What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 179 added, 93 removed, 363 unchanged (43% of the section changed)

5 unchanged sentences

subscription business and other business.

Our subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar margin profiles.

Our subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar target margin profiles.

This segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer products.

We operate our subscription business segment similar to other subscription-based businesses, with a focus on achieving a target margin prior to our new pet acquisition expense and acquiring as many pets as possible at our targeted average estimated internal rate of return.

We operate our subscription business segment similar to other subscription-based businesses, with a focus on achieving a target margin prior to our new pet acquisition expense and aiming to acquire as many pets as possible at our targeted average estimated internal rate of return.

We generate revenue in our other business segment primarily by underwriting policies on behalf of third parties that do not carry reference to the Trupanion brand.

We do not undertake the marketing efforts for these policies and have a business-to-business relationship with these third parties.

Our other business segment also includes revenue from other products and software solutions that have a different margin profile from our subscription business.

Our other business segment also includes other products and software solutions that have a different margin profile from our subscription business.

We generate leads for our subscription business segment from a diverse set of member acquisition channels, which we then convert into members through our contact center, website and other direct-to-consumer activities.

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Key Operating Metrics

The following table sets forth total pets enrolled and key operating metrics for our subscription business for each of the last eight fiscal quarters.

The following tables set forth total pets enrolled and key operating metrics for our subscription business for the six months ended June 30, 2023 and 2022 and for each of the last eight fiscal quarters.

Six Months Ended June 30,

Total Business:

Total pets enrolled (at period end) 1,679,659 1,348,145

Subscription Business:

Total subscription pets enrolled (at period end) 943,958 770,318

Monthly average revenue per pet $ 64.00 $ 64.24

Lifetime value of a pet, including fixed expenses $ 470 $ 713

Average pet acquisition cost (PAC) $ 241 $ 305

Average monthly retention 98.61 % 98.74 %

Three Months Ended

30, 2023 Mar.

31, 2023 Dec.

4 unchanged sentences

31, 2021 Sept.

30, 2021 Jun.

Total Business:

6 unchanged sentences

Average monthly retention 98.61 % 98.65 % 98.69 % 98.71 % 98.74 % 98.75 % 98.74 % 98.72 %

Total pets enrolled and total subscription pets enrolled include pet enrollments in European markets, where policies are currently underwritten by third parties and Trupanion is acting as an insurance broker.

Per pet metrics, however, exclude these European policies, as their revenue is currently earned from commissions, as opposed to the gross underwriting premiums earned by the remainder of our subscription business.

Total pets enrolled.

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Total subscription pet months in a period represents the sum of all subscription pets enrolled for each month during the period.

We exclude revenue from our managing general agent product lines because their revenue is representative of commission earnings versus underwriting premiums.

We monitor monthly average revenue per pet because it is an indicator of the per pet unit economics of our subscription business.

6 unchanged sentences

When evaluating the amount of pet acquisition expenses we may want to incur to attract new pet enrollments, we refer to the lifetime value of a pet, including fixed expenses, as well as our estimated internal rate of return calculation for an average pet, which also includes an estimated surplus capital charge, to inform the amount of acquisition spend in relation to the estimated payback period.

* Total pets enrolled and total subscription pets enrolled metrics include managing general agent pets.

† Excluding activity relating to managing general agent policies.

Average pet acquisition cost.

Average pet acquisition cost (PAC) is calculated as net acquisition cost divided by the total number of new subscription pets enrolled in that period.

Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as new pet acquisition expense, excluding stock-based compensation expense, other business segment expense and managing general agent expense, offset by sign-up fee revenue.

We exclude stock-based compensation expense because the amount varies from period to period based on number of awards issued and market-based valuation inputs.

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We exclude other business segment pet acquisition expense because that does not relate to subscription enrollments.

We exclude managing general agent pet acquisition expense because the revenue of these products is representative of commission earnings versus underwriting premiums.

We monitor average pet acquisition cost to evaluate the efficiency in acquiring new members and measure effectiveness based on our targeted return on investment.

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Average monthly retention is measured as the monthly retention rate of enrolled subscription pets for each applicable period averaged over the 12 months prior to the period end date.

As such, our average monthly retention rate as of March 31, 2023 is an average of each month’s retention from April 1, 2022 through March 31, 2023.

As such, our average monthly retention rate as of June 30, 2023 is an average of each month’s retention from July 1, 2022 through June 30, 2023.

We calculate monthly retention as the number of pets that remain after subtracting all pets that cancel during a month, including pets that enroll and cancel within that month, divided by the total pets enrolled at the beginning of that month.

We monitor average monthly retention because it provides a measure of member satisfaction and allows us to calculate the implied average subscriber life in months.

† Excluding activity relating to managing general agent policies.

Non-GAAP Financial Measures

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We define non-GAAP fixed expenses as the total of technology and development expense and general and administrative expense, less stock-based compensation expense, business combination transaction cost, and development expenses related to exploring and developing new products and offerings that are in the pre-revenue stage.

The following table presents the reconciliation of our non-GAAP financial measures from corresponding GAAP measures for the periods presented (in thousands):

The following tables present the reconciliation of our non-GAAP financial measures from corresponding GAAP measures for the periods presented (in thousands):

Six Months Ended June 30,

Veterinary invoice expense $ 400,875 $ 302,542

Stock-based compensation expense (1)

(1,695) (2,195)

Other business cost of paying veterinary invoices (137,592) (94,714)

Subscription cost of paying veterinary invoices (non-GAAP) $ 261,588 $ 205,633

% of subscription revenue 77.3 % 72.0 %

Other cost of revenue $ 70,301 $ 64,391

Stock-based compensation expense (1)

(876) (1,385)

Other business variable expenses (35,973) (34,516)

Subscription variable expenses (non-GAAP) $ 33,452 $ 28,490

% of subscription revenue 9.9 % 10.0 %

Technology and development expense $ 10,132 $ 11,625

General and administrative expense 34,153 18,593

Stock-based compensation expense (1)

(12,318) (7,311)

Non-recurring transaction or restructuring expenses (2)

Development expenses (1,823) (3,270)

Fixed expenses (non-GAAP) $ 25,977 $ 19,637

% of total revenue 4.9 % 4.6 %

New pet acquisition expense $ 42,411 $ 44,609

Stock-based compensation expense (1)

(3,754) (4,929)

Other business pet acquisition expense (113) (295)

Subscription acquisition cost (non-GAAP) $ 38,544 $ 39,385

% of subscription revenue 11.4 % 13.8 %

(1) Trupanion employees may elect to take restricted stock units in lieu of cash payment for their bonuses.

We account for such expense as stock-based compensation in accordance with GAAP, but we do not include it in any non-GAAP adjustments.

Stock-based compensation associated with bonuses was approximately $0.3 million for the six months ended June 30, 2023.

(2) Consists of business acquisition transaction expenses, severance and legal costs due to certain executive departures, and a $3.8 million non-recurring settlement of accounts receivable in the first quarter of 2023 related to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

Three Months Ended

30, 2023 Mar.

31, 2023 Dec.

4 unchanged sentences

31, 2021 Sept.

30, 2021 Jun.

Veterinary invoice expense $ 206,738 $ 194,137 $ 176,083 $ 171,112 $ 157,616 $ 144,926 $ 132,852 $ 125,058

27 unchanged sentences

We account for such expense as stock-based compensation in accordance with GAAP, but we do not include it in any non-GAAP adjustments.

Stock-based compensation associated with bonuses was approximately $0.2 million for the three months ended March 31, 2023.

(2) Consists of business acquisition transaction expenses, severance cost due to certain officers' departures, and a $3.8 million non-recurring settlement of accounts receivable related to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

Stock-based compensation associated with bonuses was approximately $0.1 million for the three months ended June 30, 2023.

(2) Consists of business acquisition transaction expenses, severance and legal costs due to certain departures, and a $3.8 million non-recurring settlement of accounts receivable in the first quarter of 2023 related to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

When determining our PAC, we calculate net acquisition cost for a more comparable metric across periods.

Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as GAAP new pet acquisition expense, excluding stock-based compensation expense, other business segment expense, and managing general agent expense, offset by sign-up fee revenue.

Net acquisition cost, a non-GAAP financial measure, is calculated in a reporting period as GAAP new pet acquisition expense, excluding stock-based compensation expense, other business segment expense, and pet acquisition expense for commission-based policies, offset by sign-up fee revenue.

We exclude stock-based compensation expense because the amount varies from period to period based on the number of awards issued and market-based valuation inputs.

We exclude other business segment pet acquisition expense because it does not relate to subscription enrollments.

We exclude managing general agent pet acquisition expense because the revenue of these products is representative of commission earnings versus underwriting premiums.

We exclude pet acquisition expense for commission-based policies because the revenue of these products is earned from commissions from a third party underwriter, as opposed to the gross underwriting premiums earned by the remainder of our subscription business.

We offset sign-up fee revenue because it is a one-time charge to new members collected at the time of enrollment used to partially offset initial setup costs, which are included in new pet acquisition expenses.

The following table reconciles GAAP new pet acquisition expense to non-GAAP net acquisition cost (in thousands) for each of the last eight fiscal quarters:

The following tables reconcile GAAP new pet acquisition expense to non-GAAP net acquisition cost (in thousands) for the six months ended June 30, 2023 and 2022 and for each of the last eight fiscal quarters:

Six Months Ended June 30,

New pet acquisition expense $ 42,411 $ 44,609

Net of sign-up fee revenue (2,408) (2,454)

Stock-based compensation expense (3,754) (4,929)

Other business pet acquisition expense (113) (295)

Pet acquisition expense for commission-based policies (1,815) —

Net acquisition cost $ 34,321 $ 36,931

Three Months Ended

30, 2023 Mar.

31, 2023 Dec.

4 unchanged sentences

31, 2021 Sept.

30, 2021 Jun.

New pet acquisition expense $ 20,769 $ 21,642 $ 22,457 $ 22,434 $ 22,982 $ 21,627 $ 19,845 $ 19,708

2 unchanged sentences

Other business pet acquisition expense (62) (51) (65) (181) (186) (109) (76) (134)

Pet acquisition expense for managing general agent policies (927) (443) — — — — — —

Pet acquisition expense for commission-based policies (888) (927) (443) — — — — —

Net acquisition cost $ 16,908 $ 17,413 $ 18,679 $ 18,806 $ 18,943 $ 17,988 $ 16,471 $ 16,194

2 unchanged sentences

subscription business and other business.

Our subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar margin profiles.

This segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer products.

Our other business segment includes revenue from other product offerings that generally have a business-to-business relationship and different margin profiles than our subscription business segment, including revenue from writing policies on behalf of third parties and revenue from other products and software solutions.

Our subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar target margin profiles.

This segment generates revenue primarily from subscription fees related to our direct-to-consumer products.

Our other business segment generates revenue primarily by underwriting policies on behalf of third parties.

We do not undertake marketing efforts for these policies and have a business-to-business relationship with these third parties.

The other business segment also includes other products and software solutions that have different margin profiles than our subscription business segment.

We generate revenue in our subscription business segment primarily from subscription fees for our pet medical insurance.

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Membership may be canceled at any time without penalty, and we issue a refund for the unused portion of the canceled membership.

We also generate a portion of our subscription business segment revenue through commissions earned in our European markets, where policies are currently underwritten by third parties and Trupanion is acting as an insurance broker.

We generate revenue in our other business segment primarily from writing policies on behalf of third parties where we do not undertake the direct consumer marketing.

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Veterinary invoice expense includes our costs to review veterinary invoices, administer the payments, and provide member services, and other operating expenses directly or indirectly related to this process.

We also accrue for veterinary invoices that have been incurred but not yet received.

We also accrue for veterinary invoices that have been incurred but not yet received and for the estimated internal costs of processing those invoices.

This also includes amounts paid by unaffiliated general agents, and an estimate of amounts incurred and not yet paid for our other business segment.

Other cost of revenue

Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, Territory Partner renewal fees, credit card transaction fees and premium tax expenses.

Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, Territory Partner renewal fees, payment processing fees and premium tax expenses.

Other cost of revenue for the other business segment includes the commissions we pay to unaffiliated general agents, costs to administer the programs in the other business segment and premium taxes on the sales in this segment.

9 unchanged sentences

New pet acquisition expense

New pet acquisition expenses primarily consist of costs, including employee compensation, to educate veterinarians and consumers about the benefits of Trupanion, to generate leads and to convert leads into enrolled pets, as well as print, online and promotional advertising costs.

New pet acquisition expenses primarily consist of costs, including personnel costs, to educate veterinarians and consumers about the benefits of Trupanion, to generate leads and to convert leads into enrolled pets, as well as print, online and promotional advertising costs.

Depreciation and amortization

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Investment in pet acquisition.

We have made and plan to continue to make significant investments to grow our member base.

We have made and may continue to make significant investments to grow our member base.

Our net acquisition cost and the number of new members we enroll depends on a number of factors, including the amount we elect to invest in pet acquisition activities in any particular period in the aggregate and by channel, the frequency of existing members adding a pet or referring their friends or family, the effectiveness of our sales execution and marketing initiatives, changes in costs of media, the mix of our pet acquisition expenditures and the competitive environment.

Our average pet acquisition cost has in the past significantly varied, and in the future may significantly vary, from period to period based upon specific marketing initiatives and estimated rates of return on pet acquisition spend.

We also regularly test new member acquisition channels and marketing initiatives, which may be more expensive than our traditional marketing channels and may increase our average acquisition costs.

We also may regularly test new member acquisition channels and marketing initiatives, which may be more expensive than our traditional marketing channels and may increase our average acquisition costs.

We continually assess our pet acquisition activities by monitoring the estimated return on PAC spend both on a detailed level by acquisition channel and in the aggregate.

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The relative mix of our business by geography, pet age and breed and other factors impacts the monthly average revenue per pet we receive.

For example, prices from our plans could vary depending on the relative cost of veterinary care in different countries or areas.

For example, prices from our plans could vary depending on the relative cost of veterinary care in different countries or areas or whether the pet is a dog or a cat.

As our mix of business between geographies changes, our metrics, such as our monthly average revenue per pet, and our exposure to foreign exchange fluctuations will be impacted.

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Other business segment.

Our other business segment primarily includes other product offerings that generally have a business-to-business relationship.

These products have been, and we expect will be in the future, materially different from our subscription business segment.

Our other business segment primarily includes other product offerings that have been, and we expect will be in the future, materially different from those in our subscription business segment.

We do not undertake marketing efforts for and are not the primary interface with the customers of the third parties for whom we write policies.

Our relationships in our other business segment are generally subject to termination provisions and are non-exclusive.

Accordingly, we cannot control the volume of business, even if a contract is not terminated.

Accordingly, we have limited influence on the volume of business.

Loss of an entire program via contract termination could result in the associated policies and revenue being lost over a period of 12 to 18 months, which could have a material impact on our results of operations.

We may enter into additional relationships in the future to the extent we believe they will be profitable to us, which could also impact our operating results.

In some cases, we have structured exclusive relationships, but those relationship have been and may continue to be subject to limitations on the number of enrolled pets as to which we will write policies for the third party.

We may enter into additional relationships in the future to the extent we believe they will be beneficial to us, which could also impact our operating results.

Results of Operations

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The period-to-period comparison of financial results is not necessarily indicative of future results.

Three Months Ended March 31,

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

2023 2022 2023 2022

(in thousands)

9 unchanged sentences

Technology and development (1)

5,232 6,396 10,132 11,625

General and administrative (1)

13,136 9,227 34,153 18,593

New pet acquisition expense (1)

10 unchanged sentences

(1) Includes stock-based compensation expense as follows:

Three Months Ended March 31,

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

2023 2022 2023 2022

(in thousands)

4 unchanged sentences

Total stock-based compensation expense $ 6,637 $ 8,634 $ 18,968 $ 16,183

Three Months Ended March 31,

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

2023 2022 2023 2022

(as a percentage of revenue)

15 unchanged sentences

Stock-based compensation expense:

Three Months Ended March 31,

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

2023 2022 2023 2022

(as a percentage of revenue)

4 unchanged sentences

Total stock-based compensation expense 2 % 4 % 4 % 4 %

Three Months Ended March 31,

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

2023 2022 2023 2022

(as a percentage of subscription revenue)

1 unchanged sentence

Subscription business cost of revenue 87 84 88 83

Comparison of the Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31, % Change

Comparison of the Three and Six Months Ended June 30, 2023 and 2022

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

2023 2022 2023 2022

(in thousands, except percentages, pet and per pet data)

10 unchanged sentences

Average monthly retention 98.61 % 98.74 % 98.61 % 98.74 %

Three months ended March 31, 2023 compared to three months ended March 31, 2022.

Total revenue increased by $50.3 million, to $256.3 million for the three months ended March 31, 2023, or 24%.

Revenue from our subscription business segment increased by $25.4 million to $165.2 million for the three months ended March 31, 2023, or 18%.

This increase was primarily due to a 19% increase in total subscription pets enrolled, excluding pets acquired through business combinations, between compared periods.

Revenue from our other business segment increased by $25.0 million to $91.1 million, or 38%, for the three months ended March 31, 2023, primarily due to a 34% increase in enrolled pets in this segment.

Three months ended June 30, 2023 compared to three months ended June 30, 2022.

Total revenue increased by $51.2 million, or 23%, to $270.6 million for the three months ended June 30, 2023.

Revenue from our subscription business segment increased by $27.4 million, or 19%, to $173.3 million for the three months ended June 30, 2023.

This increase was primarily due to an 18% increase in policies underwritten by Trupanion at the end of the respective periods, which excludes a 5% increase in policies that are currently commission-based and underwritten by third parties.

Revenue from our other business segment increased by $23.7 million to $97.3 million, or 32%, for the three months ended June 30, 2023, primarily due to a 27% increase in enrolled pets in this segment.

Six months ended June 30, 2023 compared to six months ended June 30, 2022.

Total revenue increased by $101.5 million, or 24%, to $526.9 million for the six months ended June 30, 2023.

Revenue from our subscription business segment increased by $52.8 million, or 18%, to $338.5 million for the six months ended June 30, 2023.

Revenue from our other business segment increased by $48.7 million to $188.4 million, or 35%, for the six months ended June 30, 2023, primarily due to a 27% increase in enrolled pets in this segment.

Cost of Revenue

Three Months Ended March 31, % Change

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

2023 2022 2023 2022

(in thousands, except percentages, pet and per pet data)

20 unchanged sentences

Monthly average revenue per pet $ 64.41 $ 64.26 — $ 64.00 $ 64.24 —

Three months ended March 31, 2023 compared to three months ended March 31, 2022.

Cost of revenue for our subscription business segment was $146.1 million, or 88% of revenue, for the three months ended March 31, 2023, compared to $115.3 million, or 82% of revenue, for the three months ended March 31, 2022.

This increase of 27% in subscription cost of revenue was primarily the result of a 19% increase in subscription pets enrolled, excluding pets acquired as part of business combinations, as well as rising veterinary invoice expenses in the current inflationary environment.

Three months ended June 30, 2023 compared to three months ended June 30, 2022.

Cost of revenue for our subscription business segment was $151.5 million, or 87% of revenue, for the three months ended June 30, 2023, compared to $122.4 million, or 84% of revenue, for the three months ended June 30, 2022.

This increase of 24% in subscription cost of revenue was primarily due to an 18% increase in policies underwritten by Trupanion at the end of the respective periods, which excludes a 5% increase in policies that are currently commission-based and underwritten by third parties.

It was also attributable to a 6% increase in veterinary invoice expense per pet, including impacts of rising veterinary invoice expenses in the current inflationary environment.

Additionally, as part of our long-term strategy to install more software and pay veterinary hospitals directly, the ease of submitting claims via our patented software has led to increased claims received and short-term pressure on our margin in the current period.

Cost of revenue for our other business segment increased by $23.1 million, or 38%, to $83.9 million for the three months ended March 31, 2023, primarily due to the increase in enrolled pets in this segment.

Cost of revenue for our other business segment increased by $21.3 million, or 31%, to $89.7 million for the three months ended June 30, 2023, primarily due to the increase in enrolled pets in this segment.

Six months ended June 30, 2023 compared to six months ended June 30, 2022.

Cost of revenue for our subscription business segment was $297.6 million, or 88% of revenue, for the six months ended June 30, 2023, compared to $237.7 million, or 83% of revenue, for the six months ended June 30, 2022.

This increase of 25% in subscription cost of revenue was primarily due to an 18% increase in policies underwritten by Trupanion at the end of the respective periods, which excludes a 5% increase in policies that are currently commission-based and underwritten by third parties.

It was also attributable to a 7% increase in veterinary invoice expense per pet including rising veterinary invoice expenses in the current inflationary environment.

Cost of revenue for our other business segment increased by $44.3 million, or 34%, to $173.6 million for the six months ended June 30, 2023, primarily due to the increase in enrolled pets in this segment.

Technology and Development Expenses

Three Months Ended March 31, % Change

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

2023 2022 2023 2022

(in thousands, except percentages)

1 unchanged sentence

Percentage of total revenue 2 % 3 % 2 % 3 %

Three months ended March 31, 2023 compared to three months ended March 31, 2022.

Technology and development expenses decreased by $0.3 million, or 6%, to $4.9 million for the three months ended March 31, 2023, driven primarily by a decrease of $0.8 million in development expense as several initiatives that were pre-revenue in the prior year moved out of development, partially offset by $0.6 million of higher compensation expenses primarily due to increased headcount.

Three months ended June 30, 2023 compared to three months ended June 30, 2022.

Technology and development expenses decreased by $1.2 million, or 18%, to $5.2 million for the three months ended June 30, 2023, primarily due to a decrease of $1.1 million in development expense as several initiatives that were pre-revenue in the prior year moved out of development.

Technology and development expenses decreased from 3% to 2% of total revenue year over year.

Six months ended June 30, 2023 compared to six months ended June 30, 2022.

Technology and development expenses decreased by $1.5 million, or 13%, to $10.1 million for the six months ended June 30, 2023, driven primarily by a decrease of $1.5 million in development expense as several initiatives that were pre-revenue in the prior year moved out of development.

Technology and development expenses decreased from 3% to 2% of total revenue year over year.

General and Administrative Expenses

Three Months Ended March 31, % Change

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

2023 2022 2023 2022

(in thousands, except percentages)

1 unchanged sentence

Percentage of total revenue 5 % 4 % 6 % 4 %

Three months ended March 31, 2023 compared to three months ended March 31, 2022.

General and administrative expenses increased by $11.7 million, or 124%, to $21.0 million for the three months ended March 31, 2023.

The increase in expense was primarily due to a $5.8 million increase in stock-based compensation, of which $4.8 million related to charges after certain executive officers’ departures.

Additionally, there was a $3.8 million increase related to a negotiated settlement of uncollected premiums in connection with the transition of underwriting a third-party business to other insurers, a $0.9 million increase in general compensation expense, and a $0.4 million increase in professional services.

General and administrative expenses increased from 5% to 8% of total revenue year o ver year primarily due to these non-recurring charges in the current period.

Three months ended June 30, 2023 compared to three months ended June 30, 2022.

General and administrative expenses increased by $3.9 million, or 42%, to $13.1 million for the three months ended June 30, 2023.

The increase was primarily due to a $2.1 million increase in compensation and employee-related expenses and a $0.9 million increase in professional services and legal expenses.

General and administrative expenses increased from 4% to 5% of total revenue year o ver year, partially due to certain non-recurring expenses.

Six months ended June 30, 2023 compared to six months ended June 30, 2022.

General and administrative expenses increased by $15.6 million, or 84%, to $34.2 million for the six months ended June 30, 2023.

The increase in expense was primarily due to a $5.7 million increase in stock-based compensation, of which $4.8 million related to charges after certain executive departures, and a $3.8 million increase related to the negotiated settlement of uncollected premiums in connection with the transition of underwriting a third-party business to other insurers.

Additionally, there was a $3.3 million increase in general compensation and other employee-related expenses and a $1.0 million increase in professional services.

General and administrative expenses increased from 4% to 6% of total revenue year o ver year, partially due to certain non-recurring expenses.

New Pet Acquisition Expense

Three Months Ended March 31, % Change

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

2023 2022 2023 2022

(in thousands, except percentages, pet and per pet data)

4 unchanged sentences

Average pet acquisition cost (PAC) $ 236 $ 309 (24) $ 241 $ 305 (21)

Three months ended March 31, 2023 compared to three months ended March 31, 2022.

New pet acquisition expenses were $21.6 million, for the three months ended March 31, 2023 which is consistent with the same period in the prior year.

Total subscription pets enrolled increased 19%, excluding pets acquired through business combinations.

New pet acquisition expenses as a percentage of revenue was 8% for the three months ended March 31, 2023, compared to 10% in the same period last year, as we were able to stay disciplined within our targeted internal rate of return range for our discretionary pet acquisition spend, while still maintaining a relatively high level of pet enrollment growth.

Three months ended June 30, 2023 compared to three months ended June 30, 2022.

New pet acquisition expenses decreased by $2.2 million, or 10%, to $20.8 million for the three months ended June 30, 2023 driven primarily by a $1.5 million decrease in expenses to generate leads, as we focused on growth in our more efficient channels, and a $0.9 million decrease in stock-based compensation expenses.

New pet acquisition expenses as a percentage of revenue was 8% for the three months ended June 30, 2023 compared to 10% in the same period last year, as we were able to stay disciplined with our discretionary pet acquisition spend while still maintaining a relatively high level of pet enrollment growth.

Six months ended June 30, 2023 compared to six months ended June 30, 2022.

New pet acquisition expenses decreased by $2.2 million, or 5%, to $42.4 million for the six months ended June 30, 2023 driven primarily by a decrease in expenses to generate leads, as we focused on growth in our more efficient channels.

New pet acquisition expenses as a percentage of revenue was 8% for the six months ended June 30, 2023 compared to 10% in the same period last year, as we were able to stay disciplined with our discretionary pet acquisition spend, while still maintaining a relatively high level of pet enrollment growth.

Depreciation and Amortization

Three Months Ended March 31, % Change

Three Months Ended June 30, % Change Six Months Ended June 30, % Change

2023 2022 2023 2022

(in thousands, except percentages)

1 unchanged sentence

Percentage of total revenue 1 % 1 % 1 % 1 %

Three months ended March 31, 2023 compared to three months ended March 31, 2022.

Depreciation and amortization expense increased by $0.5 million, or 18%, to $3.2 million for the three months ended March 31, 2023.

Three months ended June 30, 2023 compared to three months ended June 30, 2022.

Depreciation and amortization expense increased by $0.5 million, or 20%, to $3.3 million for the three months ended June 30, 2023 primarily driven by the amortization of acquired intangibles

Six months ended June 30, 2023 compared to six months ended June 30, 2022.

Depreciation and amortization expense increased by $1.0 million, or 19%, to $6.5 million for the six months ended June 30, 2023 primarily driven by the amortization of acquired intangibles.

Stock-Based Compensation

Three months ended March 31, 2023 compared to three months ended March 31, 2022.

Stock-based compensation is

included in the cost and expense line items in the consolidated statements of operations, discussed above.

Stock-based compensation expense in total was $12.3 million for the three months ended March 31, 2023, up from $7.5 million in the prior year period.

The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants, calculated according to our equity incentive plan.

In addition, there was a $4.8 million increase in stock-based compensation in the period as a result of charges after certain executive officers’ departures.

Stock-based compensation is included in the cost and expense line items in the consolidated statements of operations, discussed above.

Three months ended June 30, 2023 compared to three months ended June 30, 2022.

Stock-based compensation expense in total was $6.6 million for the three months ended June 30, 2023, down from $8.6 million in the prior year period.

The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants.

Six months ended June 30, 2023 compared to six months ended June 30, 2022.

Stock-based compensation expense in total was $19.0 million for the six months ended June 30, 2023, up from $16.2 million in the prior year period.

The amount of stock-based compensation recognized largely reflects the timing and vesting of our annual performance grants.

In addition, there was a $4.8 million increase in stock-based compensation in the period as a result of charges after certain executive departures.

Liquidity and Capital Resources

The following table summarizes our cash flows for the periods indicated (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Net cash provided by (used in) operating activities $ (10,267) $ (6,720)

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Our primary requirements for liquidity are paying veterinary invoices, funding operations and capital requirements, investing in new member acquisition, investing in enhancements to our member experience, and servicing debt.

We have certain contractual obligations in the normal course of business, including obligations and commitments relating to our credit facility (the Credit Facility) with Piper Sandler Finance, LLC, acting as the administrative agent, non-cancellable vendor purchase agreements, as well as future payments of veterinary invoice claims.

Refer to Note 8, Reserve for Veterinary Invoices, included in Item 1 of Part I of this report, for further details on anticipated cash outflows.

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Additional financing may not be available to us on acceptable terms, or at all.

As of March 31, 2023, we had $244.6 million in cash, cash equivalents and short-term investments and $40.0 million available under our Credit Facility.

The Credit Facility is secured by substantially all of our assets and those of our subsidiaries.

In addition, most of the assets in our insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate.

As of March 31, 2023, total assets and liabilities held outside of our insurance entities were $227.9 million and $134.6 million, respectively, including $8.4 million of cash and cash equivalents that were segregated from other operating funds and held in trust for the payment of veterinary invoices on behalf of our insurance subsidiaries.

For further information, refer to "—Regulation".

As of June 30, 2023, the Company had $236.1 million in cash, cash equivalents and short-term investments.

The Company maintained $213.1 million of capital surplus at its insurance subsidiaries, which was $57.3 million in excess of the estimated risk-based capital requirement of $155.8 million.

The Company's ability to distribute any portion of this estimated $57.3 million excess, and the timing of any distribution, may be subject to regulatory limitations.

Outside of insurance entities, the Company held $25.4 million in cash, cash equivalents and short-term investments with an additional $40.0 million available under its Credit Facility.

In April 2021, our board of directors approved a share repurchase program, pursuant to which we may, between May 2021 and May 2026, repurchase outstanding shares of our common stock.

While our board of directors has approved the program, any repurchase activity is subject to quarterly assessment and board approval, based on various factors including available cash, stock price relative to our estimated intrinsic value, forecasted operating results, and available opportunities to otherwise deploy capital for business expansion.

We repurchased no shares under this program during the three months ended March 31, 2023.

While our board of directors has approved the program, any repurchase activity is subject to quarterly assessment and board approval, based on various factors including available cash, our stock price relative to our estimated intrinsic value, forecasted operating results, and available opportunities to deploy capital.

We repurchased no shares under this program during the six months ended June 30, 2023.

Operating Cash Flows

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Additionally, cash is used to support the growth of our business by reinvesting to acquire new pet enrollments, develop new product offerings and to fund projects that improve our members' experience.

Net cash used by operating activities was $6.9 million for the three months ended March 31, 2023, compared to $3.6 million for the three months ended March 31, 2022.

Net cash used by operating activities was $10.3 million for the six months ended June 30, 2023, compared to $6.7 million for the six months ended June 30, 2022.

The change was primarily driven by increased veterinary invoice expenses in the current inflationary environment as well as increased utilization of our claims software.

Investing Cash Flows

Net cash provided by investing activities was $33.9 million for the three months ended March 31, 2023, compared to $14.3 million net cash used by investing activities for the three months ended March 31, 2022.

Net cash provided by investing activities was $28.4 million for the six months ended June 30, 2023, compared to $25.1 million net cash used by investing activities for the six months ended June 30, 2022.

The change was primarily related to reinvestment of proceeds from matured short-term investments to cash equivalents, partially offset by an increase in capital expenditures primarily attributable to development of internal-use software focused on member experience improvements.

Financing Cash Flows

Net cash provided by financing activities was $33.8 million for the three months ended March 31, 2023, compared to $52.8 million for the three months ended March 31, 2022.

The change was primarily due to a decrease in net proceeds related to the credit facility.

Net cash provided by financing activities was $33.7 million for the six months ended June 30, 2023, compared to $46.8 million for the six months ended June 30, 2022.

The change was primarily due to a decrease in net proceeds related to the credit facility partially offset by a decrease in repurchases of common stock.

Long-Term Debt

Our Credit Facility provides us with up to $ 150.0 million of credit.

As of March 31, 2023, we issued term loans totaling $110.0 million under the Credit Facility.

As of June 30, 2023, we issued term loans totaling $110.0 million under the Credit Facility.

The Credit Facility is secured by substantially all of our assets and those of our subsidiaries.

Refer to Note 9, Debt, included in Item 1 of Part I of this report, for further details.

As of March 31, 2023, our insurance entities collectively held $117.9 million in short-term investments and $324.7 million in other current assets, including $75.6 million held in cash and cash equivalents to be used for operating expenses of our insurance subsidiaries.

As of June 30, 2023, our insurance entities collectively held $117.6 million in short-term investments and $359.2 million in other current assets, including $93.1 million held in cash and cash equivalents to be used for operating expenses of our insurance subsidiaries.

Most of the assets in our insurance entities are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate.

We expect our required capital held within our insurance entities to grow as our business grows.

American Pet Insurance Company (APIC)

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As our business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly.

As of December 31, 2022, APIC was required to maintain at least $142.4 million of risk-based capital to avoid this additional regulatory oversight.

As of June 30, 2023, APIC was required to maintain at least $124.4 million of risk-based capital to avoid this additional regulatory oversight.

As of that date, APIC maintained $178.9 million of risk-based capital.

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We have funded required statutory capital to these new subsidiaries.

As of March 31, 2023, neither ZPIC, QPIC nor GPIC have begun underwriting any insurance policies.

As of June 30, 2023, neither ZPIC, QPIC nor GPIC have begun underwriting any insurance policies.

We formed these insurance subsidiaries to provide us flexibility as to the insurance entity we use to market and write policies.

Wyndham Insurance Company (SAC) Limited (WICL) Segregated Account AX

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As required by the Office of the Superintendent of Financial Institutions regulations related to our reinsurance agreement with Omega General Insurance Company, we are required to maintain a Canadian Trust account with the greater of CAD $2.0 million or 120% of unearned Canadian premium plus 20% of outstanding Canadian claims, including all incurred but not reported claims.

As of March 31, 2023, the account held CAD $11.2 million.

As of June 30, 2023, the account held CAD $12.8 million.

Though we are not directly regulated by the Bermuda Monetary Authority (BMA), WICL's regulation and compliance impacts us as it could have an adverse impact on the ability of WICL Segregated Account AX to pay dividends.

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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 2. Management’s Discussion and Analysis