Business Context and Reporting Period
Root, Inc. filed this Form 8-K on October 1, 2021, reporting events occurring on or after September 29, 2021. Following expiration of the Hart-Scott-Rodino waiting period, Root closed its previously disclosed strategic investment by Carvana Group, LLC on October 1, 2021.
Transaction and Key Financial Terms
- Root received approximately $126 million from the issuance of 14,053,096 shares of Series A Convertible Preferred Stock.
- The preferred stock has an initial liquidation preference and conversion price of $9.00 per share and is initially convertible into approximately 14.1 million shares of common stock.
- The preferred stock is perpetual, senior to Root’s common stock, and generally does not pay dividends. Subject to specified conditions, a 5.0% annual dividend may apply after the fifth anniversary of the applicable reference date.
- Root issued Carvana eight warrant tranches that could permit the purchase of approximately 129 million Class A common shares if fully exercised for cash, representing approximately 29.9% of Root’s fully diluted shares outstanding as of August 11, 2021.
- Warrant exercise prices range from $10.00 to $12.00 for short-term warrants and from $10.00 to $30.00 for long-term warrants. Short-term warrants expire three years after the reference date; long-term warrants expire five years after the reference date.
Material Changes and Strategic Arrangements
- Root and Carvana entered into a five-year commercial agreement to develop an integrated automobile insurance solution for Carvana’s online vehicle-buying platform.
- Root will pay commissions to Carvana for policies purchased by eligible Carvana customers, while Root receives certain exclusivity rights to offer auto insurance on Carvana’s platform.
- Root will partner exclusively with Carvana for an enterprise total-loss replacement vehicle solution and is restricted from implementing certain embedded insurance arrangements with other automotive companies.
- Carvana received governance, consent, and registration rights, including the right to appoint Carvana CEO Ernest Garcia III to Root’s board. Carvana had not exercised that appointment right as of the filing date.
- Carvana is subject to standstill and transfer restrictions for five years after closing, subject to specified exceptions. Regulatory filings may be required if conversion or warrant exercise would result in Carvana holding more than 9.9% of Root’s voting stock.
- The September 29, 2021 amendment changed the investment closing date to the later of October 1, 2021 or the third business day after applicable closing conditions were satisfied or waived.
Guidance, Risks, Contingencies, and Unusual Items
- The filing does not provide revenue, net income, cash-flow, margin, debt, liquidity, or forward financial guidance.
- The preferred stock is mandatorily convertible or redeemable upon a change of control and has voting rights on an as-converted basis, with separate-class voting rights in limited circumstances.
- Potential dilution is significant because of the preferred-stock conversion feature and the warrants covering approximately 129 million potential shares.
- Commercial exclusivity obligations and specified damages for breach could constrain Root’s strategic flexibility and create contingent exposure.
- Warrant exercise is subject to varying conditions, including milestones related to development of the integrated platform and insurance sales through that platform.
- The securities were issued in an unregistered transaction under Section 4(a)(2) of the Securities Act.
Investor Verification Items
- Verify the final terms, exercise conditions, expiration dates, and share counts in the Certificate of Designations and warrant agreements.
- Assess the potential dilution from preferred-stock conversion and full warrant exercise relative to Root’s current capitalization.
- Review the commercial agreement for exclusivity scope, commission economics, milestones, termination rights, and damages provisions.
- Confirm any required insurance-regulatory approvals or filings associated with Carvana’s potential ownership increase.
- Review subsequent filings for the accounting classification and financial-statement impact of the preferred stock, warrants, and approximately $126 million of proceeds.