed on January 1, 2022. In addition, the unaudited pro forma financial information does not give effect to any anticipated cost savings, operating efficiencies or other synergies that may be associated with the Metromile Acquisition, or any estimated costs that have been or will be incurred by the Company to integrate the assets and operations of Metromile.


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Total Revenue	$	85.1	$	221.1
Net Loss	$	(112.2)	$	(316.8)

The unaudited pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the Metromile Acquisition had occurred on January 1, 2022 to give effect to certain events the Company believes to be directly attributable to the Metromile Acquisition. These pro forma adjustments primarily include:

•a net decrease in amortization expense that would have been recognized due to acquired intangible assets;

•an increase in the nine months ended September 30, 2022 for acquisition-related transaction costs;

•a decrease in operating revenues due to the elimination of deferred revenues and assigned no value at the Acquisition Date;

•a decrease to amortization expense due to the elimination of unamortized deferred acquisition costs;

•an increase to income due to the adjustment of the loss and loss adjustment expense reserves at fair value; and

•an increase in income due to the depreciation of Right-of-Use assets and lease expense upon adoption of ASC 842.

6. 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, 2023 and December 31, 2022 ($ in millions):


	Cost or Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
September 30, 2023
Corporate debt securities	$	460.2	$	—	$	(9.2)	$	451.0
U.S. Government obligations	184.8		—		(2.8)		182.0
Asset-backed securities	0.4		—		—		0.4

Total	$	645.4	$	—	$	(12.0)	$	633.4

December 31, 2022
Corporate debt securities	$	549.7	$	0.1	$	(19.6)	$	530.2
U.S. Government obligations	121.0		—		(3.7)		117.3
Asset-backed securities	2.8		—		—		2.8

Total	$	673.5	$	0.1	$	(23.3)	$	650.3

Gross unrealized losses for fixed maturities was $12.0 million as of September 30, 2023 and $23.3 million as of December 31, 2022. Gross unrealized gains and losses were recorded as a component of accumulated other comprehensive loss.

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, 2023 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.


	September 30, 2023
	Cost or Amortized Cost		Fair Value
Due in one year or less	$	257.8	$	252.9
Due after one year through five years	387.6		380.5
Due after five years through ten years	—		—
Due after ten years	—		—
Total	$	645.4	$	633.4

Net investment income

An analysis of net investment income follows ($ in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest on cash and cash equivalents	$	0.8	$	0.3	$	3.0	$	0.4
Fixed maturities	5.0		1.7		11.9		3.7
Short-term investments	1.3		0.7		3.0		0.9
Total	7.1		2.7		17.9		5.0
Investment expense	0.1		0.1		0.3		0.3
Net investment income	$	7.0	$	2.6	$	17.6	$	4.7

Investment gains and losses

The Company had pre-tax net realized capital losses of $0.7 million for the three and nine months ended September 30, 2023, which were included in "Commission and other income" in the consolidated statements of operations. There were no pre-tax net realized capital gains and losses for the three months ended September 30, 2022, and the Company had pre-tax net realized capital losses of $0.4 million for the nine months ended September 30, 2022.

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, 2023 and December 31, 2022 ($ in millions):


	Less than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses




September 30, 2023
Corporate debt securities	$	204.5	$	(2.2)	$	216.7	$	(6.9)	$	421.2	$	(9.1)
U.S. Government obligations	116.8		(1.0)		62.4		(1.9)		179.2		(2.9)
Asset-backed securities	—		—		0.4		—		0.4		—

Total	$	321.3	$	(3.2)	$	279.5	$	(8.8)	$	600.8	$	(12.0)


	Less than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses




December 31, 2022
Corporate debt securities	$	83.6	$	(2.1)	$	428.1	$	(17.5)	$	511.7	$	(19.6)
U.S. Government obligations	29.6		(0.2)		85.1		(3.5)		114.7		(3.7)
Asset-backed securities	2.8		—		—		—		2.8		—


Total	$	116.0	$	(2.3)	$	513.2	$	(21.0)	$	629.2	$	(23.3)

As of September 30, 2023, 260 of the securities held were in an unrealized loss position. Investments in fixed maturities with gross unrealized losses for twelve months or more was $8.8 million and $21.0 million as of September 30, 2023 and December 31, 2022, respectively. The Company determined that unrealized losses on fixed maturities were primarily due to the interest rate environment, and not credit risk related to the issuers of these securities. The Company does not intend to sell these investment in fixed maturities, and it is not more likely than not that that the Company will be required to sell these investment in fixed maturities before recovery of the amortized cost basis. No allowance for credit losses related to any of these securities was recorded for the three and nine months ended September 30, 2023. The Company does not measure an allowance for credit losses on accrued interest receivable and would instead write off accrued interest receivable at the time an issuer defaults or is expected to default on payments.

Restricted investments

Restricted investments are held in a trust account securing the Company’s insurance subsidiary's contractual obligations under the Property Catastrophe Excess of Loss reinsurance contract with a captive (see Note 8) which will not be released until the underlying risks have expired or have been settled. Restricted investments include certain investments in debt securities and short-term investments of $81.0 million as of September 30, 2023.

7. Fair Value Measurements

The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured as of September 30, 2023 and December 31, 2022 ($ in millions):


	September 30, 2023
	Level 1		Level 2		Level 3		Total
Financial Assets:
Corporate debt securities	$	—	$	451.0	$	—	$	451.0
U.S. Government obligations	—		182.0		—		182.0
Asset-backed securities	—		0.4		—		0.4

Fixed maturities	$	—	$	633.4	$	—	$	633.4
Short term investments	—		73.4		—		73.4
Total	$	—	$	706.8	$	—	$	706.8

Financial Liabilities:
Warrant Liability (1)	$	—	$	—	$	—	$	—

(1) Fair value of Public and Private warrant liability amounted to less than $0.1 million as of September 30, 2023.


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Financial Assets:
Corporate debt securities	$	—	$	530.2	$	—	$	530.2
U.S. Government obligations	—		117.3		—		117.3
Asset-backed securities	—		2.8		—		2.8

Fixed maturities	$	—	$	650.3	$	—	$	650.3
Short term investments	—		99.8		—		99.8
Total	$	—	$	750.1	$	—	$	750.1

Financial Liabilities:
Warrant Liability	$	—	$	—	$	0.3	$	0.3

The fair value of all 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 the three and nine months ended September 30, 2023, other than the public and private warrants previously reported as Level 3 except as discussed below. There were no transfers between Level 1, Level 2, or Level 3 during the year ended December 31, 2022.

Warrant liability

As part of the Metromile Acquisition as discussed in Note 5, public and private warrants were assumed and are measured at fair value on a recurring basis at the end of the reporting period, and classified as Level 3 for fair value hierarchy disclosure purposes as of December 31, 2022. These warrants do not meet the criteria for equity treatment and are recorded as a liability and presented under "Other liabilities and accrued expenses" on the consolidated balance sheet at fair value, with changes in fair value recognized and presented under "General and administrative expenses" in the consolidated statements of operations and comprehensive loss. The Company utilized the binomial Monte-Carlo simulation to estimate the fair value of the warrants which were not actively traded as of December 31, 2022.

The public warrants liability is classified as Level 1 for fair value hierarchy disclosure purposes as of March 31, 2023, due to the use of an observable market quote in an active market, following the listing of the public warrants in New York Stock Exchange American. The Company also reclassified the private warrants liability from Level 3 to Level 2 as of March 31, 2023, as the Company utilizes the observable prices of the public warrants in deriving the value of the private placement warrants.

The following table below presents the change in fair value of the warrant liability (Public and Private) ($ in millions):


	September 30, 2023
Balance as of January 1	$	0.3

Change in fair value	(0.3)
Balance as of September 30 (1)	$	—

(1) Fair value of Public and Private warrant liability amounted to less than $0.1 million as of September 30, 2023.

8. 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, 2023 and 2022 ($ in millions):


	September 30,
	2023		2022
Unpaid loss and LAE at beginning of period	$	256.2	$	97.9
Less: Reinsurance recoverable at beginning of period (1)	124.6		72.7
Net unpaid loss and LAE at beginning of period	131.6		25.2
Add: Incurred loss and LAE, net of reinsurance, related to:
Current year	219.0		106.9
Prior years	(3.6)		(1.1)
Total incurred	215.4		105.8
Deduct: Paid loss and LAE, net of reinsurance, related to:
Current year	133.4		65.9
Prior years	71.6		21.9
Total paid	205.0		87.8

Unpaid loss and LAE, net of reinsurance recoverable, at end of period	142.0		111.3
Reinsurance recoverable at end of period (1)	113.1		109.3
Unpaid loss and LAE, gross of reinsurance recoverable, at end of period	$	255.1	$	220.6

(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. Other factors that can impact loss reserve development may also include trends in general economic conditions, including the effects of inflation. The Company had favorable development on net loss and LAE reserves of $3.6 million for the nine months ended September 30, 2023, and favorable development on net loss and LAE reserves of $1.1 million for the nine months ended September 30, 2022. No additional premiums or returned premiums have been accrued as a result of prior year effects.

For the nine months ended September 30, 2023, current accident year incurred loss and LAE included $10.0 million from winter storm Elliott and $3.5 million from the hail storm that impacted customers in Texas. The net incurred loss and LAE from winter storm Elliott and from the hail storm as of September 30, 2023 represents the Company's best estimates based upon information currently available.

In the ordinary course of business, the Company cedes losses and LAE to other reinsurance companies. These arrangements reduce the net loss potentially 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 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 Incurred But Not Reported ("IBNR"), loss adjustment expenses, and unearned premium with any individual reinsurer.

The Company maintained proportional reinsurance contracts which cover all of the Company's products and geographies, and transferred, or “ceded,” a specified percentage of the premium to reinsurers ("Proportional Reinsurance Contracts"). In exchange, these reinsurers paid a ceding commission for every dollar ceded, in addition to funding all of the corresponding claims at the same specified percentage as applied to premium. The Company also opted to manage the remaining percentage of the business with alternative forms of reinsurance through non-proportional reinsurance contracts ("Non-Proportional Reinsurance Contracts").

The Company decreased the overall share of proportional reinsurance from 75% of the premium to 70% effective July 1, 2021, and to 55% effective July 1, 2022. In addition, the Company purchased a reinsurance program to protect against catastrophe risk in the U.S that exceed $80 million in losses effective July 1, 2022, and expired on June 30, 2023. Other non-proportional reinsurance contracts were renewed with terms similar to the expired contracts. The proportional reinsurance and other non-proportional reinsurance contracts expired on June 30, 2023.

Metromile entered into a Quota Share reinsurance agreement effective January 1, 2022 and expired on June 30, 2023. Under the terms of the agreement, the Company ceded 30% of premiums and losses to reinsurers.

Effective July 1, 2023 through June 30, 2024, the Company agreed to the terms of a reinsurance program which includes Whole Account Quota Share Reinsurance Contracts by and among the Company, Lemonade Insurance Company ("LIC"), Metromile Insurance Company and Lemonade Insurance N.V. ("Lemonade Insurance"), and each of Hannover Ruck SE, MAPFRE Re, and Swiss Reinsurance America Corporation (collectively referred to as “Reinsurers”) ("Reinsurance Program"). Under the Reinsurance Program, which covers all products and geographies, the Company transfers, or "cedes," a share of premium to the Reinsurers. In exchange, these Reinsurers pay the Company a ceding commission on all premiums ceded to the Reinsurers, in addition to funding the corresponding claims, subject to certain limitations, including but not limited to, the exclusion of hurricane losses, and a limit of $5,000,000 per occurrence for non-hurricane catastrophe losses. The overall share of proportional reinsurance under the Reinsurance Program is approximately 55% of premium. The Per Risk Cap across the contracts is $750,000. Additionally, the contracts are subject to loss ratio caps and variable ceding commission levels, which align the Company's interests with those of its Reinsurers.

In addition, LIC and Lemonade Insurance agreed to the terms of a Property Per Risk Excess of Loss Reinsurance Contract with a panel of reinsurance companies (the "PPR Contract"), and LIC agreed to the terms of an Automatic Facultative Property Per Risk Excess of Loss Reinsurance Contract with Arch Re (the "Automatic Facultative PPR Contract"), each effective from July 1, 2023 until June 30, 2024. Under the PPR Contract, claims in excess of $750,000 are 100% ceded up to a maximum recovery of $2.25 million, subject to certain limitations. Under the Automatic Facultative PPR Contract, claims in excess of $3 million are 100% ceded with a potential recovery of at least $10 million, subject to certain limitations.

The Company also purchased a Excess of Loss ("XOL") Reinsurance Contract through a captive in Bermuda to cover catastrophe risk over the initial $50 million limit for each loss occurrence, and further subject to a limit of $80 million for each loss occurrence and in aggregate, primarily on property and auto business underwritten by LIC. This XOL reinsurance contract became effective July 1, 2023 and will expire on July 1, 2024. The Company is also exposed to some risks from MIC ceded through the Quota Share ("QS") Reinsurance Contract which is retained in a captive subsidiary, Lemonade Re SPC in the Cayman Islands. This QS reinsurance contract became effective July 1, 2023 and shall remain in force for an indefinite period until terminated by either party. Through our captives, we are exposed to the risk of natural catastrophe events and other covered risks under the reinsurance contracts from assumed risks from policies underwritten by both LIC and MIC.

9. Borrowings under Financing Agreement

On June 28, 2023, the Company entered into a Customer Investment Agreement (the “Agreement”), with GC Customer Value Arranger, LLC (a General Catalyst company) ("GC"). Under the Agreement, up to $150 million of financing will be provided for the Company’s sales and marketing growth efforts. The Agreement has a commitment period of 18 months. Under the Agreement, subject to certain terms and conditions specified therein, at the start of each growth period, an Investment Amount of up to 80% of the Company’s growth spend (the "Investment Amount") will be advanced by GC. During each growth period, the Company will repay each Investment Amount including a 16% rate of return based upon an agreed schedule. Once fully repaid, the Company will retain all future reference income related to each respective Investment Amount.

As of September 30, 2023, the Company had $7.7 million of outstanding borrowings under financing agreement. The Company incurred interest expense of $0.1 million for the three and nine months ended September 30, 2023, and such interest is included in “General and administrative expense” in the consolidated statements of operations and comprehensive income.

10. Other Liabilities and Accrued Expenses

Other liabilities and accrued expenses as of September 30, 2023 and December 31, 2022 consist of the following ($ in millions):


	September 30,		December 31,
	2023		2022
Lease liabilities	$	29.7	$	35.2
Ceded commission payable	12.6		—
Uncertain tax position	11.2		8.1
Employee compensation	6.9		12.8
Accrued professional fees	5.6		5.5
Accrued advertising costs	5.0		6.8
Advance premium	4.3		2.1
Premium taxes payable	4.0		6.2
Accrued hosting and software	1.4		2.0
Income taxes payable	0.9		0.6
Warrant liability	—		0.3
Other payables	11.5		4.9
Total	$	93.1	$	84.5

11. Stockholders’ Equity

Common stock

Upon closing of the Company's initial public offering ("IPO") in 2020, 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.

The Company completed a Follow-on Offering of common stock (the "Follow-on Offering") in 2021, 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 the Company of $525.7 million after deducting underwriting discounts and commissions and other offering costs. 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 the Company after deducting underwriting discounts.

On July 28, 2022, the Company completed its acquisition of Metromile in which 6,901,934 shares of Lemonade's common stock were issued to Metromile stockholders as discussed in Note 5.

As of September 30, 2023 and December 31, 2022, 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.

The Company in 2020 made a contribution of 500,000 newly issued shares of common stock to a related party, the Lemonade Foundation (see Note 15). 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, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, there were no shares of undesignated preferred stock issued or outstanding.

Warrants

On October 14, 2022, the Company entered into an omnibus agreement (the “Omnibus Agreement”) and a warrant agreement (the “Warrant Agreement” and, together with the Omnibus Agreement, the “Agreements”) with Chewy Insurance Services, LLC (the “Warrantholder”) in connection with the execution of an agency agreement on the same date between the Company, Lemonade Insurance Agency, LLC, Lemonade Insurance Company and the Warrantholder. In connection with the Agreements, the Company is authorized to issue to the Warrantholder 3,352,025 shares of the Company’s common stock underlying the warrant with an exercise price of $0.01 per share, which will vest in installments, in increasing amounts over a period of five years. The Warrant Agreement allows the Company to cancel unvested warrant shares which are subject to certain vesting events and thresholds.

12. 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, 2023, the 2020 Plan share pool was increased by 3,463,751 shares, equal to 5% of the aggregate number of outstanding common stock as of December 31, 2022. As of September 30, 2023, there were 4,393,900 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 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, 2023, there was no increase in the 2020 ESPP share pool. As of September 30, 2023, 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 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 September 30, 2023, 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.

Assumed Share Option Plans

As part of the Metromile Acquisition, the Company assumed the Metromile 2011 Incentive Stock Plan ("2011 Plan") and Metromile 2021 Incentive Stock Plan ("2021 Plan") (collectively referred to as "Assumed Plans"). The equity awards assumed of 404,207 were granted from the respective Assumed Plans but will be settled in the Company's common stock (see Note 5). The remaining unallocated shares reserved under both 2011 Plan and 2021 Plan were cancelled and no new awards will be granted under these Assumed Plans.

Options granted to employees and non-employees

The fair value of each option granted for the nine months ended September 30, 2023 and 2022 is estimated on the date of grant using the Black-Scholes model based on the following assumptions:


	Nine Months Ended September 30,
	2023	2022
Weighted average expected term (years)	6.0	6.1
Risk-free interest rate	4.2%	2.7%
Volatility	74%	47%
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 Topic 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


	Number of Options	Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2022 (1)	9,760,657	$	39.43	8.17	$	8.05
Granted	1,016,218	15.67
Exercised	(92,954)	5.13
Cancelled/Forfeited	(961,442)	38.87
Outstanding as of September 30, 2023	9,722,479	$	37.28	7.47	$	5.30
Options exercisable as of September 30, 2023	4,386,472	$	29.79	6.22	$	5.30
Options unvested as of September 30, 2023	5,336,007	$	43.44	8.49	$	—

(1) Includes assumed options of 72,410 from the Metromile Acquisition (see Note 5).

Restricted Stock Units


	Number of Shares	Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2022 (1)	1,651,243	$	27.92
Granted	2,753,356	15.84
Vested	(541,372)	25.28
Cancelled/Forfeited	(523,455)	22.38
Outstanding as of September 30, 2023	3,339,772	$	19.22

(1) Includes assumed restricted stock units of 331,797 from the Metromile Acquisition (see Note 5).

Stock-based compensation expense

Stock-based compensation expense from stock options and RSUs granted are included and classified in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022, including assumed awards from the Metromile Acquisition and warrant shares for the three and nine months ended September 30, 2023 and 2022, as follows ($ in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Loss and loss adjustment expense, net	$	0.8	$	0.7	$	2.2	$	1.9
Other insurance expense	0.6		0.4		1.6		1.2
Sales and marketing (1)	1.9		1.8		4.6		5.0
Technology development	6.4		6.4		19.4		17.6
General and administrative	5.7		6.3		17.8		17.9
Total stock-based compensation expense	$	15.4	$	15.6	$	45.6	$	43.6

(1) Includes compensation expense related to warrant shares of $0.9 million and $1.5 million for the three and nine months ended September 30, 2023.

Stock-based compensation expense classified by award type as included in the condensed consolidated statements of operations is as follows ($ in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Stock options	$	9.1	$	11.9	$	29.4	$	35.9
RSUs	5.4		3.7		14.7		7.7
Warrant shares	0.9		—		1.5		—
Total stock-based compensation expense	$	15.4	$	15.6	$	45.6	$	43.6

The total unrecognized expense granted to employees and non-employees outstanding at September 30, 2023 was $64.3 million for the stock options and $59.7 million for the RSUs, with a remaining weighted-average vesting period of 1.2 years for the stock options and 1.6 years for the RSUs.

Warrants

In connection with the Warrant Agreement as discussed in Note 11, the Company is authorized to issue 3,352,025 warrant shares with a grant date fair value of $20.37 that will vest in installments on a yearly basis in increasing amounts for a period of five years. The Company recognized $0.9 million and $1.5 million in compensation expense related to these equity-classified warrants for the three and nine months ended September 30, 2023, respectively. Compensation expense is presented under “Sales and marketing expense” in the consolidated statements of operations and comprehensive income. Total unrecognized compensation expense related to these warrants amounted to $66.8 million as of September 30, 2023, and will be recognized over the vesting period, for each of the installments, in increasing amounts over five years. There are no vested warrant shares as of September 30, 2023.

13. Income Taxes

The consolidated effective tax rate was (2.3)% and (3.2)% for the nine months ended September 30, 2023 and 2022, respectively. The change in effective tax rate over the two periods was predominantly reflective of the change in profit before tax of the Company's foreign jurisdictions and uncertain tax positions.

Our unrecognized tax benefits related to tax positions, excluding penalty and interest amounted to $10.9 million as of September 30, 2023, and there was $6.8 million as of September 30, 2022. The increase was primarily driven by the implementation of transfer pricing methodology. Interest and penalties related to unrecognized tax expense (benefits) are recognized in income tax expense, when applicable. There was $0.3 million interest and penalties as of September 30, 2023, and there was none as of September 30, 2022. We believe it is reasonably possible that our unrecognized tax benefits could increase within the next 12 months.

14. Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net loss attributable to common stockholders ($ in millions)	$	(61.5)	$	(91.4)	$	(194.5)	$	(234.1)
Denominator:
Weighted average common shares outstanding — basic and diluted	69,753,576		66,877,100		69,542,342		63,482,945
Net loss per share attributable to common stockholders — basic and diluted	$	(0.88)	$	(1.37)

Lemonade, Inc. [LMND] Filings
Lemonade, Inc. [LMND-WT] Filings
10-Q	[2023-11-03]
10-Q	[2023-08-04]
10-Q	[2023-05-05]
10-K	[2023-03-03]
10-Q	[2022-11-09]
10-Q	[2022-08-09]
10-Q	[2022-05-10]
10-K	[2022-03-01]
10-Q	[2021-11-09]
10-Q	[2021-08-11]
10-Q	[2021-05-12]
10-K	[2021-03-08]
S-1	[2021-01-11]
10-Q	[2020-11-12]
10-Q	[2020-08-12]
S-1	[2020-06-08]

Lemonade, Inc. [LMND] Filings

Lemonade, Inc. [LMND-WT] Filings