TRUPANION, INC. 10-Q

Item 1. Financial Statements TRUPANION, INC. Consolidated Statements of Operations (in thousands, except share data) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue $ 117,920 $ 92,199 $ 229,221 $ 179,177 Cost of revenue: Veterinary invoice expense 82,049 65,933 161,689 127,215 Other cost of revenue 16,004 11,553 29,813 22,217 Gross profit 19,867 14,713 37,719 29,745 Operating expenses: Technology and development 2,989 2,578 5,834 5,247 General and administrative 6,100 5,219 11,616 10,638 Sales and marketing 9,242 8,757 19,684 16,984 Total operating expenses 18,331 16,554 37,134 32,869 Gain (loss) from investment in joint venture ( 27 ) ( 272 ) ( 86 ) ( 272 ) Operating income (loss) 1,509 ( 2,113 ) 499 ( 3,396 ) Interest expense 341 317 720 634 Other income, net ( 202 ) ( 453 ) ( 484 ) ( 797 ) Income (loss) before income taxes 1,370 ( 1,977 ) 263 ( 3,233 ) Income tax expense (benefit) 17 ( 46 ) 43 ( 6 ) Net income (loss) $ 1,353 $ ( 1,931 ) $ 220 $ ( 3,227 ) Net income (loss) per share: Basic $ 0.04 $ ( 0.06 ) $ 0.01 $ ( 0.09 ) Diluted $ 0.04 $ ( 0.06 ) $ 0.01 $ ( 0.09 ) Weighted average shares of common stock outstanding: Basic 35,143,592 34,610,709 35,075,322 34,450,070 Diluted 36,688,167 34,610,709 36,601,927 34,450,070 See accompanying notes to the consolidated financial statements. 1 TRUPANION, INC. Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income (loss) $ 1,353 $ ( 1,931 ) $ 220 $ ( 3,227 ) Other comprehensive income (loss): Foreign currency translation adjustments 291 138 ( 339 ) 328 Net unrealized gain on available-for-sale debt securities 5 — — 18 Other comprehensive income (loss), net of taxes 296 138 ( 339 ) 346 Comprehensive income (loss) $ 1,649 $ ( 1,793 ) $ ( 119 ) $ ( 2,881 ) See accompanying notes to the consolidated financial statements. 2 TRUPANION, INC. Consolidated Balance Sheets (in thousands, except share data) June 30, 2020 December 31, 2019 Assets (unaudited) Current assets: Cash and cash equivalents $ 30,013 $ 29,168 Short-term investments 75,162 69,732 Accounts and other receivables 80,724 54,408 Prepaid expenses and other assets 5,888 5,513 Total current assets 191,787 158,821 Restricted cash 1,400 1,400 Long-term investments, at fair value 4,462 4,323 Property and equipment, net 71,018 70,372 Intangible assets, net 7,111 7,731 Other long-term assets 14,495 14,553 Total assets $ 290,273 $ 257,200 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 2,928 $ 4,087 Accrued liabilities and other current liabilities 15,017 13,798 Reserve for veterinary invoices 24,380 21,194 Deferred revenue 75,658 52,546 Total current liabilities 117,983 91,625 Long-term debt 27,347 26,086 Deferred tax liabilities 1,118 1,118 Other liabilities 1,916 1,611 Total liabilities 148,364 120,440 Stockholders’ equity: Common stock: $0.00001 par value per share, 100,000,000 shares authorized; 36,179,457 and 35,246,292 shares issued and outstanding at June 30, 2020; 35,876,882 and 34,947,017 shares issued and outstanding at December 31, 2019 — — Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 238,077 232,731 Accumulated other comprehensive income (loss) ( 89 ) 250 Accumulated deficit ( 85,300 ) ( 85,520 ) Treasury stock, at cost: 933,165 shares at June 30, 2020 and 929,865 shares at December 31, 2019 ( 10,779 ) ( 10,701 ) Total stockholders’ equity 141,909 136,760 Total liabilities and stockholders’ equity $ 290,273 $ 257,200 See accompanying notes to the consolidated financial statements. 3 Trupanion, Inc. Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at April 1, 2020 35,084,505 $ — $ 234,642 $ ( 86,653 ) $ ( 385 ) $ ( 10,779 ) $ 136,825 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 161,787 — 1,141 — — — 1,141 Stock-based compensation expense — — 2,294 — — — 2,294 Other comprehensive income (loss) — — — — 296 — 296 Net income (loss) — — — 1,353 — — 1,353 Balance at June 30, 2020 35,246,292 $ — $ 238,077 $ ( 85,300 ) $ ( 89 ) $ ( 10,779 ) $ 141,909 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at April 1, 2019 34,467,465 $ — $ 226,262 $ ( 85,007 ) $ ( 545 ) $ ( 10,701 ) $ 130,009 Exercise of warrants, net 30,000 — 300 — — — 300 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 284,859 — 585 — — — 585 Stock-based compensation expense — — 1,922 — — — 1,922 Other comprehensive income (loss) — — — — 138 — 138 Net income (loss) — — — ( 1,931 ) — — ( 1,931 ) Balance at June 30, 2019 34,782,324 $ — $ 229,069 $ ( 86,938 ) $ ( 407 ) $ ( 10,701 ) $ 131,023 See accompanying notes to the consolidated financial statements. 4 Trupanion, Inc. Consolidated Statements of Stockholders' Equity (Continued) (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2020 34,947,017 — $ 232,731 $ ( 85,520 ) $ 250 $ ( 10,701 ) $ 136,760 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 302,575 — 1,346 — — — 1,346 Stock-based compensation expense — — 4,000 — — — 4,000 Repurchase of common stock ( 3,300 ) — — — — ( 78 ) ( 78 ) Other comprehensive income (loss) — — — — ( 339 ) — ( 339 ) Net income (loss) — — — 220 — — 220 Balance at June 30, 2020 35,246,292 $ — $ 238,077 $ ( 85,300 ) $ ( 89 ) $ ( 10,779 ) $ 141,909 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2019 34,025,136 — $ 219,838 $ ( 83,711 ) $ ( 753 ) $ ( 6,201 ) $ 129,173 Exercise of warrants, net 306,120 — 4,800 — — ( 4,500 ) 300 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 451,068 — 1,092 — — — 1,092 Stock-based compensation expense — — 3,339 — — — 3,339 Other comprehensive income (loss) — — — — 346 — 346 Net income (loss) — — — ( 3,227 ) — — ( 3,227 ) Balance at June 30, 2019 34,782,324 $ — $ 229,069 $ ( 86,938 ) $ ( 407 ) $ ( 10,701 ) $ 131,023 See accompanying notes to the consolidated financial statements. 5 TRUPANION, INC. Consolidated Statements of Cash Flows (in thousands) (unaudited) Six Months Ended June 30, 2020 2019 Operating activities Net income (loss) $ 220 $ ( 3,227 ) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 3,104 3,177 Stock-based compensation expense 3,880 3,230 Other, net 102 97 Changes in operating assets and liabilities: Accounts and other receivables ( 26,102 ) ( 11,940 ) Prepaid expenses and other assets ( 444 ) 989 Accounts payable, accrued liabilities, and other liabilities 516 1,443 Reserve for veterinary invoices 3,264 2,145 Deferred revenue 23,234 10,967 Net cash provided by operating activities 7,774 6,881 Investing activities Purchases of investment securities ( 26,550 ) ( 32,222 ) Maturities of investment securities 20,804 21,895 Purchases of property, equipment and intangible assets ( 3,239 ) ( 1,780 ) Other 107 ( 1,474 ) Net cash used in investing activities ( 8,878 ) ( 13,581 ) Financing activities Proceeds from exercise of stock options 1,667 1,626 Shares withheld to satisfy tax withholding ( 441 ) ( 247 ) Borrowings from line of credit, net of financing fees 3,735 6,167 Repayments to line of credit ( 2,500 ) — Other ( 78 ) ( 415 ) Net cash provided by financing activities 2,383 7,131 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net ( 434 ) 396 Net change in cash, cash equivalents, and restricted cash 845 827 Cash, cash equivalents, and restricted cash at beginning of period 30,568 27,952 Cash, cash equivalents, and restricted cash at end of period $ 31,413 $ 28,779 Supplemental disclosures Noncash investing and financing activities: Issuance of common stock for cashless exercise of warrants $ — $ 4,500 Purchases of property and equipment included in accounts payable and accrued liabilities $ 273 $ 637 See accompanying notes to the consolidated financial statements. 6 TRUPANION, INC. Notes to the Consolidated Financial Statements (unaudited) 1. Nature of Operations and Significant Accounting Policies Description of Business and Basis of Presentation Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the Company) provides medical insurance for cats and dogs throughout the United States, Canada and Puerto Rico. The financial data as of December 31, 2019 was derived from the Company's audited consolidated financial statements. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and, in management's opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations, comprehensive income (loss), stockholders' equity and cash flows for the interim periods. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on February 13, 2020 (the 2019 10-K). The Company's accounting policies are described in Note 1 to the audited financial statements included in the 2019 10-K. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from such estimates. See Note 1 to the audited financial statements included in the 2019 10-K for additional discussion of these estimates and assumptions. Recently Adopted Accounting Pronouncements The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), using the modified retrospective approach on January 1, 2020. The ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The new standard did not have a material impact on the Company's consolidated statements of operations, balance sheets, stockholders' equity, or cash flows. The Company did not record any cumulative-effect adjustment to its retained earnings upon the adoption. 7 2. Net Income (Loss) per Share Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated using the weighted average number of shares of common stock plus, when dilutive, potential shares of common stock outstanding using the treasury-stock method. Potential shares of common stock outstanding include stock options, unvested restricted stock awards and restricted stock units, and warrants. The components of basic and diluted earnings per share were as follows (in thousands except share and per share information): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Basic earnings per share: Net income (loss) $ 1,353 $ ( 1,931 ) $ 220 $ ( 3,227 ) Shares used in computation: Weighted average shares of common stock outstanding 35,143,592 34,610,709 35,075,322 34,450,070 Basic earnings per share $ 0.04 $ ( 0.06 ) $ 0.01 $ ( 0.09 ) Diluted earnings per share: Net income (loss) $ 1,353 $ ( 1,931 ) $ 220 $ ( 3,227 ) Shares used in computation: Weighted average shares of common stock outstanding 35,143,592 34,610,709 35,075,322 34,450,070 Stock options 1,390,249 — 1,382,192 — Restricted stock awards and units 154,326 — 144,413 — Weighted average shares of diluted common stock outstanding 36,688,167 34,610,709 36,601,927 34,450,070 Diluted earnings per share $ 0.04 $ ( 0.06 ) $ 0.01 $ ( 0.09 ) The following potentially dilutive equity securities were not included in the diluted earnings per share of common stock calculation because they would have had an antidilutive effect: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Stock options — 2,253,995 — 2,253,995 Restricted stock awards and restricted stock units 56,311 715,941 56,311 715,941 3. Investments Long-term investments are classified as available-for-sale and reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss). Short-term investments are classified as held-to-maturity and reported at amortized cost. The amortized cost, gross unrealized holding gains and losses, and estimates of fair value of long-term and short-term investments by major security type and class of security were as follows as of June 30, 2020 and December 31, 2019 (in thousands): 8 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of June 30, 2020 Long-term investments: Foreign deposits $ 3,461 $ — $ — $ 3,461 Municipal bond 1,000 1 — 1,001 $ 4,461 $ 1 $ — $ 4,462 Short-term investments: U.S. Treasury securities $ 6,162 $ — $ — $ 6,162 Certificates of deposit 1,610 — — 1,610 U.S. government funds 67,390 — — 67,390 $ 75,162 $ — $ — $ 75,162 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2019 Long-term investments: Foreign deposits $ 3,323 $ — $ — $ 3,323 Municipal bond 1,000 — — 1,000 $ 4,323 $ — $ — $ 4,323 Short-term investments: U.S. Treasury securities $ 6,156 $ — $ ( 1 ) $ 6,155 Certificates of deposit 440 — — 440 U.S. government funds 63,136 — — 63,136 $ 69,732 $ — $ ( 1 ) $ 69,731 Maturities of debt securities classified as available-for-sale were as follows (in thousands): As of June 30, 2020 Amortized Cost Fair Value Available-for-sale: Due after one year through five years $ 4,461 $ 4,462 $ 4,461 $ 4,462 The Company does not expect any credit losses from its held-to-maturity investments, considering the composition of the investment portfolio and the credit loss history of these investments. For available-for-sale debt securities, the Company determined that the unrealized losses were immaterial and due to non-credit factors. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell, the securities prior to maturity or prior to the recovery of the amortized cost basis. 4. Other Investments Investment in Variable Interest Entity In July 2018, the Company purchased $ 3.0 million in preferred stock of a privately held corporation with a complementary business line. In October 2019, the Company purchased an additional $ 4.0 million in preferred stock upon the exercise of an option by the variable interest entity. The Company does not have power over the activities that most significantly impact the economic performance of the variable interest entity and is, therefore, not the primary beneficiary. The Company has the option to purchase all of the outstanding common shares issued by the variable interest entity on the fifth anniversary of the initial preferred stock purchase. 9 Additionally, the Company has extended a $ 2.5 million revolving line of credit to the variable interest entity to fund its inventory purchases. The Company's investment and amounts loaned under the line of credit are recorded in other long-term assets on its consolidated balance sheet. The outstanding loan balance under the line of credit was $ 2.5 million as of June 30, 2020 and December 31, 2019. The Company has also entered into a series of agreements to provide ancillary services to the variable interest entity at cost. The Company provided $ 0.7 million and $ 0.6 million of these services for the six months ended June 30, 2020 and 2019, respectively, which were recorded against its operating expenses. Investment in Joint Venture In September 2018, the Company acquired a non-controlling equity interest in a joint venture, whereby it has committed to licensing certain intellectual property and contributing up to $ 2.2 million AUD upon the achievement of specific operational milestones over a period of at least four years from the agreement execution date. As of June 30, 2020, the Company has contributed $ 0.5 million AUD. This equity investment is accounted for using the equity method and is classified in other long-term assets on the Company's consolidated balance sheet. The Company's share of income and losses from this equity method investment is included in gain (loss) from investment in joint venture on its consolidated statement of operations. Also included in this line item are income and expenses associated with administrative services provided to the joint venture. 5. Fair Value Investments The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring basis, and placement within the fair value hierarchy (in thousands): As of June 30, 2020 Fair Value Level 1 Level 2 Level 3 Assets Restricted cash $ 1,400 $ 1,400 $ — $ — Money market funds 1,053 1,053 — — Fixed maturities: Foreign deposits 3,461 3,461 — — Municipal bond 1,001 — 1,001 — Investment in variable interest entity 7,625 — — 7,625 Total $ 14,540 $ 5,914 $ 1,001 $ 7,625 As of December 31, 2019 Fair Value Level 1 Level 2 Level 3 Assets Restricted cash $ 1,400 $ 1,400 $ — $ — Money market funds 1,050 1,050 — — Fixed maturities: Foreign deposits 3,323 3,323 — — Municipal bond 1,000 — 1,000 — Investment in variable interest entity 7,625 — — 7,625 Total $ 14,398 $ 5,773 $ 1,000 $ 7,625 The Company measures the fair value of restricted cash, money market funds, and foreign deposits based on quoted prices in active markets for identical assets. The fair value of the municipal bond is based on either recent trades in inactive markets or quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. Short-term investments are carried at amortized cost, and the fair value and changes in unrealized gains (losses) are disclosed in Note 3, Investments. The fair value of these investments is determined in the same manner as for available-for-sale securities and is considered a Level 1 measurement. 10 The Company's preferred stock investment in the variable interest entity (see Note 4) is accounted for as an available-for-sale debt security and measured at fair value at each balance sheet date. The estimated fair value of the preferred stock investment is a Level 3 measurement and is based on certain unobservable inputs such as the value of the underlying enterprise, volatility, time to liquidity, and market interest rates. An increase or decrease in any of these unobservable inputs would result in a change in the fair value measurement. Estimated fair value was $ 7.6 million as of June 30, 2020, unchanged from December 31, 2019, recorded in other long-term assets on the Company's consolidated balance sheet. An unrealized gain of $ 0.6 million was recorded in other comprehensive income in the quarter ended December 31, 2019. Fair Value Disclosures The Company's other long-term assets balance included notes receivable of $ 6.0 million as of June 30, 2020 and $ 6.1 million as of December 31, 2019, recorded at their estimated collectible amount. The Company estimates that the carrying value of the notes receivable approximates the fair value. The estimated fair value represents a Level 3 measurement within the fair value hierarchy and is based on market interest rates and the assessed creditworthiness of the third party. There was no significant activity in Level 3 of the hierarchy during the six months ended June 30, 2020. The Company estimates the fair value of long-term debt based upon rates currently available to the Company for debt with similar terms and remaining maturities. This is a Level 3 measurement. Based upon the terms of the debt, the carrying amount of long-term debt approximated fair value at June 30, 2020 and December 31, 2019. The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers between levels for the six months ended June 30, 2020 and the year ended December 31, 2019. 6. Debt The Company has a revolving line of credit of up to $ 50.0 million, maturing June 2022. The facility is secured by any and all interests in the Company's assets that are not otherwise restricted. Interest on the revolving line of credit is payable monthly at the greater of 4.5%, or 0.75% plus the prime rate ( 4.50 % at June 30, 2020). The credit agreement includes other ancillary services and letters of credit of up to $ 4.5 million. It also requires a deposit of restricted cash of $ 1.4 million and a minimum cash or investment balance of $ 2.1 million. The credit agreement requires the Company to comply with various financial and non-financial covenants. As of June 30, 2020, the Company was in compliance with all financial and non-financial covenants required by the credit agreement. Borrowings on the revolving line of credit are limited to the lesser of $ 50.0 million or the total amount of cash and securities held by the Company's insurance subsidiaries (American Pet Insurance Company and Wyndham Insurance Company (SAC) Limited Segregated Account AX). As of June 30, 2020, available borrowing capacity on the line of credit was $ 22.2 million, with an outstanding balance of $ 0.3 million for ancillary services and letters of credit, and borrowings under the facility of $ 27.5 million, recorded net of financing fees of $ 0.1 million. 7. Commitments and Contingencies Certain state insurance regulators in the United States have contacted the Company regarding whether employees who had helped prospective members enroll by telephone in prior years were required to have an insurance license to conduct such telephone conversations. To date, the Company has resolved each of these matters in non-material amounts and believes it is compliant with the applicable regulations. The Company is currently engaged with a limited number of state insurance regulators to resolve this same legacy issue and believes it has adequately reserved for these matters. In addition, from time to time the Company is or may become subject to various legal proceedings arising in the ordinary course of business, including proceedings against members, other entities or regulatory bodies. Estimated liabilities are recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. At this time, the Company does not believe any such matters to be material individually or in the aggregate. These views are subject to change following the outcome of future events or the results of future developments. 11 8. Reserve for Veterinary Invoices The reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that are dated as of, or prior to, its balance sheet date. The reserve also includes the Company's estimate of related internal processing costs. The reserve estimate involves actuarial projections, and is based on management's assessment of facts and circumstances currently known, and assumptions about anticipated patterns. The Company uses generally accepted actuarial methodologies, such as paid loss development methods, in estimating the amount of the reserve for veterinary invoices. The reserve is made for each of the Company's segments, subscription and other business, and is continually refined as the Company receives and pays veterinary invoices. Changes in management's assumptions and estimates may have a relatively large impact to the reserve and associated expense. Reserve for veterinary invoices Summarized below are the changes in the total liability for the Company's subscription business segment (in thousands): Six Months Ended June 30, Subscription 2020 2019 Reserve at beginning of year $ 15,541 $ 13,875 Veterinary invoices during the period related to: Current year 130,825 110,248 Prior years 393 551 Total veterinary invoice expense 131,218 110,799 Amounts paid during the period related to: Current year 116,676 97,165 Prior years 12,129 11,364 Total paid 128,805 108,529 Non-cash expenses 514 369 Reserve at end of period $ 17,440 $ 15,776 The Company's reserve for the subscription business segment increased from $ 15.5 million at December 31, 2019 to $ 17.4 million at June 30, 2020. This change was comprised of $ 131.2 million in expense recorded during the period less $ 128.8 million in payments of veterinary invoices. The $ 131.2 million in veterinary invoice expense incurred included an adjustment of $ 0.4 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. For the six months ended June 30, 2019, the Company increased prior year reserves by $ 0.6 million as a result of analysis of payment trends. Summarized below are the changes in total liability for the Company's other business segment (in thousands): Six Months Ended June 30, Other Business 2020 2019 Reserve at beginning of year $ 5,653 $ 2,187 Veterinary invoices during the period related to: Current year 30,650 16,747 Prior years ( 179 ) ( 331 ) Total veterinary invoice expense 30,471 16,416 Amounts paid during the period related to: Current year 23,994 14,431 Prior years 5,190 1,668 Total paid 29,184 16,099 Non-cash expenses — — Reserve at end of period $ 6,940 $ 2,504 12 The Company’s reserve for the other business segment increased from $ 5.7 million at December 31, 2019 to $ 6.9 million at June 30, 2020. This change was comprised of $ 30.5 million in expense recorded during the period less $ 29.2 million in payments of veterinary invoices. The $ 30.5 million in veterinary invoice expense incurred included a reduction of $ 0.2 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. For the six months ended June 30, 2019, the Company decreased prior year reserves by $ 0.3 million as a result of analysis of payment trends. Reserve for veterinary invoices, by year of occurrence In the following tables, the reserve for veterinary invoices for each segment is presented as the amount (in thousands) by the year to which the veterinary invoice relates, referred to as the year of occurrence. Subscription As of June 30, 2020 Year of Occurrence 2018 and prior $ 972 2019 2,832 2020 13,636 $ 17,440 Other Business As of June 30, 2020 Year of Occurrence 2018 and prior $ 45 2019 239 2020 6,656 $ 6,940 9. Stock-Based Compensation Stock-based compensation expense includes stock options, restricted stock awards, and restricted stock units granted to employees and other service providers and has been reported in the Company’s consolidated statements of operations depending on the function performed by the employee or other service provider. Stock-based compensation expense recognized in the consolidated statements of operations was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Veterinary invoice expense $ 245 $ 185 $ 423 $ 346 Other cost of revenue 99 93 189 179 Technology and development 133 110 233 173 General and administrative 1,075 918 1,804 1,536 Sales and marketing 675 567 1,231 996 Total stock-based compensation expense 2,227 1,873 3,880 3,230 Capitalized stock-based compensation 67 49 120 109 Total stock-based compensation $ 2,294 $ 1,922 $ 4,000 $ 3,339 As of June 30, 2020, the Company had 101,341 unvested stock options and 812,143 unvested restricted stock awards and restricted stock units that are expected to vest. Stock-based compensation expenses of $ 0.7 million related to unvested stock options and $ 21.8 million related to unvested restricted stock awards and restricted stock units are expected to be recognized over a weighted average period of approximately 0.8 years and 3.1 years, respectively. 13 Stock Options A summary of the Company's stock option activity is as follows: Number of Options Weighted Average Exercise Price per Share Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2019 2,097,978 $ 9.86 $ 57,907 Granted — — — Exercised ( 156,295 ) 11.43 3,531 Forfeited ( 11,332 ) 17.59 — Outstanding as of June 30, 2020 1,930,351 9.69 63,709 Exercisable as of June 30, 2020 1,829,010 $ 9.23 $ 61,194 As of June 30, 2020, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 4.5 years and 4.4 years, respectively. Restricted Stock Awards and Restricted Stock Units A summary of the Company’s restricted stock award and restricted stock unit activity is as follows: Number of Shares Weighted Average Grant Date Fair Value per Share Unvested shares as of December 31, 2019 581,943 $ 29.56 Granted 439,690 27.34 Vested ( 160,169 ) 29.08 Forfeited ( 49,321 ) 29.81 Unvested shares as of June 30, 2020 812,143 $ 28.44 10. Leases The Company leases certain office space and equipment from third parties and recognizes lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on its consolidated balance sheets. The Company also leases a portion of its building to third parties and records related rental income within general and administrative expense in the consolidated statements of operations. These leases have remaining initial lease terms of 2 years to 8 years, some of which give the tenants options to renew the leases for up to an additional 10 years, and options to terminate the leases after 3 years of the initial lease terms, with early termination fees required. The Company recorded rental income of $ 0.5 million and $ 1.1 million for the three and six months ended June 30, 2020. 11. Stockholders' Equity Common Stock and Preferred Stock As of June 30, 2020, the Company had 100,000,000 shares of common stock authorized and 35,246,292 shares of common stock outstanding. Holders of common stock are entitled to one vote on each matter properly submitted to the stockholders of the Company except those related to matters concerning possible outstanding preferred stock. At June 30, 2020, the Company had 10,000,000 shares of undesignated preferred stock authorized for future issuance and did not have any outstanding shares of preferred stock. The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of any senior classes of stock outstanding at the time. The Company is unable to pay dividends to stockholders as of June 30, 2020 due to restrictions in its credit agreements. 14 Share Repurchase Program In November 2019, the Company's board of directors approved a share repurchase program, pursuant to which the Company may repurchase up to $ 15.0 million of its outstanding shares over the twelve-month period following the approval. The Company repurchased 3,300 shares during the six months ended June 30, 2020. The Company did not repurchase any shares during the three months ended June 30, 2020 or the year ended December 31, 2019. 12. Segments The Company has two segments: subscription business and other business. The subscription business segment includes revenue and expenses related to monthly pet insurance subscriptions marketed directly to consumers, while the other business segment includes all other business that is not directly marketed to consumers. The chief operating decision maker reviews revenue, gross profit, and operating income (loss) to evaluate segment performance. Revenue, veterinary invoice expense, other cost of revenue, and sales and marketing expenses are generally directly attributed to each segment. Other operating expenses, such as technology and development expense and general and administrative expense, are allocated proportionately based on revenue in each segment. Interest and other expenses and income taxes are not allocated to the segments, nor included in the measure of segment profit or loss. The Company does not analyze discrete segment balance sheet information related to long-term assets. Operating income (loss) of the Company’s segments were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Subscription business: Revenue $ 92,453 $ 77,736 $ 181,937 $ 151,958 Veterinary invoice expense 66,030 57,161 131,218 110,799 Other cost of revenue 8,564 7,103 16,798 13,852 Gross profit 17,859 13,472 33,921 27,307 Technology and development 2,343 2,174 4,630 4,450 General and administrative 4,783 4,400 9,218 9,022 Sales and marketing 9,051 8,719 19,330 16,816 Subscription business operating income (loss) 1,682 ( 1,821 ) 743 ( 2,981 ) Other business: Revenue 25,467 14,463 47,284 27,219 Veterinary invoice expense 16,019 8,772 30,471 16,416 Other cost of revenue 7,440 4,450 13,015 8,365 Gross profit 2,008 1,241 3,798 2,438 Technology and development 646 404 1,204 797 General and administrative 1,317 819 2,398 1,616 Sales and marketing 191 38 354 168 Other business operating income (loss) ( 146 ) ( 20 ) ( 158 ) ( 143 ) Gain (loss) from investment in joint venture ( 27 ) ( 272 ) ( 86 ) ( 272 ) Total operating income (loss) $ 1,509 $ ( 2,113 ) $ 499 $ ( 3,396 ) 15 The following table presents the Company’s revenue by geographic region of the member (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 United States $ 99,056 $ 75,930 $ 191,580 $ 147,087 Canada 18,864 16,269 37,641 32,090 Total revenue $ 117,920 $ 92,199 $ 229,221 $ 179,177 Substantially all of the Company’s long-lived assets were located in the United States as of June 30, 2020 and December 31, 2019. 13. Related Parties In August 2018, the Company invested $ 0.3 million in a limited liability entity in exchange for a 17.5 % ownership interest. The investee is considered to be a related party, as the Company has the ability to exercise significant influence over the investee. In February 2020, the Company entered into a service agreement with the investee, under which the Company incurred $ 0.6 million and $ 1.1 million of expenses for consulting services provided by the investee during the three and six months ended June 30, 2020, respectively. 16