UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from to
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, 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 | ||
| The | ||||
| Warrants | MILEW | The Nasdaq Capital Market |
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.
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).
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 | ☐ | |
| ☒ | 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.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of shares of the registrant’s common stock, $0.0001 par value per share, outstanding as of August 6, 2021 was 126,727,134.
METROMILE, INC.
TABLE OF CONTENTS
| Page | ||
| PART I | ||
| Item 1. | Financial Statements (unaudited) | 1 |
| Consolidated Balance Sheets | 1 | |
| Consolidated Statements of Operations | 2 | |
| Consolidated Statements of Comprehensive Loss | 3 | |
| Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) | 4 | |
| Consolidated Statements of Cash Flows | 5 | |
| Notes to Consolidated Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 40 |
| Item 4. | Controls and Procedures | 40 |
| PART II | ||
| Item 1. | Legal Proceedings | 42 |
| Item 1A. | Risk Factors | 42 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 83 |
| Item 3. | Defaults Upon Senior Securities | 83 |
| Item 4. | Mine Safety Disclosures | 83 |
| Item 5. | Other Information | 83 |
| Item 6. | Exhibits | 84 |
| SIGNATURES | 85 | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of present or historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Forward-looking statements in this Quarterly Report on Form 10-Q may include, for example, statements about:
| ● | our ability to recognize the anticipated benefits of the Business Combination (as defined herein), which may be affected by, among other things, competition and the ability of the combined business to grow and manage growth profitably; |
| ● | our financial and business performance, including financial projections and business metrics and any underlying assumptions thereunder; |
| ● | changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans; |
| ● | the implementation, market acceptance and success of our business model; |
| ● | our ability to scale in a cost-effective manner; |
| ● | developments and projections relating to our competitors and industry; |
| ● | the impact of health epidemics, including the 2019 novel coronavirus (“COVID-19”) pandemic, on our business and the actions we may take in response thereto; |
| ● | our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others; |
| ● | expectations regarding the time during which we will be an emerging growth company; |
| ● | our future capital requirements and sources and uses of cash; |
| ● | our ability to obtain funding for our future operations; |
| ● | our business, expansion plans and opportunities; and |
| ● | the outcome of any known and unknown litigation and regulatory proceedings. |
In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would” or the negative of such terms or other similar expressions. Further, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These forward-looking statements and statements about our beliefs are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include the following:
| ● | We have a history of net losses and could continue to incur substantial net losses in the future; |
| ● | We may lose existing customers or fail to acquire new customers |
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| ● | We may require additional capital to support business growth or to satisfy our regulatory capital and surplus requirements, and this capital might not be available on acceptable terms, if at all; |
| ● | The COVID-19 pandemic has caused disruption to our operations and may negatively impact our business, key metrics, and results of operations in numerous ways that remain unpredictable; |
| ● | We rely on telematics, mobile technology and its digital platform to collect data points that we evaluate in pricing and underwriting insurance policies, managing claims and customer support, and improving business processes, and to the extent regulators prohibit or restrict this collection or use of this data, our business could be harmed; |
| ● | Regulatory changes may limit our ability to develop or implement our telematics-based pricing model and/or may eliminate or restrict the confidentiality of our proprietary technology; |
| ● | We expect a number of factors to cause our results of operations to fluctuate on a quarterly and annual basis, which may make it difficult to predict future performance; |
| ● | Denial of claims or our failure to accurately and timely pay claims could materially and adversely affect our business, financial condition, results of operations, brand and prospects; |
| ● | Unexpected increases in the frequency or severity of claims may adversely affect our results of operations and financial condition; |
| ● | Failure to maintain our risk-based capital (“RBC”) at the required levels could adversely affect our ability to maintain regulatory authority to conduct our business; |
| ● | We are subject to stringent and changing privacy and data security laws, regulations, and standards related to data privacy and security, and our actual or perceived failure to comply with such obligations could harm our reputation, subject us to significant fines and liability, or adversely affect our business; |
| ● | If we are unable to underwrite risks accurately or charge competitive yet profitable rates to our customers, our business, results of operations and financial condition will be adversely affected; |
| ● | Litigation and legal proceedings filed by or against us and our subsidiaries could have a material adverse effect on our business, results of operations and financial condition; |
| ● | The insurance business, including the market for automobile, renters’ and homeowners’ 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 regulation and potential further restrictive regulation may increase our operating costs and limit our growth; and |
| ● | Our actual incurred losses may be greater than our loss and loss adjustment expense (“LAE”) reserves, which could have a material adverse effect on our financial condition and results of operations. |
Additional discussion of the risks, uncertainties and other factors described above, as well as other risks and uncertainties material to our business, can be found under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and we encourage you to refer to that additional discussion. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our plans, objectives, estimates, expectations and intentions only as of the date of this filing. You should read this report completely and with the understanding that our actual future results and the timing of events may be materially different from what we expect, and we cannot otherwise guarantee that any forward-looking statement will be realized. We hereby qualify all of our forward-looking statements by these cautionary statements.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control.
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PART I
ITEM 1. FINANCIAL STATEMENTS
METROMILE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| December 31, | June 30, | |||||||
| 2020 | 2021 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Investments | ||||||||
| Marketable securities - restricted | $ | $ | ||||||
| Total investments | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash and cash equivalents | ||||||||
| Receivable for securities | ||||||||
| Premiums receivable | ||||||||
| Accounts receivable | ||||||||
| Reinsurance recoverable on paid loss | ||||||||
| Reinsurance recoverable on unpaid loss | ||||||||
| Prepaid reinsurance premium | ||||||||
| Prepaid expenses and other assets | ||||||||
| Deferred transaction costs | ||||||||
| Deferred policy acquisition costs, net | ||||||||
| Telematics devices, improvements and equipment, net | ||||||||
| Website and software development costs, net | ||||||||
| Digital assets, net | ||||||||
| Intangible assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, Convertible Preferred Stock and Stockholders’ Deficit | ||||||||
| Loss and loss adjustment expense reserves | $ | $ | ||||||
| Ceded reinsurance premium payable | ||||||||
| Payable to carriers - premiums and LAE, net | ||||||||
| Unearned premium reserve | ||||||||
| Deferred revenue | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Notes payable | ||||||||
| Warrant liability | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Common stock, $ | ||||||||
| Accumulated paid-in capital | ||||||||
| Note receivable from executive | ( | ) | ||||||
| Accumulated other comprehensive gain/(loss) | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ (deficit) equity | ( | ) | ||||||
| Total liabilities, convertible preferred stock and stockholders’ deficit | $ | $ | ||||||
See notes to consolidated financial statements.
1
METROMILE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Revenue | ||||||||||||||||
| Premiums earned, net | $ | $ | $ | $ | ||||||||||||
| Investment income | ||||||||||||||||
| Other revenue | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Costs and expenses | ||||||||||||||||
| Losses and loss adjustment expenses | ||||||||||||||||
| Policy servicing expense and other | ||||||||||||||||
| Sales, marketing and other acquisition costs | ( | ) | ||||||||||||||
| Research and development | ||||||||||||||||
| Amortization of capitalized software | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Impairment on digital asset | - | - | ||||||||||||||
| Increase (decrease) in fair value of stock warrant liability | ( | ) | ||||||||||||||
| Total other expense | ( | ) | ||||||||||||||
| Net loss before taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss after taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted-average shares used in computing basic and diluted net loss per share | ||||||||||||||||
See notes to consolidated financial statements.
2
METROMILE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Unrealized net gain (loss) on marketable securities | ( | ) | ( | ) | ||||||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See notes to consolidated financial statements.
3
METROMILE, INC.
CONSOLIDATED
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’
(DEFICIT) EQUITY
(dollars in thousands)
| Convertible Preferred Stock | Common Stock | Note | Accumulated Other Comprehensive | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | APIC | Receivable | Income | Deficit | Total | ||||||||||||||||||||||||||||
| Balances as of December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Retroactive application of recapitalization | ||||||||||||||||||||||||||||||||||||
| As adjusted, beginning of period | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Exercises and vested portion of common stock options | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Interest on stock purchase promissory note | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Unrealized net loss on marketable securities | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balances as of March 31, 2020 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Vested portion of common stock options | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Interest on stock purchase promissory note | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Unrealized net gain on marketable securities | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balances as of June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Balances as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Retroactive application of recapitalization | ||||||||||||||||||||||||||||||||||||
| As adjusted, beginning of period | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Exercises and vested portion of stock options | ||||||||||||||||||||||||||||||||||||
| Conversion of promissory note | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| RSUs withheld for tax purposes | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Unrealized net loss on marketable securities | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Exercise of convertible preferred stock warrants | ||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock to common | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Business Combination and PIPE financing | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balances as of March 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Vested portion of common stock options | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Unrealized net loss on marketable securities | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balances as of June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||
See notes to consolidated financial statements.
4
METROMILE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| (unaudited) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Change in fair value of warrant liability | ||||||||
| Telematic devices unreturned | ||||||||
| Amortization of debt issuance costs | ||||||||
| Noncash interest and other expense | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Premiums receivable | ( | ) | ||||||
| Accounts receivable | ( | ) | ||||||
| Reinsurance recoverable on paid loss | ( | ) | ||||||
| Reinsurance recoverable on unpaid loss | ( | ) | ||||||
| Prepaid reinsurance premium | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Deferred transaction costs | ||||||||
| Deferred policy acquisition costs, net | ( | ) | ( | ) | ||||
| Digital assets, net | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Ceded reinsurance premium payable | ( | ) | ||||||
| Loss and loss adjustment expense reserves | ( | ) | ||||||
| Payable to carriers - premiums and LAE, net | ( | ) | ( | ) | ||||
| Unearned premium reserve | ||||||||
| Deferred revenue | ( | ) | ||||||
| Other liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of telematics devices, improvements, and equipment | ( | ) | ( | ) | ||||
| Payments relating to capitalized website and software development costs | ( | ) | ( | ) | ||||
Net change in payable/(receivable) for securities | ( | ) | ||||||
| Purchase of securities | ( | ) | ( | ) | ||||
| Sales and maturities of marketable securities | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flow from financing activities: | ||||||||
| Proceeds from notes payable | ||||||||
| Payment on notes payable | ( | ) | ||||||
| Proceeds from merger with INSU II, net of issuance costs | ||||||||
| Proceeds from exercise of common stock options and warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents | ||||||||
| Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | ||||||||
| Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | $ | ||||||
| Supplemental cash flow data: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Non-cash investing and financing transactions: | ||||||||
| Net liabilities assumed in the Business Combination | $ | $ | ||||||
| Net exercise of preferred stock warrants | $ | $ | ||||||
| Net exercise of promissory note | $ | $ | ||||||
| Capitalized website and software development costs included in accrued liabilities at period end | $ | $ | ||||||
| Capitalized stock-based compensation | $ | $ | ||||||
| Reclassification of liability to equity for vesting of stock options | $ | $ | ||||||
See notes to consolidated financial statements.
5
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
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.
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 $
On February 9, 2021, a number of purchasers (each,
a “Subscriber”) purchased from the Company an aggregate of
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.
6
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 June 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 December 31, 2020 and June 30, 2021 (unaudited) were $
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 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 9, 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 $
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.
Unaudited interim financial information
The accompanying interim consolidated balance sheet as of June 30, 2021, the interim consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ (deficit) equity for the three months and six months ended June 30, 2020 and 2021, and cash flows for the six months ended June 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 June 30, 2021 and the Company’s consolidated results of operations for the three months and six months ended June 30, 2020 and 2021, and cash flows for the six months ended June 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.
7
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 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. 1 to Form S-1 filed with the SEC on August 9, 2021.
Digital Assets, Net
During the six months ended June 30, 2021, the
Company purchased an aggregate of $
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 six months ended June 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 2016-02, 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.
8
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 December 31, 2020 and June 30, 2021 (unaudited).
Assets measured on a recurring basis at fair value, primarily related to marketable securities, included in the consolidated balance sheets as of December 31, 2020 and June 30, 2021 (unaudited) (in thousands) are set forth below:
| Fair Value Measurement at December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash equivalents | ||||||||||||||||
| Money market accounts | $ | $ | $ | $ | ||||||||||||
| Total cash equivalents | ||||||||||||||||
| Restricted cash equivalents | ||||||||||||||||
| Money market accounts | ||||||||||||||||
| Certificates of deposits | ||||||||||||||||
| Total restricted cash equivalents | ||||||||||||||||
| Marketable securities - restricted | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| U.S. treasury securities | ||||||||||||||||
| Commercial paper | ||||||||||||||||
| Asset backed securities | ||||||||||||||||
| Total marketable securities - restricted | $ | $ | $ | $ | ||||||||||||
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| Fair Value Measurement at June 30, 2021 (unaudited) | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash equivalents | ||||||||||||||||
| Money market accounts | $ | $ | $ | $ | ||||||||||||
| Total cash equivalents | ||||||||||||||||
| Restricted cash equivalents | ||||||||||||||||
| Money market accounts | ||||||||||||||||
| Certificates of deposits | ||||||||||||||||
| Total restricted cash equivalents | ||||||||||||||||
| Marketable securities - restricted | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| U.S. treasury and agency securities | ||||||||||||||||
| Commercial paper | ||||||||||||||||
| Asset backed securities | ||||||||||||||||
| Total marketable securities - restricted | $ | $ | $ | $ | ||||||||||||
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. We consider our Public warrants to be Level 1 liabilities as we use publicly and readily available information to measure the fair value of the warrants. For our 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.
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 years ended December 31, 2020 and the six months ended June 30, 2021 (unaudited) (in thousands):
| Balance at December 31, 2019 | $ | |||
| Issuance of warrant on Series E convertible preferred stock | ||||
| Increase in fair value of warrant | ||||
| Balance at December 31, 2020 | $ | |||
| Increase in fair value of warrants | ||||
| Exercise of preferred stock warrants prior to Business Combination | ( | ) | ||
| Public and Private placement Warrants acquired in Business Combination | ||||
| Decrease in fair value of Public and Private placement Warrants | ( | ) | ||
| Balance at June 30, 2021 | $ |
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 June 30, 2021:
| Estimated | ||||||||||||||||||||||||
| Fair Value of | ||||||||||||||||||||||||
| Warrants | ||||||||||||||||||||||||
| as of | Risk-Free | Expected | ||||||||||||||||||||||
| June 30, | Exercise | Dividend | Interest | Term | ||||||||||||||||||||
| 2021 | Price | Yield | Volatility | Rate | (in Years) | |||||||||||||||||||
| Private placement warrants | $ | $ | % | % | % | |||||||||||||||||||
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.
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Through the three months and six months ended June 30, 2020 and 2021 (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 December 31, 2020 and June 30, 2021 (unaudited), deposits with various states consisted of bonds with carrying values of $
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 June 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.
The cost basis and fair value of available-for-sale securities as of December 31, 2020 and June 30, 2021 (unaudited) are presented below (in thousands):
| As of December 31, 2020 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
| Cost | Gain | Loss | Fair Value | |||||||||||||
| Marketable securities - restricted | ||||||||||||||||
| Corporate debt securities | $ | $ | | $ | $ | |||||||||||
| U.S. treasury securities | ||||||||||||||||
| Commercial paper | ||||||||||||||||
| Asset backed securities | ||||||||||||||||
| Total marketable securities - restricted | $ | $ | $ | $ | ||||||||||||
| As of June 30, 2021 (unaudited) | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
| Cost | Gain | Loss | Fair Value | |||||||||||||
| Marketable securities - restricted | ||||||||||||||||
| Corporate debt securities | $ | $ | $ | $ | ||||||||||||
| U.S. treasury and agency securities | ( | ) | ||||||||||||||
| Commercial paper | ||||||||||||||||
| Asset backed securities | ||||||||||||||||
| Total marketable securities - restricted | $ | $ | $ | ( | ) | $ | ||||||||||
The amortized cost and estimated fair value of marketable securities as of December 31, 2020 and June 30, 2021 (unaudited) are shown below by contractual maturity (in thousands):
| As of December 31, 2020 | ||||||||
| Amortized | Estimated | |||||||
| Cost | Fair Value | |||||||
| Due within one year | $ | $ | ||||||
| Due between one to five years | ||||||||
| $ | $ | |||||||
| As of June 30, 2021 (unaudited) | ||||||||
| Amortized | Estimated | |||||||
| Cost | Fair Value | |||||||
| Due within one year | $ | $ | ||||||
| Due between one to five years | ||||||||
| $ | $ | |||||||
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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 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 six months ended June 30, 2021 (dollars in thousands).
| Recapitalization | ||||
| Cash – INSU’s trust and cash (net of redemptions) | $ | |||
| Cash – PIPE | ||||
| Less transaction costs and advisory fees paid | ||||
| Less cash payments to Metromile Operating Company stockholders | ||||
| Net Business Combination and PIPE financing | ||||
| Less non-cash net liabilities assumed from INSU | ||||
| Net contributions from Business Combination and PIPE Financing | $ | |||
| Number of Shares | ||||
| INSU Class A Common stock, outstanding prior to Business Combination | ||||
| INSU Class B Common stock, outstanding prior to Business Combination | ||||
| Less redemption of INSU shares | ||||
| Common stock of INSU | ||||
| Shares issued in PIPE | ||||
| Business Combination and PIPE financing shares | ||||
| Metromile Operating Company shares (1) | ||||
| Total shares of common stock immediately after Business Combination | ||||
| (1) |
5. Deferred Policy Acquisition Costs, Net
DPAC consists of the following (in thousands):
| December 31, | June 30, | |||||||
| 2020 | 2021 | |||||||
| (unaudited) | ||||||||
| Deferred policy acquisition costs | $ | $ | ||||||
| Less deferred ceding commission | ( | ) | ( | ) | ||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Deferred policy acquisition costs, net | $ | $ | ||||||
For the three months ended June 30, 2020 and 2021 (unaudited), total
amortization expense was approximately $
12
6. Digital Assets, Net
In June 2021, the Company purchased and received
$
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 six months ended June 30, 2020 and 2021 (unaudited) (in thousands):
| Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| (unaudited) | ||||||||
| Balance at January 1 | $ | $ | ||||||
| Less reinsurance recoverable | ( | ) | ( | ) | ||||
| Net balance at January 1 | ||||||||
| Incurred related to: | ||||||||
| Current year | ||||||||
| Prior years | ||||||||
| Total incurred | ||||||||
| Paid related to: | ||||||||
| Current year | ||||||||
| Prior years | ( | ) | ||||||
| Total paid | ( | ) | ||||||
| Net balance at end of period | ||||||||
| Plus reinsurance recoverable | - | |||||||
| Balance at end of period | $ | $ | ||||||
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 six months ended June 30, 2021, 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. However, the business to which the development relates is subject to premium adjustments. 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.
13
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 June 30, 2021, the Company has commuted all of its reinsurance agreements.
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 $
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 $
Prior to the above-mentioned reinsurance agreement
commutations, the Company had several reinsurance agreements in place. Effective May 1, 2017, two quota-share reinsurance agreements were
entered into under which
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 June 30, 2020 and 2021 (unaudited) the Company received $
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.
The effect of the Company’s reinsurance agreements on premiums, loss and LAE related to the insurance company for the year ended December 31, 2020 and the six months ended June 30, 2021 (unaudited) is as follows (in thousands):
| December 31, 2020 | ||||||||||||||||||||
| Premium | Premium | Unearned | Losses and LAE | Loss and LAE | ||||||||||||||||
| Written | Earned | Premium | Incurred | Reserves | ||||||||||||||||
| Direct | $ | $ | $ | $ | $ | |||||||||||||||
| Ceded | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net | $ | $ | $ | $ | $ | |||||||||||||||
| June 30, 2021 (unaudited) | ||||||||||||||||||||
| Premium | Premium | Unearned | Losses and LAE | Loss and LAE | ||||||||||||||||
| Written | Earned | Premium | Incurred | Reserves | ||||||||||||||||
| Direct | $ | $ | $ | $ | $ | |||||||||||||||
| Ceded | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net | $ | $ | $ | $ | $ | |||||||||||||||
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9. Notes Payable, net
The following table summarizes the Company’s debt outstanding, net of issuance costs (in thousands):
| December 31, | June 30, | |||||||
| 2020 | 2021 | |||||||
| (unaudited) | ||||||||
| 2019 Loan and Security Agreement | $ | $ | ||||||
| Subordinated Note Purchase and Security Agreement | ||||||||
| Paycheck Protection Program Loan | ||||||||
| Principal Amount Due | ||||||||
| Less: Unamortized debt issuance costs and discounts | ( | ) | ||||||
| Notes payable, net | $ | $ | ||||||
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 $
Subordinated Note Purchase and Security Agreement
In April 2020, the Company entered into that certain
Note Purchase and Security Agreement
As part of the Note Purchase and Security Agreement,
the Company issued warrants for up to
2019 Loan and Security Agreement
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
15
10. Commitments
The Company leases facilities in San Francisco,
California, which is the corporate headquarters, Tempe, Arizona and Boston, Massachusetts, as well as certain equipment.
Future minimum lease payments relating to these agreements as of June 30, 2021 (unaudited), are as follows (in thousands):
| As of June 30, 2021 (unaudited) | Purchase Obligations | Leases | Total | |||||||||
| 2021 (remaining six months) | $ | $ | $ | |||||||||
| 2022 | ||||||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| Thereafter | ||||||||||||
| Total minimum lease payments | $ | $ | $ | |||||||||
For the three months ended June 30, 2020 and
2021 (unaudited), rent expense was approximately $
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, 2020 and June 30, 2021 (unaudited).
11. Stockholders’ Equity
Common Stock
As of June 30, 2021, the Company had authorized
a total of
Preferred Stock
As of June 30, 2021, the Company had authorized
a total of
12. Public and Private Warrants
As of June 30, 2021, the Company had
The Company may call the public warrants for redemption:
| ● | in whole or in part; |
| ● | at
a price of $ |
| ● | upon a minimum of 30 days’ prior written notice of redemption; and |
| ● |
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.
16
13. Stock Option Plans
Restricted Stock Units (“RSUs”)
In 2021, we granted
A summary of the Company’s RSUs as of June 30, 2021 (unaudited) is presented in the table below:
| Number of RSUs | Weighted-Average Fair Value | |||||||
| Balance at December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Balance at June 30, 2020 | $ | |||||||
As of June 30, 2021, there was $
Performance Based Awards
As of December 31, 2020, the Company had issued
In the six months ended June 30, 2021, the Company
has issued
In the six months ended June 30, 2021, 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 | ||||
| Expected term (years) | ||||
| Expected dividend yield | ||||
| Risk-free interest rate |
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
17
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 |
The following assumptions were used to estimate the value of options granted during the year ended December 31, 2020 and the six months ended June 30, 2021 (unaudited):
Year
ended | ||||
| Forfeiture rate | % | |||
| Volatility | % | |||
| Expected term (years) | ||||
| Risk-free interest rate | % | |||
| Expected dividends |
| Six months ended June 30, 2021 | ||||
| Forfeiture rate | % | |||
| Volatility | % | |||
| Expected term (years) | ||||
| Risk-free interest rate | % | |||
| Expected dividends | ||||
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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 | $ | $ | ||||||||||||||
| Options granted | $ | |||||||||||||||
| Options exercised | ( | ) | $ | |||||||||||||
| Options cancelled or expired and returned to plan | ( | ) | $ | |||||||||||||
| Outstanding as of June 30, 2021 | $ | $ | ||||||||||||||
| Vested and exercisable to vest as of June 30, 2021 | $ | $ | ||||||||||||||
| Vested and expected as of June 30, 2021 | $ | $ | ||||||||||||||
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 six months ended June 30, 2021 (unaudited) was $
The following table illustrates stock-based compensation expense for employee and nonemployee RSUs and options for the six months ended June 30, 2020 and 2021 (unaudited) (in thousands).
| Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| (unaudited) | ||||||||
| Cost of revenues | $ | $ | ||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| Other operating expenses | ||||||||
| Total stock-based compensation | $ | $ | ||||||
19
14. Income Taxes
The consolidated effective tax rate for the six
months ended June 30, 2020 and 2021 (unaudited), was
15. Segment and Geographic Information
The Company operates in the following
| - | 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 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 $
The following table summarizes the operating results of the Company’s reportable segments (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Revenue: | ||||||||||||||||
| Insurance services | $ | $ | $ | $ | ||||||||||||
| Enterprise business solutions | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Contribution: | ||||||||||||||||
| Insurance services | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Enterprise business solutions | ( | ) | ( | ) | ( | ) | ||||||||||
| Total contribution | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
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The following table provides a reconciliation of the Company’s total reportable segments’ contribution to its total loss from operations (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Total segment contribution | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Ceded premium, losses and LAE | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Policy services expenses and other | ||||||||||||||||
| Sales, marketing, and other acquisition costs | ( | ) | ||||||||||||||
| Research and development | ||||||||||||||||
| Amortization of capitalized software | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Geographical Breakdown of Direct Earned Premiums
Direct earned premium by state is as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| California | $ | $ | $ | $ | ||||||||||||
| Washington | ||||||||||||||||
| New Jersey | ||||||||||||||||
| Oregon | ||||||||||||||||
| Illinois | ||||||||||||||||
| Arizona | ||||||||||||||||
| Pennsylvania | ||||||||||||||||
| Virginia | ||||||||||||||||
| Total premiums earned | $ | $ | $ | $ | ||||||||||||
During the three months ended June 30, 2020 and
2021 (unaudited), the Company recognized $
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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
The following table sets forth the computation of basic and diluted net loss per share attributable to our common stockholders:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Numerator: | (unaudited) | (unaudited) | ||||||||||||||
| Net loss attributable to common stockholders ($ in thousands) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Demoninator: | ||||||||||||||||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||||||
| Net loss per share attributable to common stockholders - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
As we have 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:
| As of June 30, | ||||||||
| 2020 | 2021 | |||||||
| (unaudited) | ||||||||
| Convertible preferred stock | ||||||||
| Outstanding stock options - Stock Plan | ||||||||
| Warrants for preferred stock | ||||||||
| Warrants for common stock | ||||||||
| Restricted stock units | ||||||||
| Total anti-dilutive securities | ||||||||
17. Related-Party Transactions
In August 2014, the Company loaned the CEO $
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 June 30, 2020 and June 30, 2021 (unaudited), the Company recognized $
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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
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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.
Our gross profit/(loss), which is impacted by our reinsurance arrangements, increased from $(1.5) million for the three months ended June 30, 2020 to $(2.3) million for the three months ended June 30, 2021, and decreased from $(5.5) million for the six months ended June 30, 2020 to $(4.4) million for the six months ended June 30, 2021. Our accident period contribution profit/(loss), a non-GAAP financial measure that excludes the results of prior period development on loss and LAE, decreased from $6.5 million for the three months ended June 30, 2020 to $(0.9) million for the three months ended June 30, 2021, and decreased from $8.7 million for the six months ended June 30, 2020 to $1.0 million for the six months ended June 30, 2021, largely due to an increase in losses. Accident period refers to the period in which the loss 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 on loss and LAE, decreased from $4.8 million for the three months ended June 30, 2020 to $(1.2) million for the three months ended June 30, 2021, and decreased from $6.5 million for the six months ended June 30, 2020 to $(3.0) million for the six months ended June 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 June 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.
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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.
The following table presents these metrics as of and for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| ($ in millions, except for Direct Earned Premium per Policy) | ($ in millions, except for Direct Earned Premium per Policy) | |||||||||||||||
| Policies in Force (end of period) | 93,117 | 95,314 | 93,117 | 95,314 | ||||||||||||
| Direct Earned Premium per Policy (annualized) | $ | 995 | $ | 1,181 | $ | 1,059 | $ | 1,141 | ||||||||
| Direct Written Premium | $ | 21.7 | $ | 26.3 | $ | 48.3 | $ | 54.3 | ||||||||
| Direct Earned Premium | $ | 22.6 | $ | 27.8 | $ | 47.4 | $ | 53.6 | ||||||||
| Gross Profit/(Loss) | $ | (1.5 | ) | $ | (2.3 | ) | $ | (5.5 | ) | $ | (4.4 | ) | ||||
| Gross Margin | (19.5 | )% | (8.2 | )% | (33.8 | )% | (9.6 | )% | ||||||||
| Accident Period Contribution Profit/(Loss) | $ | 6.5 | $ | (0.9 | ) | $ | 8.7 | $ | 1.0 | |||||||
| Accident Period Contribution Margin | 28.8 | % | (3.3 | )% | 18.2 | % | 1.8 | % | ||||||||
| Contribution Profit/(Loss) | $ | 4.8 | $ | (1.2 | ) | $ | 6.5 | $ | (3.0 | ) | ||||||
| Contribution Margin | 21.2 | % | (4.2 | )% | 13.6 | % | (5.6 | )% | ||||||||
| Direct Loss Ratio | 52.4 | % | 78.7 | % | 59.5 | % | 78.6 | % | ||||||||
| Direct LAE Ratio | 12.2 | % | 13.0 | % | 13.2 | % | 13.7 | % | ||||||||
| Accident Period Loss Ratio | 49.8 | % | 74.2 | % | 58.9 | % | 70.5 | % | ||||||||
| Accident Period LAE Ratio | 7.2 | % | 16.5 | % | 9.1 | % | 14.4 | % | ||||||||
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 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.
25
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 contribution profit/(loss) and accident period 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.
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.
26
Recent Developments Affecting Comparability
Business Combination with INSU
In February 2021, we completed the Merger, pursuant to which Metromile Operating Company (formerly MetroMile, Inc.) became our wholly owned direct subsidiary. The Merger 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 Merger 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 Merger 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 Business Combination, 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 June 30, 2021, we generated $27.8 million in direct earned premium, an increase of $5.2 million or 22.9%, as compared to $22.6 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, we generated $53.6 million in direct earned premium, an increase of $6.2 million or 13.1%, as compared to $47.4 million for the six months ended June 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, the average miles driven per policy increased by 20% for the first half 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 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.
27
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.
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).
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.
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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 consist 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 (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).
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 telematic devices. Policy servicing expense and other is expensed as incurred.
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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 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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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 June 30, 2020 and June 30, 2021
The following table presents our consolidated statement of operations for the three months ended June 30, 2020 and 2021, and the dollar and percentage change between the two periods:
| Three Months Ended June 30, | ||||||||||||||||
| 2020 | 2021 | $ Change | % Change | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenue | ||||||||||||||||
| Premiums earned, net | $ | 2,794 | $ | 18,049 | $ | 15,255 | 546 | % | ||||||||
| Investment income | 139 | 19 | (120 | ) | (86 | )% | ||||||||||
| Other revenue | 4,785 | 10,030 | 5,245 | 110 | % | |||||||||||
| Total revenue | 7,718 | 28,098 | 20,380 | 264 | % | |||||||||||
| Costs and expenses | ||||||||||||||||
| Losses and loss adjustment expenses | 2,366 | 22,640 | 20,274 | 857 | % | |||||||||||
| Policy servicing expense and other | 4,056 | 5,055 | 999 | 25 | % | |||||||||||
| Sales, marketing and other acquisition costs | (300 | ) | 25,926 | 26,226 | (8,742 | )% | ||||||||||
| Research and development | 2,173 | 3,118 | 945 | 43 | % | |||||||||||
| Amortization of capitalized software | 2,799 | 2,701 | (98 | ) | (4 | )% | ||||||||||
| Other operating expenses | 3,965 | 16,738 | 12,773 | 322 | % | |||||||||||
| Total costs and expenses | 15,059 | 76,178 | 61,119 | 406 | % | |||||||||||
| Loss from operations | (7,341 | ) | (48,080 | ) | (40,739 | ) | 555 | % | ||||||||
| Other expense | ||||||||||||||||
| Interest expense and other | 1,201 | 164 | (1,037 | ) | (86 | )% | ||||||||||
| Increase in fair value of stock warrant liability | 356 | (6,984 | ) | (7,340 | ) | (2,062 | )% | |||||||||
| Total other expense | 1,557 | (6,820 | ) | (8,377 | ) | (538 | )% | |||||||||
| Net loss before taxes | (8,898 | ) | (41,260 | ) | (32,362 | ) | 364 | % | ||||||||
| Net loss after taxes | $ | (8,898 | ) | $ | (41,260 | ) | $ | (32,362 | ) | 364 | % | |||||
Revenue
Premiums Earned, net
Net premiums earned increased $15.3 million, or 546%, from $2.8 million for the three months ended June 30, 2020 to $18.1 million for the three months ended June 30, 2021, which was primarily attributable to a $9.8 million decrease in premiums ceded to our reinsurance partners, a $5.2 million increase in direct earned premium, and a $0.3 million decrease in bad debt expense which was due primarily to state mandated COVID-19 payment extensions. Decrease of $9.8 million in premiums ceded to our reinsurance partners was driven largely by reinsurance commutation settlements. Direct earned premium increased by $5.2 million from $22.6 million for the three months ended June 30, 2020 to $27.8 million for the three months ended June 30, 2021. Increase in direct earned premiums was primarily attributable to an increase in policies in force during the three months ended June 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 $0.1 million, or 86%, from $0.1 million for the three months ended June 30, 2020 to $19,000 for the three months ended June 30, 2021. The decrease was primarily due to a lower balance of highly liquid fixed income investments during the three months ended June 30, 2021.
Other Revenue
Other revenue increased $5.2 million, or 110%, from $4.8 million for the three months ended June 30, 2020 to $10.0 million for the three months ended June 30, 2021. The increase was primarily attributable to an $8.1 million gain recognized on reinsurance commutation settlements, partially offset by $0.7 million decrease in revenues from new customer implementations of our Enterprise business solutions, and a $2.2 million decrease in revenues from policy acquisition costs recovered for policies onboarded into our reinsurance program. 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 in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Costs and Expenses
Losses and LAE
Losses and LAE increased $20.3 million, or 857%, from $2.3 million for the three months ended June 30, 2020 to $22.6 million for the three months ended June 30, 2021. Ceded losses and LAE decreased $9.3 million as a result of commuting all of our reinsurance programs and thereby retaining more losses. Direct losses and LAE increased by $11.0 million due to an overall increase in claims cost, frequency, and severity.
Policy Servicing Expense and Other
Policy servicing expense and other increased $1.0 million, or 25%, from $4.0 million for the three months ended June 30, 2020 to $5.0 million for the three months ended June 30, 2021. The increase was primarily attributable to 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 $26.2 million, or 8,742%, from ($0.3) million for the three months ended June 30, 2020 to $25.9 million for the three months ended June 30, 2021. Of this increase, $20.1 million was reinsurance-related including the commutation settlement and the impact to the ceding commission offset. During the second quarter of 2021, we completed the restructuring of our reinsurance programs commuting all of the programs. As a result of the commutations, we recorded a gain of $8.1 million recorded in Other Revenue as well as Sales, Marketing, and Other Acquisition Cost expense of $17.6 million related to a return of revenues from policy acquisition costs recovered for policies onboarded into our reinsurance program. Additionally, as part of our typical marketing efforts, there was an increase of $5.7 million in both our online and offline marketing campaigns. This was increased by a $2.5 million less in reinsurance ceding commission which serves as an offset to sales and marketing expense. During the second quarter of 2020, reinsurance ceding commission which was driven by improved ceded loss ratio, resulting from the COVID-19 pandemic, exceeded sales, marketing and other acquisition expense incurred during the same period, resulting in a negative expense for the three-month period. For the six-month period, sales, marketing and other acquisition expenses incurred exceeded reinsurance ceding commission.
Research and Development
Research and development increased $0.9 million, or 43%, from $2.2 million for the three months ended June 30, 2020 to $3.1 million for the three months ended June 30, 2021. The increase was primarily attributable to increase in personnel related expenses to support our growth objectives.
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Amortization of Capitalized Software
Amortization of capitalized software decreased $0.1 million, or 4%, from $2.8 million for the three months ended June 30, 2020 to $2.7 million for the three months ended June 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 $12.8 million, or 322%, from $4.0 million for the three months ended June 30, 2020 to $16.8 million for the three months ended June 30, 2021. The increase was primarily driven by an increase of $8.0 million in director and officers’ stock-based compensation expense and a $4.8 million increase in general corporate overhead 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 decreased $1.0 million, or 86%, from $1.2 million for the three months ended June 30, 2020 to $0.2 million for the three months ended June 30, 2021. The decrease was primarily attributable to lower debt principal balance during the second quarter of 2021 as debt was paid off during the first quarter of 2021 and no outstanding debt remains on the balance sheet.
Decrease in fair value of stock warrant liability
Fair value of stock warrant liability decreased $7.3 million, from $0.4 million for the three months ended June 30, 2020 to ($6.9) million for the three months ended June 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 in Part I, Item 1, of this Quarterly Report on form 10-Q.
Comparison of the six months ended June 30, 2020 and June 30, 2021
The following table presents our consolidated statement of operations for the six months ended June 30, 2020 and 2021, and the dollar and percentage change between the two periods:
| Six Months Ended June 30, | ||||||||||||||||
| 2020 | 2021 | $ Change | % Change | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenue | ||||||||||||||||
| Premiums earned, net | $ | 6,221 | $ | 19,174 | $ | 12,953 | 208 | % | ||||||||
| Investment income | 419 | 55 | (364 | ) | (87 | )% | ||||||||||
| Other revenue | 9,768 | 26,145 | 16,377 | 168 | % | |||||||||||
| Total revenue | 16,408 | 45,374 | 28,966 | 177 | % | |||||||||||
| Costs and expenses | ||||||||||||||||
| Losses and loss adjustment expenses | 7,771 | 34,903 | 27,132 | 349 | % | |||||||||||
| Policy servicing expense and other | 8,684 | 9,498 | 814 | 9 | % | |||||||||||
| Sales, marketing and other acquisition costs | 3,588 | 73,220 | 69,632 | 1,941 | % | |||||||||||
| Research and development | 4,836 | 6,768 | 1,932 | 40 | % | |||||||||||
| Amortization of capitalized software | 5,496 | 5,352 | (144 | ) | (3 | )% | ||||||||||
| Other operating expenses | 9,214 | 25,327 | 16,113 | 175 | % | |||||||||||
| Total costs and expenses | 39,589 | 155,068 | 115,479 | 292 | % | |||||||||||
| Loss from operations | (23,181 | ) | (109,694 | ) | (86,513 | ) | 373 | % | ||||||||
| Other expense | ||||||||||||||||
| Interest expense and other | 1,940 | 16,040 | 14,100 | 727 | % | |||||||||||
| Increase in fair value of stock warrant liability | 666 | 19,153 | 18,487 | 2,776 | % | |||||||||||
| Total other expense | 2,606 | 35,193 | 32,587 | 1,250 | % | |||||||||||
| Net loss before taxes | (25,787 | ) | (144,887 | ) | (119,100 | ) | 462 | % | ||||||||
| Net loss after taxes | $ | (25,787 | ) | $ | (144,887 | ) | $ | (119,100 | ) | 462 | % | |||||
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Revenue
Premiums Earned, net
Net premiums earned increased $13.0 million, or 208%, from $6.2 million for the six months ended June 30, 2020 to $19.2 million for the six months ended June 30, 2021, which was primarily attributable to a $7.2 million decrease in premiums ceded to our reinsurance partners, a $6.2 million increase in direct earned premium, and a $0.5 million increase in bad debt expense which was due primarily to state mandated COVID-19 payment extensions. The decrease of $7.2 million in premiums ceded to our reinsurance partners was driven largely by reinsurance commutation settlements. Direct earned premium increased by $6.2 million from $47.4 million for the six months ended June 30, 2020 to $53.6 million for the six months ended June 30, 2021. The increase in direct earned premiums was primarily attributable to an increase in policies in force during the six months ended June 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.
Investment Income
Investment income decreased $0.3 million, or 87%, from $0.4 million for the six months ended June 30, 2020 to $0.1 million for the six months ended June 30, 2021. The decrease was primarily due to a lower balance of highly liquid fixed income investments during the six months ended June 30, 2021.
Other Revenue
Other revenue increased $16.4 million, or 168%, from $9.8 million for the six months ended June 30, 2020 to $26.2 million for the six months ended June 30, 2021. The increase was primarily attributable to a $19.4 million gain recognized on reinsurance commutation settlement, partially offset by a $3.0 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 in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Costs and Expenses
Losses and LAE
Losses and LAE increased $27.1 million, or 349%, from $7.8 million for the six months ended June 30, 2020 to $34.9 million for the six months ended June 30, 2021. Ceded losses and LAE decreased $12.0 million as a result of commuting all of our reinsurance programs and thereby retaining more losses. Direct losses and LAE increased by $15.1 million, driven by an overall increase in claims costs due to an increase in claims severity observed industry-wide and a reserve adjustment.
Policy Servicing Expense and Other
Policy servicing expense and other increased $0.8 million, or 9%, from $8.7 million for the six months ended June 30, 2020 to $9.5 million for the six months ended June 30, 2021. The increase was primarily attributable to increase in our customer experience and other policy servicing personnel related expenses to support our growth objectives.
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Sales, Marketing, and Other Acquisition Costs
Sales, marketing, and other acquisition costs increased $69.6 million, or 1,941%, from $3.6 million for the six months ended June 30, 2020 to $73.2 million for the six months ended June 30, 2021. Of this increase, $62.2 million was reinsurance-related including the commutation settlement and impact to the ceding commission offset. During the six months ended June 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. Additionally, as part of our typical marketing efforts, there was an increase of $7.8 million in both our online and offline marketing campaigns. This was reduced by a $3.9 million less in reinsurance ceding commission which serves as an offset to sales and marketing expense.
Research and Development
Research and development increased $1.9 million, or 40%, from $4.8 million for the six months ended June 30, 2020 to $6.7 million for the six months ended June 30, 2021. The increase was primarily attributable to a decrease of $2.0 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 3%, from $5.5 million for the six months ended June 30, 2020 to $5.4 million for the six months ended June 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 $16.1 million, or 175%, from $9.2 million for the six months ended June 30, 2020 to $25.3 million for the six months ended June 30, 2021. The increase was primarily driven by an increase of $10.8 million in director’s, officers’, and employees’ stock-based compensation expense and a $2.3 million increase in general corporate overhead 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 $14.1 million, or 727%, from $1.9 million for the six months ended June 30, 2020 to $16.0 million for the six months ended June 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 six months ended June 30, 2021 as described in Note 9 of the unaudited consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q. As of June 30, 2021, all debt had been repaid and no outstanding debt remains on the balance sheet.
Increase in fair value of stock warrant liability
Fair value of stock warrant liability increased $18.5 million, from $0.7 million for the six months ended June 30, 2020 to $19.2 million for the six months ended June 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 in Part I, Item 1, of this Quarterly Report on form 10-Q.
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.
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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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| ($ in millions) | ($ in millions) | |||||||||||||||
| Total revenue | $ | 7.7 | $ | 28.1 | $ | 16.4 | $ | 45.4 | ||||||||
| Losses and LAE | (2.4 | ) | (22.6 | ) | (7.8 | ) | (34.9 | ) | ||||||||
| Policy servicing expense and other | (4.0 | ) | (5.1 | ) | (8.6 | ) | (9.5 | ) | ||||||||
| Amortization of capitalized software | (2.8 | ) | (2.7 | ) | (5.5 | ) | (5.4 | ) | ||||||||
| Gross profit/(loss) | (1.5 | ) | (2.3 | ) | (5.5 | ) | (4.4 | ) | ||||||||
| Gross margin | (19.5 | )% | (8.2 | )% | (33.8 | )% | (9.6 | )% | ||||||||
| Less revenue adjustments | ||||||||||||||||
| Revenue Adjustments Related to Reinsurance | 16.3 | 0.6 | 33.1 | 9.5 | ||||||||||||
| Revenue from Enterprise Segment | (1.8 | ) | (1.1 | ) | (2.5 | ) | (2.2 | ) | ||||||||
| Interest Income and Other | 0.5 | 0.2 | 0.8 | 1.3 | ||||||||||||
| Less costs and expense adjustments | ||||||||||||||||
| Loss and LAE Adjustments Related to Reinsurance | (12.2 | ) | (2.9 | ) | (26.7 | ) | (14.7 | ) | ||||||||
| Loss and LAE Adjustments Related to Prior Period Development | 1.7 | 0.3 | 2.2 | 4.0 | ||||||||||||
| Bad Debt, Report Costs and Other Expenses | (0.2 | ) | 0.3 | (0.2 | ) | (0.1 | ) | |||||||||
| Amortization of Internally Developed Software | 2.8 | 2.7 | 5.5 | 5.4 | ||||||||||||
| Devices | 0.9 | 1.3 | 2.0 | 2.2 | ||||||||||||
| Accident period contribution profit/(loss) | $ | 6.5 | $ | (0.9 | ) | $ | 8.7 | $ | 1.0 | |||||||
| Prior Period Development | $ | (1.7 | ) | $ | (0.3 | ) | $ | (2.2 | ) | $ | (4.0 | ) | ||||
| Contribution profit/(loss) | $ | 4.8 | $ | (1.2 | ) | $ | 6.5 | $ | (3.0 | ) | ||||||
| Total revenue | $ | 7.7 | $ | 28.1 | $ | 16.4 | $ | 45.4 | ||||||||
| Revenue adjustments | 15.0 | (0.3 | ) | 31.4 | 8.6 | |||||||||||
| Adjusted revenue | $ | 22.7 | $ | 27.8 | $ | 47.8 | $ | 54.0 | ||||||||
| Accident period contribution margin | 28.8 | % | (3.3 | )% | 18.2 | % | 1.8 | % | ||||||||
| Contribution margin | 21.2 | % | (4.2 | )% | 13.6 | % | (5.6 | )% | ||||||||
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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 Merger, 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 June 30, 2021, we had $202.6 million in cash and cash equivalents which includes $310.0 million received in cash from the trust account and the private placements in connection with the Closing in February 2021, compared to $19.2 million 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 June 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 expansion of marketing activities, 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.
As part of our plans to restructure our reinsurance program and ensure the insurance carrier is adequately capitalized, approximately $55.2 million moved from unrestricted to restricted cash in the first and second quarter of 2021, a portion of which was used for reinsurance commutation settlements.
The following table summarizes our cash flow data for the periods presented:
| Six Months Ended June 30, | ||||||||
| 2020 | 2021 | |||||||
| ($ in millions) | ||||||||
| Net cash used in operating activities | $ | (23.0 | ) | (47.5 | ) | |||
| Net cash provided by investing activities | 22.0 | (32.2 | ) | |||||
| Net cash provided by financing activities | 25.9 | 273.5 | ||||||
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2021 was $47.5 million, which was an increase of net cash used of $24.5 million from $23.0 million for the six months ended June 30, 2020. Cash used during this period included $89.3 million from net loss for the six months ended June 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 $49.4 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 LAE reserves.
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Net cash used in operating activities for the six months ended June 30, 2020 was $23.0 million. Cash used during this period included $15.3 million from net loss for the six months ended June 30, 2020, excluding the non-cash impacts from depreciation, stock-based compensation, and other non-cash items. Net cash used due to changes in operating assets and liabilities primarily consisted of increases in ceded reinsurance premium payable, loss and LAE reserves, other liabilities, and unearned premium reserves which outpaced the growth of premiums and accounts receivable, reinsurance recoverable and accounts payable. The increase in cash used in operating activities from the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to a reinsurance commutation settlement, as well as an increase in corporate overhead costs.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2021 was $32.2 compared to $22.0 million in net cash provided by investing activities during the three months ended June 30, 2020, which was primarily driven by purchases and maturities of marketable securities offset by our continued investment in telematics devices, leasehold improvements, and other equipment, as well as continued investment in our website and software development.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2021 was $273.5 million compared to $25.9 million in cash provided by financing activities for the six months ended June 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 in February 2021.
Contractual Obligations
The following is a summary of material contractual obligations and commitments as of June 30, 2021:
| Total | 2021 (remaining six months) | 2022 – 2023 | 2024 – 2025 | Thereafter | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Long-term debt | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Interest on long-term debt | - | - | - | - | - | |||||||||||||||
| Operating Leases | 24.7 | 1.6 | 6.3 | 5.6 | 11.2 | |||||||||||||||
| Purchase Commitments | 3.1 | 3.1 | - | - | - | |||||||||||||||
| Total | $ | 27.8 | $ | 4.7 | $ | 6.3 | $ | 5.6 | $ | 11.2 | ||||||||||
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 Merger 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 in Part I, Item 1, of this Quarterly Report on form 10-Q.
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.
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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.
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 Merger 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 Merger, 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 Merger 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.
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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 in Part I, Item 1, of this Quarterly Report on Form 10-Q 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. 1 to Form S-1 filed with the SEC on August 9, 2021.
New Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies, to our unaudited consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to certain credit and interest rate risks as part of our ongoing business operations.
Credit Risk
We are exposed to credit risk on our investment portfolio and were exposed on our reinsurance contracts. Investments that potentially subject us to credit risk consist principally of cash and marketable securities. We place our cash and cash equivalents with financial institutions with high credit standing and our excess cash in marketable investment grade securities. With respect to our reinsurance contracts, we were exposed to credit risk from reinsurance recoverables and prepaid reinsurance premiums, which was mitigated by using a diverse group of reinsurers and monitoring their financial strength ratings. For any reinsurance counterparties who were not rated, we require adequate levels of collateral in the form of a trust account or Letter of Credit. The credit risk on our reinsurance contracts has been eliminated with the commutation of the reinsurance programs.
Interest Rate Risk
Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risks. Our primary market risk has been interest rate risks which impacts the fair value of our liabilities as well as interest rate risks associated with our investments in fixed maturities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Because there are inherent limitations in all control systems, a control system, no matter how well conceived and operated, can provide only reasonable, as opposed to absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
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Our management, with the participation of our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this report solely due to the material weakness in our internal control over financial reporting due to the insufficient risk assessment of the underlying accounting treatment for certain complex financial instruments, as described below.
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 our annual or interim financial statements will not be prevented or detected on a timely basis.
On April 12, 2021, the Acting Director of the Division of Corporate Finance and the Acting Chief Accountant of the SEC issued “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies” (the “Statement”). The Statement indicated that when certain features are included in warrants issued in special purpose acquisition company (“SPAC”) transactions, the warrant “should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.” Management analyzed and evaluated INSU’s financial statements previously filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and concluded that there was a material misstatement related to the accounting for complex financial instruments in the historical financial statements of INSU for the year ended December 31, 2020. We have filed a Current Report on Form 8-K under Item 4.02 that includes a statement of non-reliance on such historical financial statements and filed an Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2020 with the SEC on June 2, 2021.
Prior to the issuance of the Statement, management had concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by the Annual Report on Form 10-K filed with the SEC on March 31, 2021. However, in response to the guidance in the Statement, management re-evaluated INSU’s disclosure controls and procedures as of December 31, 2020 and concluded that INSU’s disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2020 due to a material weakness in internal control over financial reporting due to the insufficient risk assessment of the underlying accounting treatment for certain complex financial instruments.
Our evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q included consideration of the guidance set forth in the Statement. Based on the items discussed in the Statement, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2021, we did not design and maintain effective controls over financial reporting relating to the accounting treatment for complex financial instruments, as discussed above.
Notwithstanding this material weakness, management has concluded that our financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with GAAP.
Remediation Plan
We are taking steps to remediate the material weakness by, among other things, devoting significant effort and resources to the remediation and improvement of our internal control over financial reporting as it relates to the accounting treatment for complex financial instruments. We have enhanced these processes to better evaluate our research and understanding of the nuances of the complex accounting standards that apply to our securities and financial statements. We have provided enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. These actions are subject to ongoing review by senior management and Audit Committee oversight. As we continue to evaluate and work to improve our internal control over financial reporting, management may implement additional measures to address the material weakness or modify the remediation efforts described above and will continue to review and make necessary changes to the overall design of our internal controls. The weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2021, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II
ITEM 1. 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 insurance claims made against us. Other than as described below, our management believes that there are currently no 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.
ITEM 1A. RISK FACTORS
RISK FACTORS
Investing in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed under the heading “Cautionary Note Regarding Forward-Looking Statements,” in this Quarterly Report on Form 10-Q, you should carefully consider the specific risks set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results of operations. As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this Quarterly Report on Form 10-Q are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect our business.
We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2020 with the SEC on June 2, 2021.
Risks Related to Our Business
We have a history of net losses and could continue to incur substantial net losses in the future.*
We have incurred recurring losses on an annual basis since our incorporation in 2011. We 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. We 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 our losses to date is our insured losses paid associated with accidents and other insured events by our customers. Establishing adequate premium rates is necessary to generate sufficient revenue to offset losses, LAE and other costs. If we do not accurately assess the risks that we underwrite, the premiums that we charge may not be adequate to cover our losses and expenses, which would adversely affect our results of operations and our profitability. Moreover, as we continue to invest in our business, we expect 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 our business. If we fail to manage our losses or to grow our revenue sufficiently to keep pace with our investments and other expenses, our business will be seriously harmed.
In addition, we will incur additional expenses to support our growth. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We 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 our market or demand for our services and success of current or potential future competitors. As a result, we may not achieve or maintain profitability in future periods.
We may lose existing customers or fail to acquire new customers.
We believe that growth of our business and revenue depends upon our ability to continue to grow our business in the geographic markets that we currently serve by retaining our existing customers and adding new customers in our current as well as new geographic markets. Expanding into new geographic markets takes time, requires us to navigate and comply with extensive regulations and may occur more slowly than we expect or than it has occurred in the past. If we lose customers, our 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 our profitability. If we fail to remain competitive on customer experience, pricing, and insurance coverage options, our ability to grow our business may also be adversely affected. In addition, we may fail to accurately predict risk segmentation of new customers or potential customers, which could also reduce our profitability.
While a key part of our business strategy is to retain and add customers in our existing markets and into our current product offerings, we also intend to expand our operations into new markets and new product offerings. In doing so, we may incur losses or otherwise fail to enter new markets or offer new products successfully. Our expansion into new markets and product offerings may place us 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.
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There are many factors that could negatively affect our ability to grow our customer base, including if:
| ● | we lose customers to new market entrants and/or existing competitors; |
| ● | we do not obtain regulatory approvals necessary for expansion into new markets or in relation to our products (such as underwriting and rating requirements); |
| ● | we fail 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 our website and our mobile app; |
| ● | our digital platform experiences disruptions; |
| ● | we suffer reputational harm to our brand including from negative publicity, whether accurate or inaccurate; |
| ● | we fail to expand geographically; |
| ● | we fail to offer new and competitive products, to provide effective updates to our existing products or to keep pace with technological improvements in our industry; |
| ● | customers have difficulty installing, updating or otherwise accessing our app or website on mobile devices or web browsers as a result of actions by us 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 us from generating quotes or paying claims in a fast and reliable manner; or |
| ● | we are unable to address customer concerns regarding the content, privacy, and security of our digital platform. |
Our inability to overcome these challenges could impair our ability to attract new customers and retain existing customers, and could have a material adverse effect on our business, operating results and financial condition.
We may require additional capital to support business growth or to satisfy our regulatory capital and surplus requirements, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features and products or enhance our existing products and services, satisfy our regulatory capital and surplus requirements, cover losses, improve our operating infrastructure or acquire complementary businesses and technologies. Many factors will affect our capital needs as well as their amount and timing, including our growth and profitability, regulatory requirements, market disruptions and other developments. If our present capital and surplus is insufficient to meet our current or future operating requirements, including regulatory capital and surplus requirements, or to cover losses, we may need to raise additional funds through financings or curtail our growth. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans and operating performance, as well as the condition of the capital markets at the time we seek financing. We cannot be certain that additional financing will be available to us on favorable terms, or at all.
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If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Common Stock. As an insurance company, we are subject to extensive laws and regulations in every jurisdiction in which we conduct 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 our 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 our company. Moreover, any debt financing, in addition to our outstanding credit facilities, that we secure in the future could subject us to restrictive covenants relating to our capital raising activities, our ability to make certain types of investments or payments, and other financial and operational matters, which may increase our difficulty to obtain additional capital or to pursue business opportunities, including new product offerings and potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired, and our business, revenue, results of operations and financial condition may be materially harmed.
Further, we are restricted by covenants in our credit agreements. These covenants restrict, among other things, our ability to incur additional debt without lender consent or grant liens over our assets, which may limit our ability to obtain additional funds.
The COVID-19 pandemic has caused disruption to our operations and may negatively impact our business, key metrics, and results of operations in numerous ways that remain unpredictable.
Our 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, our business was favorably impacted by the SIPs as our customers drove less. While our premiums collected declined due to per-mile billing, we had a corresponding material decline in incurred losses. Our 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. We continue to assess and update our business continuity plans in the context of this pandemic, including taking steps in an effort to help keep our employees healthy and safe. The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations in certain cases, and cancellation of physical participation in meetings, events, and conferences), and we expect to take further actions as may be required or recommended by government authorities or as we determine are in the best interests of our 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 economic slowdown of potentially extended duration, as well as a global recession. This could result in an increase in costs associated with claims under our 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 our 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 we operate, state insurance regulators have either encouraged, strongly suggested or mandated insurers to provide COVID-19-related consumer relief. Regulators in several states in which we operate or into which we plan 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 our ability to charge or increase premiums to adequately cover our losses and could result in continued increased premium write-offs.
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Though we continue 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 we are not currently aware of, any of which could have a material effect on us. In addition, if there is a future resurgence of COVID-19, these negative impacts on our business may be further exacerbated. As a result, the full extent of the impact of the pandemic on our overall financial and operating results, whether in the near or long term, cannot be reasonably estimated at this time.
Our future growth and profitability depend in part on our ability to successfully operate in an insurance industry that is highly competitive.
Many of our primary competitors have well-established national brands and market similar products. Our 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 we do, such as homeowners and renters, which are often bundled together to help attract and retain customers. Our 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. Our future growth will depend in large part on our ability to grow our insurance business in which traditional insurance companies retain certain advantages. In particular, unlike us, 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, we may in the future expand into new lines of business and offer additional products beyond automobile insurance, and as we do so, we 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. We have invested in growth strategies by utilizing unique customer value propositions, differentiated product offerings and distinctive advertising campaigns. If we are unsuccessful through these strategies in generating new business, retaining a sufficient number of customers or retaining or acquiring key relationships, our ability to maintain or increase premiums written or the ability to sell our products could be adversely impacted. Because of the competitive nature of the insurance industry, there can be no assurance that we will continue to compete effectively within our industry, or that competitive pressures will not have a material effect on our business, results of operations or financial condition.
We rely on telematics, mobile technology and our digital platform to collect data points that we evaluate in pricing and underwriting our insurance policies, managing claims and customer support, and improving business processes. To the extent regulators prohibit or restrict our collection or use of this data, our business could be harmed.
We use telematics, mobile technology and our digital platform to collect data points that we evaluate in pricing and underwriting certain of our 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 we collect, the process we use for collecting this data or how we use it unfairly discriminates against a protected class of people, regulators could move to prohibit or restrict our collection or use of this data. In addition, if legislation were to restrict our ability to collect driving behavior data, it could impair our capacity to underwrite insurance cost effectively, negatively impacting our revenue and earnings.
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Due to Proposition 103 in California, our largest market, we are currently limited in our ability to use telematics data beyond miles-driven to underwrite insurance, including data on how the car is driven. This could hinder our ability to accurately assess the risks that we underwrite in other states if they were to pass similar laws or regulations. In three other states where we currently operate, we do not use behavioral telematics data because it is either permitted, but we 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 we aim to be a fully national provider of insurance across 49 states and the District of Columbia by 2022, we will need to comply with the rules and regulations of each market. At this time, we do not know which of our 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 we are currently in discussions with regulators to allow the use of telematics to a greater extent to underwrite and price insurance policies, we 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 our 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 our 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 we collect and the process we use for collecting this data unfairly discriminates against a protected class of people could subject us 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 our business, financial condition, results of operations and prospects. Although we have implemented policies and procedures into our business operations that we feel are appropriately calibrated to our machine learning and automation-driven operations, these policies and procedures may prove inadequate to manage our 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 we currently use or plan to use in the future to underwrite insurance could negatively impact our business.
Regulators may also require us to disclose the external data we use, algorithms and/or predictive matters prior to approving our underwriting models and rates. Such disclosures could put our intellectual property at risk.
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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 our 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 we operate, it could impact the integrity and quality of our pricing and underwriting processes.
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 mobile app both rapidly and cost-effectively. If these third parties change their listings or increase their pricing, if our relationship with them deteriorates or terminates, or due to other factors beyond our control, we may be unable to attract new customers rapidly and cost-effectively, which would adversely affect our business and results of operations.
Our success depends on our ability to attract consumers to our website and our mobile app and convert them into customers in a rapid and cost-effective manner. We depend in large part on search engines, social media platforms, digital app stores, content-based online advertising and other online sources for traffic to our website and our mobile app, which are material sources for new consumers.
With respect to search engines, we are included in search results as a result of both paid search listings, where we purchase specific search terms that result in the inclusion of our 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 we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise if we are required to pay a higher price for such listings or if the alternatives we find are more expensive, or we could lose consumers and traffic to our website could decrease, any of which could have a material adverse effect on our business, results of operations and financial condition. For free search listings, if search engines on which we rely for algorithmic listings modify their algorithms, our websites may appear less prominently or not at all in search results, which could result in reduced traffic to our websites, as a result of which we might attract fewer new customers.
Our ability to maintain or increase the number of consumers who purchase our products after being directed to our website or our mobile app from other digital platforms depends on many factors that are not within our 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 we rely for traffic to our website and our mobile app were to modify its general methodology for how it displays our advertisements or keyword search results, resulting in fewer consumers clicking through to our website and our mobile app, our business and operating results are likely to suffer. In addition, if our online display advertisements are no longer effective or are not able to reach certain consumers due to consumers’ use of ad-blocking software, our 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 our advertisements to our 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, we may incur additional marketing expenses or be required to allocate a larger portion of our marketing spend to other channels and our business and operating results could be adversely affected. Similarly, changes to regulations applicable to the insurance brokerage and distribution business may limit our ability to rely on key distribution platforms, if the third-party distribution platforms are unable to continue to distribute our insurance products without an insurance producer license pursuant to applicable insurance law and regulations.
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The marketing of our insurance products depends on our ability to cultivate and maintain cost-effective and otherwise satisfactory relationships with digital app stores, in particular, those operated by Google and Apple. As we grow, we may struggle to maintain cost-effective marketing strategies, and our customer acquisition costs could rise substantially. Furthermore, because many of our customers access our insurance products through a mobile app, we depend on the Apple App Store and the Google Play Store to distribute our 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 our ability to distribute our mobile app, collect data through it, and market our products.
We are subject to the terms of service and policies governing the operating system platforms on which our mobile app runs and the application stores through which we distribute our 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 affect our 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.
We rely 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 our ability to collect, use or share telematics and other data derived from the OBD-II device, as well as new technologies that block our ability to collect, use or share such data, could significantly diminish the value of our platform and have an adverse effect on our ability to generate revenue. Limitations or blockages on our ability to collect, use or share data derived from use of our mobile app may also restrict our ability to analyze such data to facilitate our 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 our business.
If we were 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 we provide and the manner in which we market our mobile app, or give preferential treatment on their platforms or stores to a competitor. To the extent either or both of them do so, our business, results of operations and financial condition could be adversely affected.
Furthermore, one of the factors we use to evaluate our customer satisfaction and market position is our Apple App Store ratings. This rating, however, may not be a reliable indicator of our customer satisfaction relative to other companies who are rated on the Apple App Store since, to date, we have received a fraction of the number of reviews of some of the companies we benchmark against, and thus our number of positive reviews may not be as meaningful.
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Our expansion within the United States will subject us to additional costs and risks, and our plans may not be successful.
Our success depends in significant part on our ability to expand into additional markets in the United States and abroad. We are 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. We plan to have a presence in almost all states by 2022 but cannot guarantee that we will be able to provide nationwide coverage on that timeline or at all. Moreover, one or more states could revoke our license to operate, or implement additional regulatory hurdles that could preclude or inhibit our ability to obtain or maintain our license in such states. As we seek to expand in the United States, we may incur significant operating expenses, although our 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 our 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 us 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 we invest substantial time and resources to expand our operations while our revenues from those additional operations do not exceed the expense of establishing and maintaining them, or if we are unable to manage these risks effectively, our business, results of operations and financial condition could be adversely affected.
If we fail to grow our geographic footprint or geographic growth occurs at a slower rate than expected, our business, results of operations and financial condition could be materially and adversely affected.
Our technology platform may not operate properly or as we expect it to operate.
We utilize our technology platform to gather customer data in order to determine whether or not to write and how to price our insurance products. Similarly, we use our technology platform to process many of our claims. Our 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. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our technology from operating properly. If our platform does not function reliably, we may incorrectly select our customers, bill our customers, price insurance products or incorrectly pay or deny insurance claims made by our 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 us, which could cause customers to cancel or fail to renew their insurance policies with us or make it less likely that prospective customers obtain new insurance policies from us. Additionally, technology platform errors may lead to unintentional bias and discrimination in the underwriting process, which could subject us to legal or regulatory liability and harm our brand and reputation. Any of these eventualities could result in a material adverse effect on our business, results of operations and financial condition.
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We depend on third-party technology providers to support our telematics data acquisition.
We utilize telematics technology to gather data that we use to underwrite insurance policies, bill customers, and manage claims and customer service. Our telematics hardware is designed and manufactured and telematics data services are provided to us by third parties. These companies may fail to provide us 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 us. If we are delivered inaccurate or no data due to these failures, we may overpay claims, underbill customers, or create customer dissatisfaction that causes customers to cancel their insurance policies with us. Any of these eventualities could result in a material adverse effect on our business, results of operations and financial condition.
Regulatory changes may limit our ability to develop or implement our telematics-based pricing model and/or may eliminate or restrict the confidentiality of our proprietary technology.
Our future success depends on our ability to continue to develop and implement our telematics-based pricing model, and to maintain the confidentiality of our proprietary technology. Changes to existing laws, their interpretation or implementation, or new laws could impede our use of this technology, or require that we disclose our proprietary technology to our competitors, which could negatively impact our competitive position and result in a material adverse effect on our 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 our proprietary technology, limit the effectiveness of our products and reduce demand for them.
Our brand may not become as widely known or accepted as incumbents’ brands or the brand may become tarnished.
Many of our competitors have brands that are well-recognized. As a relatively new entrant into the insurance market, we have spent, and expect that we will for the foreseeable future continue to spend, considerable amounts of money and other resources on creating brand awareness and building our reputation. We may not be able to build brand awareness to levels matching our competitors, and our efforts at building, maintaining and enhancing our reputation could fail and/or may not be cost-effective. Complaints or negative publicity about our business practices, our marketing and advertising campaigns (including marketing affiliations or partnerships), our compliance with applicable laws, the integrity of the data that we provide to consumers or business partners, data privacy and security issues, and other aspects of our business, whether real or perceived, could diminish confidence in our brand, which could adversely affect our reputation and business. As we expand our product offerings and enter new markets, we will need to establish our reputation with new customers, and to the extent we are not successful in creating positive impressions, our business in these newer markets could be adversely affected. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful or cost effective. If we are unable to maintain or enhance our reputation or enhance consumer awareness of our brand in a cost-effective manner, our business, results of operations and financial condition could be materially adversely affected.
We may not continue to grow at historical rates or achieve or maintain profitability in the future.
Our limited operating history may make it difficult to evaluate our current business and our future prospects. While our revenue has grown in recent periods, this growth rate may not be sustainable and should not be considered indicative of future performance, and we may not realize sufficient revenue to achieve or maintain profitability. As we grow our business, we expect our revenue growth rates may slow in future periods due to a number of reasons, which may include slowing demand for our service, increasing competition, a decrease in the growth of our overall market, and our failure to capitalize on growth opportunities or the maturation of our business. We have incurred net losses on an annual basis since our 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 our existing customers, and increasing competition, as well as other risks described in these Risk Factors, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. We expect to continue to make investments in the development and expansion of our business, which may not result in increased or sufficient revenue or growth, as a result of which we may not be able to achieve or maintain profitability.
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We rely on highly skilled and experienced personnel and if we are unable to attract, retain or motivate key personnel or hire qualified personnel, our business may be seriously harmed. In addition, the loss of key senior management personnel could harm our business and future prospects.
Our performance largely depends on the talents and efforts of highly-skilled and experienced individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled and experienced personnel and, if we are unable to hire and train a sufficient number of qualified employees for any reason, we may not be able to maintain or implement our current initiatives or grow, or our business may contract and we may lose market share. Moreover, certain of our competitors or other insurance or technology businesses may seek to hire our employees. We cannot assure you that our equity incentives and other compensation will provide adequate incentives to attract, retain and motivate employees in the future, particularly if the market price of our Common Stock does not increase or declines. If we do not succeed in attracting, retaining and motivating highly qualified personnel, our business may be seriously harmed.
We depend on our senior management, including Dan Preston, our Chief Executive Officer, and Paw Andersen, our Chief Technology Officer, as well as other key personnel. We may not be able to retain the services of any of our senior management or other key personnel, as their employment is at-will and they could leave at any time. If we lose the services of one or more of our senior management and other key personnel, including as a result of the COVID-19 pandemic, we may not be able to successfully manage our business, meet competitive challenges or achieve our growth objectives. Further, to the extent that our business grows, we will need to attract and retain additional qualified management personnel in a timely manner, and we may not be able to do so. Our future success depends on our continuing ability to identify, hire, develop, motivate, retain and integrate highly skilled personnel in all areas of our organization.
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.
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 our revenues and earnings and may require us to change the m