What changed in this filing

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Item 1. Financial Statements

2020-10-30 compared with 2020-08-05 · 76 added, 65 removed, 398 unchanged (26% of the section changed)

3 unchanged sentences

(in thousands, except share data)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

10 unchanged sentences

Gain (loss) from investment in joint venture 2 ( 59 ) ( 84 ) ( 331 )

Operating income (loss) 1,509 ( 2,113 ) 499 ( 3,396 )

Operating (loss) income ( 2,257 ) 843 ( 1,758 ) ( 2,553 )

Interest expense 324 340 1,044 974

Other income, net ( 49 ) ( 297 ) ( 533 ) ( 1,094 )

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:

(Loss) income before income taxes ( 2,532 ) 800 ( 2,269 ) ( 2,433 )

Income tax expense 26 18 69 12

Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 )

Net (loss) income per share:

Basic $ ( 0.07 ) $ 0.02 $ ( 0.07 ) $ ( 0.07 )

7 unchanged sentences

(in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net income (loss) $ 1,353 $ ( 1,931 ) $ 220 $ ( 3,227 )

Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 )

Other comprehensive income (loss):

2 unchanged sentences

Other comprehensive income (loss), net of taxes 199 ( 99 ) ( 140 ) 247

Comprehensive income (loss) $ 1,649 $ ( 1,793 ) $ ( 119 ) $ ( 2,881 )

Comprehensive (loss) income $ ( 2,359 ) $ 683 $ ( 2,478 ) $ ( 2,198 )

See accompanying notes to the consolidated financial statements.

2 unchanged sentences

(in thousands, except share data)

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Assets (unaudited)

25 unchanged sentences

$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;

36,511,705 and 35,578,540 shares issued and outstanding at September 30, 2020;

35,876,882 and 34,947,017 shares issued and outstanding at December 31, 2019 — —

6 unchanged sentences

Treasury stock, at cost:

933,165 shares at June 30, 2020 and 929,865 shares at December 31, 2019 ( 10,779 ) ( 10,701 )

933,165 shares at September 30, 2020 and 929,865 shares at December 31, 2019 ( 10,779 ) ( 10,701 )

Total stockholders’ equity 144,298 136,760

6 unchanged sentences

Shares Amount

Balance at April 1, 2020 35,084,505 $ — $ 234,642 $ ( 86,653 ) $ ( 385 ) $ ( 10,779 ) $ 136,825

Balance at July 1, 2020 35,246,292 $ — $ 238,077 $ ( 85,300 ) $ ( 89 ) $ ( 10,779 ) $ 141,909

Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 332,248 — 2,260 — — — 2,260

2 unchanged sentences

Net income (loss) — — — ( 2,558 ) — — ( 2,558 )

Balance at June 30, 2020 35,246,292 $ — $ 238,077 $ ( 85,300 ) $ ( 89 ) $ ( 10,779 ) $ 141,909

Balance at September 30, 2020 35,578,540 $ — $ 242,825 $ ( 87,858 ) $ 110 $ ( 10,779 ) $ 144,298

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

Balance at July 1, 2019 34,782,324 $ — $ 229,069 $ ( 86,938 ) $ ( 407 ) $ ( 10,701 ) $ 131,023

Exercise of warrants, net — — — — — — —

3 unchanged sentences

Net income (loss) — — — 782 — — 782

Balance at June 30, 2019 34,782,324 $ — $ 229,069 $ ( 86,938 ) $ ( 407 ) $ ( 10,701 ) $ 131,023

Balance at September 30, 2019 34,935,822 $ — $ 230,209 $ ( 86,156 ) $ ( 506 ) $ ( 10,701 ) $ 132,846

See accompanying notes to the consolidated financial statements.

10 unchanged sentences

Net income (loss) — — — ( 2,338 ) — — ( 2,338 )

Balance at June 30, 2020 35,246,292 $ — $ 238,077 $ ( 85,300 ) $ ( 89 ) $ ( 10,779 ) $ 141,909

Balance at September 30, 2020 35,578,540 $ — $ 242,825 $ ( 87,858 ) $ 110 $ ( 10,779 ) $ 144,298

Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity

6 unchanged sentences

Net income (loss) — — — ( 2,445 ) — — ( 2,445 )

Balance at June 30, 2019 34,782,324 $ — $ 229,069 $ ( 86,938 ) $ ( 407 ) $ ( 10,701 ) $ 131,023

Balance at September 30, 2019 34,935,822 $ — $ 230,209 $ ( 86,156 ) $ ( 506 ) $ ( 10,701 ) $ 132,846

See accompanying notes to the consolidated financial statements.

2 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities

Net income (loss) $ 220 $ ( 3,227 )

Adjustments to reconcile net income (loss) to cash provided by operating activities:

Net loss $ ( 2,338 ) $ ( 2,445 )

Adjustments to reconcile net loss to cash provided by operating activities:

Depreciation and amortization 4,770 4,358

42 unchanged sentences

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.

Operating results for the three and nine months ended September 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

12 unchanged sentences

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,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Basic earnings per share:

Net income (loss) $ 1,353 $ ( 1,931 ) $ 220 $ ( 3,227 )

Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 )

Shares used in computation:

2 unchanged sentences

Diluted earnings per share:

Net income (loss) $ 1,353 $ ( 1,931 ) $ 220 $ ( 3,227 )

Net (loss) income $ ( 2,558 ) $ 782 $ ( 2,338 ) $ ( 2,445 )

Shares used in computation:

5 unchanged sentences

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,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

3 unchanged sentences

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):

As of June 30, 2020

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 September 30, 2020 and December 31, 2019 (in thousands):

As of September 30, 2020

Long-term investments:

18 unchanged sentences

Maturities of debt securities classified as available-for-sale were as follows (in thousands):

As of June 30, 2020

As of September 30, 2020

Available-for-sale:

12 unchanged sentences

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 outstanding loan balance under the line of credit was $ 2.5 million as of September 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.

The Company provided $ 1.0 million of these services for both of the nine months ended September 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.

As of September 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.

2 unchanged sentences

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

As of September 30, 2020

Fair Value Level 1 Level 2 Level 3

22 unchanged sentences

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.

Estimated fair value was $ 7.6 million as of September 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's other long-term assets balance included notes receivable of $ 5.9 million as of September 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.

There was no significant activity in Level 3 of the hierarchy during the nine months ended September 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.

Based upon the terms of the debt, the carrying amount of long-term debt approximated fair value at September 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.

There were no transfers between levels for the nine months ended September 30, 2020 and the year ended December 31, 2019.

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).

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 September 30, 2020).

The credit agreement includes other ancillary services and letters of credit of up to $ 4.5 million.

1 unchanged sentence

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.

As of September 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.

As of September 30, 2020, available borrowing capacity on the line of credit was $ 19.9 million, with an outstanding balance of $ 0.2 million for ancillary services and letters of credit, and borrowings under the facility of $ 30.0 million, recorded net of financing fees of $ 0.1 million.

Commitments and Contingencies

15 unchanged sentences

Summarized below are the changes in the total liability for the Company's subscription business segment (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Subscription 2020 2019

10 unchanged sentences

Reserve at end of period $ 19,051 $ 16,041

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.

The Company's reserve for the subscription business segment increased from $ 15.5 million at December 31, 2019 to $ 19.1 million at September 30, 2020.

This change was comprised of $ 203.1 million in expense recorded during the period less $ 198.7 million in payments of veterinary invoices.

The $ 203.1 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.

For the nine months ended September 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,

Nine Months Ended September 30,

Other Business 2020 2019

10 unchanged sentences

Reserve at end of period $ 9,788 $ 3,258

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.

The Company’s reserve for the other business segment increased from $ 5.7 million at December 31, 2019 to $ 9.8 million at September 30, 2020.

This change was comprised of $ 49.9 million in expense recorded during the period less $ 45.7 million in payments of veterinary invoices.

The $ 49.9 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.

For the nine months ended September 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

Subscription As of September 30, 2020

Year of Occurrence

2018 and prior $ 769

Other Business As of June 30, 2020

Other Business As of September 30, 2020

Year of Occurrence

3 unchanged sentences

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,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

7 unchanged sentences

Total stock-based compensation $ 2,488 $ 1,893 $ 6,488 $ 5,232

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.

As of September 30, 2020, the Company had 66,956 unvested stock options and 765,825 unvested restricted stock awards and restricted stock units that are expected to vest.

Stock-based compensation expenses of $ 0.4 million related to unvested stock options and $ 20.2 million related to unvested restricted stock awards and restricted stock units are expected to be recognized over a weighted average period of approximately 0.6 years and 2.9 years, respectively.

6 unchanged sentences

Forfeited ( 11,945 ) 17.40 —

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.

Outstanding as of September 30, 2020 1,647,052 9.84 113,740

Exercisable as of September 30, 2020 1,580,096 9.49 109,670

As of September 30, 2020, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 4.3 years and 4.2 years, respectively.

Restricted Stock Awards and Restricted Stock Units

6 unchanged sentences

Forfeited ( 60,176 ) 30.43

Unvested shares as of June 30, 2020 812,143 $ 28.44

Unvested shares as of September 30, 2020 765,825 28.91

The Company leases certain office space and equipment from third parties and recognizes lease expense on a straight-line basis over the lease term.

2 unchanged sentences

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.

The Company recorded rental income of $ 0.4 million and $ 1.5 million for the three and nine months ended September 30, 2020.

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.

As of September 30, 2020, the Company had 100,000,000 shares of common stock authorized and 35,578,540 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.

At September 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.

The Company is unable to pay dividends to stockholders as of September 30, 2020 due to restrictions in its credit agreements.

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.

The Company repurchased 3,300 shares during the nine months ended September 30, 2020.

The Company did not repurchase any shares during the three months ended September 30, 2020 or the year ended December 31, 2019.

The Company has two segments:

7 unchanged sentences

Operating income (loss) of the Company’s segments were as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

20 unchanged sentences

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,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

2 unchanged sentences

Total revenue $ 130,120 $ 99,276 $ 359,341 $ 278,453

Substantially all of the Company’s long-lived assets were located in the United States as of June 30, 2020 and December 31, 2019.

Substantially all of the Company’s long-lived assets were located in the United States as of September 30, 2020 and December 31, 2019.

Related Parties

1 unchanged sentence

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.

In February 2020, the Company entered into a service agreement with the investee, under which the Company incurred $ 0.6 million and $ 1.7 million of expenses for consulting services provided by the investee during the three and nine months ended September 30, 2020, respectively.

Subsequent Events

On October 26, 2020, the Company entered into a Strategic Alliance Agreement, Shareholder Agreement, and a Stock Purchase Agreement with Aflac Incorporated (“Aflac”).

The Strategic Alliance Agreement sets forth the structure for a distribution alliance between the parties (the “Alliance”).

This includes responsibilities of Aflac relating to brand, access and distribution, responsibilities of the Company relating to marketing, product development and middle and back office functions, the intended go-to-market approach, the economic assumptions, and the intending timing.

The parties have agreed to negotiate in good faith and to act reasonably with each other in order to agree on such terms as are necessary to fully implement the Alliance.

To drive long term alignment, Aflac committed to invest $ 200.0 million cash in exchange for 3,636,364 newly issued shares of the Company's common stock at a price of $ 55 per share, subject to a minimum holding period of three years.

The initial investment of $ 60.0 million closed on October 26, 2020.

The remaining $ 140.0 million is subject to regulatory approvals and is expected to close by the end of 2020.

On October 30, 2020, the Company completed an acquisition of an unaffiliated software company and also completed an asset acquisition for a total purchase price of approximately $ 48.2 million.

The acquired technology in both transactions focuses on the pet space and, along with the acquired personnel, is intended to enable the Company to improve its back-end software to help facilitate growth opportunities, additional products and geographies, as well as enhance its mobile platform.

The initial accounting of these acquisitions has not been completed at the time this Quarterly Report on Form 10-Q is issued.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements