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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2021

Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Cash and Cash Equivalents

The Company’s cash and cash equivalents are demand and money market accounts and other highly liquid investments with an original maturity of three months or less. Demand and money market accounts are at stated values. Fair values for other cash equivalents are classified as Level 1 and are based upon appropriate valuation methodology.

Marketable Securities — Available-for-sale

The Company classifies highly liquid money market funds, U.S. Treasury bonds and certificates of deposit within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets and upon models that take into consideration such market-based factors as recent sales, risk-free yield curves, and prices of similarly rated bonds. Commercial paper, corporate bonds, corporate debt securities, repurchase agreements, and asset backed securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which

may not be actively traded. The Company did not hold any securities classified within Level 3 as of September 30, 2021 (unaudited) and December 31, 2020.

Assets measured on a recurring basis at fair value, primarily related to marketable securities, included in the consolidated balance sheets as of September 30, 2021 (unaudited) and December 31, 2020 are set forth below (in thousands):


	Fair Value Measurement at September 30, 2021 (unaudited)
	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market accounts	$	154,111	$	—	$	—	$	154,111
Total cash equivalents	$	154,111	$	—	$	—	$	154,111

Restricted cash equivalents
Money market accounts	$	31,254	$	—	$	—	$	31,254
Certificates of deposits	3,331		—		—		3,331
Total restricted cash equivalents	$	34,585	$	—	$	—	$	34,585

Marketable securities - restricted
Corporate debt securities	$	—	$	3,356	$	—	$	3,356
U.S. treasury and agency securities	23,273		1,995		—		25,268
Commercial paper	—		12,088		—		12,088
Asset backed securities	—		9,080		—		9,080
Total marketable securities - restricted	$	23,273	$	26,519	$	—	$	49,792


	Fair Value Measurement at December 31, 2020
	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market accounts	$	6,771	$	—	$	—	$	6,771
Total cash equivalents	$	6,771	$	—	$	—	$	6,771

Restricted cash equivalents
Money market accounts	$	6,201	$	—	$	—	$	6,201
Certificates of deposits	3,331		—		—		3,331
Total restricted cash equivalents	$	9,532	$	—	$	—	$	9,532

Marketable securities - restricted
Corporate debt securities	$	—	$	5,955	$	—	$	5,955
U.S. treasury securities	6,994		—		—		6,994
Commercial paper	—		8,791		—		8,791
Asset backed securities	—		2,911		—		2,911
Total marketable securities - restricted	$	6,994	$	17,657	$	—	$	24,651

Public and Private Warrants

At the Closing, Metromile Operating Company acquired the net liabilities from INSU, including warrants exercisable for common stock. The Company estimated the fair value of warrants exercisable for common stock measured at fair value on a recurring basis at the respective dates using the public trading price, for the Public warrants, and the Black-Scholes option valuation model, for the Private placement warrants (together with the public warrants, the “Warrants”), respectively. The Black-Scholes option valuation model inputs are based on the estimated fair value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrant, the risk-free interest rates, the expected dividends, and the expected volatility of the price of the Company’s underlying stock. These estimates, especially the expected volatility, are highly judgmental and could differ materially in the future.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The Company considers its Public warrants to be Level 1 liabilities as it uses publicly and

readily available information to measure the fair value of the warrants. For the Company's Private placement warrants, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date and as such are classified as Level 2 liabilities.

The table below sets forth a summary of changes in the fair value of the Company’s Level 1, Level 2, and Level 3 liabilities for the year ended December 31, 2020 and the nine months ended September 30, 2021 (unaudited) (in thousands):


Balance at December 31, 2019	$	1,738
Issuance of warrant on Series E convertible preferred stock	12,620
Increase in fair value of warrant	69,294
Balance at December 31, 2020	$	83,652
Increase in fair value of warrants	47,061
Exercise of preferred stock warrants prior to Business Combination	(130,714)
Public and Private placement Warrants acquired in Business Combination	45,623
Decrease in fair value of Public and Private placement Warrants	(38,929)
Balance at September 30, 2021	$	6,693

The fair value of the Private placement warrants was determined using the Black-Scholes option valuation model using the following assumptions for values as of September 30, 2021:


	Estimated Fair Value of Warrants as of September 30, 2021		Exercise Price		Dividend Yield		Volatility		Risk-Free Interest Rate		Expected Term
	(in thousands)		(in whole dollars)								(in years)
Private placement warrants	$	176	$	11.50	0	%	70	%	0.84	%	4.4

In connection with the Merger, each of the Metromile Operating Company convertible preferred stock warrants outstanding as of December 31, 2020 was exercised for shares of Metromile Operating Company common stock. Therefore, there were no convertible preferred stock warrants outstanding after the Closing.

Through the three months and nine months ended September 30, 2021 and 2020 (unaudited), there were no transfers to or from any Level. The carrying amounts of accounts payable, accrued expenses and notes payable approximate their fair values because of the relatively short periods until they mature or are required to be settled.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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