TRUPANION, INC. 10-Q

Item 1. Financial Statements TRUPANION, INC. Condensed Consolidated Statements of Operations (in thousands, except share data) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue $ 270,566 $ 219,411 $ 526,895 $ 425,410 Cost of revenue: Veterinary invoice expense (1) 206,738 157,616 400,875 302,542 Other cost of revenue (1) 34,455 33,212 70,301 64,391 Total cost of revenue 241,193 190,828 471,176 366,933 Operating expenses: 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) 20,769 22,982 42,411 44,609 Depreciation and amortization 3,253 2,707 6,455 5,424 Total operating expenses 42,390 41,312 93,151 80,251 Gain (loss) from investment in joint venture ( 73 ) ( 42 ) ( 144 ) ( 111 ) Operating loss ( 13,090 ) ( 12,771 ) ( 37,576 ) ( 21,885 ) Interest expense 2,940 1,193 5,327 1,272 Other income, net ( 2,078 ) ( 365 ) ( 3,980 ) ( 679 ) Loss before income taxes ( 13,952 ) ( 13,599 ) ( 38,923 ) ( 22,478 ) Income tax expense (benefit) ( 238 ) 19 ( 429 ) ( 5 ) Net loss $ ( 13,714 ) $ ( 13,618 ) $ ( 38,494 ) $ ( 22,473 ) Net loss per share: Basic and diluted $ ( 0.33 ) $ ( 0.33 ) $ ( 0.93 ) $ ( 0.55 ) Weighted average shares of common stock outstanding: Basic and diluted 41,383,411 40,738,738 41,246,411 40,660,797 (1) Includes stock-based compensation expense as follows: Veterinary invoice expense $ 866 $ 1,047 $ 1,719 $ 2,234 Other cost of revenue 441 783 906 1,432 Technology and development 627 1,101 1,335 2,009 General and administrative 2,948 3,066 11,167 5,489 New pet acquisition expense 1,755 2,637 3,841 5,019 See accompanying notes to the condensed consolidated financial statements. 1 TRUPANION, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net loss $ ( 13,714 ) $ ( 13,618 ) $ ( 38,494 ) $ ( 22,473 ) Other comprehensive income (loss): Foreign currency translation adjustments 1,256 ( 3,349 ) 2,811 ( 4,247 ) Net unrealized gain (loss) on available-for-sale investments ( 1,103 ) ( 1 ) ( 612 ) ( 1 ) Other comprehensive income (loss), net of taxes 153 ( 3,350 ) 2,199 ( 4,248 ) Comprehensive income (loss) $ ( 13,561 ) $ ( 16,968 ) $ ( 36,295 ) $ ( 26,721 ) See accompanying notes to the condensed consolidated financial statements. 2 TRUPANION, INC. Condensed Consolidated Balance Sheets (in thousands, except share data) June 30, 2023 December 31, 2022 Assets (unaudited) Current assets: Cash and cash equivalents $ 118,417 $ 65,605 Short-term investments 117,648 156,804 Accounts and other receivables, net of allowance for doubtful accounts of $ 701 at June 30, 2023 and $ 540 at December 31, 2022 265,648 232,439 Prepaid expenses and other assets 18,882 14,248 Total current assets 520,595 469,096 Restricted cash 18,131 19,032 Long-term investments 9,818 7,841 Property, equipment, and internal-use software, net 97,984 90,701 Intangible assets, net 21,633 24,031 Other long-term assets 18,153 18,943 Goodwill 43,877 41,983 Total assets $ 730,191 $ 671,627 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 6,918 $ 9,471 Accrued liabilities and other current liabilities 29,893 32,616 Reserve for veterinary invoices 56,202 43,734 Deferred revenue 236,545 202,692 Long-term debt - current portion 1,100 1,103 Total current liabilities 330,658 289,616 Long-term debt 102,934 68,354 Deferred tax liabilities 2,940 3,392 Other liabilities 4,901 4,968 Total liabilities 441,433 366,330 Stockholders’ equity: Common stock: $ 0.00001 par value per share, 100,000,000 shares authorized; 42,498,924 and 41,470,738 issued and outstanding at June 30, 2023; 42,041,344 and 41,013,158 shares issued and outstanding at December 31, 2022 — — Preferred stock: $ 0.00001 par value per share, 10,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 519,450 499,694 Accumulated other comprehensive income (loss) ( 4,102 ) ( 6,301 ) Accumulated deficit ( 210,056 ) ( 171,562 ) Treasury stock, at cost: 1,028,186 shares at June 30, 2023 and December 31, 2022 ( 16,534 ) ( 16,534 ) Total stockholders’ equity 288,758 305,297 Total liabilities and stockholders’ equity $ 730,191 $ 671,627 See accompanying notes to the condensed consolidated financial statements. 3 Trupanion, Inc. Condensed 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, 2023 41,327,702 $ — $ 511,940 $ ( 196,342 ) $ ( 4,255 ) $ ( 16,534 ) $ 294,809 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 143,036 — 342 — — — 342 Stock-based compensation expense — — 7,168 — — — 7,168 Other comprehensive income (loss) — — — — 153 — 153 Net income (loss) — — — ( 13,714 ) — — ( 13,714 ) Balance at June 30, 2023 41,470,738 $ — $ 519,450 $ ( 210,056 ) $ ( 4,102 ) $ ( 16,534 ) $ 288,758 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at April 1, 2022 40,711,491 $ — $ 472,878 $ ( 135,745 ) $ 2,179 $ ( 10,779 ) $ 328,533 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 128,766 — ( 60 ) — — — ( 60 ) Stock-based compensation expense — — 9,000 — — — 9,000 Repurchases of common stock ( 94,959 ) — — — — ( 5,751 ) ( 5,751 ) Other comprehensive income (loss) — — — — ( 3,350 ) — ( 3,350 ) Net income (loss) — — — ( 13,618 ) — — ( 13,618 ) Balance at June 30, 2022 40,745,298 $ — $ 481,818 $ ( 149,363 ) $ ( 1,171 ) $ ( 16,530 ) $ 314,754 4 Trupanion, Inc. Condensed 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 January 1, 2023 41,013,158 $ — $ 499,694 $ ( 171,562 ) $ ( 6,301 ) $ ( 16,534 ) $ 305,297 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 457,580 — ( 371 ) — — — ( 371 ) Stock-based compensation expense — — 20,127 — — — 20,127 Other comprehensive income (loss) — — — — 2,199 — 2,199 Net income (loss) — — — ( 38,494 ) — — ( 38,494 ) Balance at June 30, 2023 41,470,738 $ — $ 519,450 $ ( 210,056 ) $ ( 4,102 ) $ ( 16,534 ) $ 288,758 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2022 40,475,185 $ — $ 466,792 $ ( 126,890 ) $ 3,077 $ ( 10,779 ) $ 332,200 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 365,072 — ( 1,759 ) — — — ( 1,759 ) Stock-based compensation expense — — 16,785 — — — 16,785 Repurchases of common stock ( 94,959 ) — — — — ( 5,751 ) ( 5,751 ) Other comprehensive income (loss) — — — — ( 4,248 ) — ( 4,248 ) Net income (loss) — — — ( 22,473 ) — — ( 22,473 ) Balance at June 30, 2022 40,745,298 $ — $ 481,818 $ ( 149,363 ) $ ( 1,171 ) $ ( 16,530 ) $ 314,754 See accompanying notes to the condensed consolidated financial statements. 5 TRUPANION, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Six Months Ended June 30, 2023 2022 Operating activities Net loss $ ( 38,494 ) $ ( 22,473 ) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 6,455 5,424 Stock-based compensation expense 18,968 16,183 Other, net ( 585 ) ( 74 ) Changes in operating assets and liabilities: Accounts and other receivables ( 33,184 ) ( 39,127 ) Prepaid expenses and other assets ( 3,213 ) ( 2,821 ) Accounts payable, accrued liabilities, and other liabilities ( 6,464 ) 703 Reserve for veterinary invoices 12,439 ( 2,998 ) Deferred revenue 33,811 38,463 Net cash provided by (used in) operating activities ( 10,267 ) ( 6,720 ) Investing activities Purchases of investment securities ( 79,931 ) ( 47,368 ) Maturities and sales of investment securities 117,652 31,212 Purchases of property, equipment, and internal-use software ( 9,919 ) ( 7,479 ) Other 583 ( 1,502 ) Net cash provided by (used in) investing activities 28,385 ( 25,137 ) Financing activities Proceeds from debt financing, net of financing fees 35,130 54,431 Repayment of debt financing ( 1,042 ) ( 150 ) Repurchases of common stock — ( 5,751 ) Proceeds from exercise of stock options 653 1,171 Shares withheld to satisfy tax withholding ( 1,024 ) ( 2,930 ) Net cash provided by (used in) financing activities 33,717 46,771 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net 76 ( 696 ) Net change in cash, cash equivalents, and restricted cash 51,911 14,218 Cash, cash equivalents, and restricted cash at beginning of period 84,637 100,869 Cash, cash equivalents, and restricted cash at end of period $ 136,548 $ 115,087 Supplemental disclosures Noncash investing and financing activities: Purchases of property, equipment, and internal-use software included in accounts payable and accrued liabilities $ 1,328 $ 924 See accompanying notes to the condensed consolidated financial statements. 6 TRUPANION, INC. Notes to the Condensed 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, Europe, Puerto Rico, and Australia. The Company's data-driven, vertically-integrated approach enables the Company to provide pet owners with products that the Company believes are the highest value medical insurance, priced specifically for each pet’s unique characteristics. The financial data as of December 31, 2022 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 16, 2023 (the 2022 10-K). The Company's accounting policies are described in Note 1 to the audited financial statements included in the 2022 10-K. Operating results for the six months ended June 30, 2023 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 2022 10-K for additional discussion of these estimates and assumptions. Accounts and Other Receivabl es Accounts and other receivables are comprised of trade receivables and other miscellaneous receivables and are carried at their estimated collectible amounts. Trade receivables are primarily related to the Company’s other business segment where the Company generates revenue from underwriting policies through unaffiliated general agents. During the six months ended June 30, 2023, the Company incurred a non-recurring $ 3.8 million settlement of accounts receivable due to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers. 2. Net Loss per Share Basic net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net 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. 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, 2023 2022 2023 2022 Stock options 574,151 716,537 574,151 716,537 Restricted stock awards and restricted stock units 793,883 1,261,460 793,883 1,261,460 7 3. Goodwill Goodwill arises from business acquisitions in which the purchase price exceeds the fair value of tangible and intangible assets acquired less assumed liabilities. The following is a summary of goodwill by reportable segment for the six months ended June 30, 2023 (in thousands): Subscription Business Other Business Total Balance as of December 31, 2022 $ 41,983 $ — $ 41,983 Acquisitions — — — Effects of foreign currency 1,894 — 1,894 Balance as of June 30, 2023 $ 43,877 $ — $ 43,877 4. Investments Available-for sale securities are classified as short-term versus long-term investments based on whether they represent the investment of funds available for current operations. All available-for-sale securities are considered short-term in nature, with the exception of certain long-term investments that are being held for statutory requirements. Held-to-maturity securities are classified as short-term versus long-term investments based on the effective maturity dates. 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, 2023 and December 31, 2022 (in thousands): Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of June 30, 2023 Long-term investments: Available-for-sale investments Foreign deposits $ 9,659 $ — $ — $ 9,659 $ 9,659 $ — $ — $ 9,659 Held-to-maturity investments U.S. treasury securities $ 159 $ — $ ( 5 ) $ 154 $ 159 $ — $ ( 5 ) $ 154 Short-term investments: Available-for-sale investments U.S. treasury securities $ 40,242 $ — $ ( 445 ) $ 39,797 Mortgage-backed securities and collateralized mortgage obligations 8,294 — ( 145 ) 8,149 Other asset-backed securities 12,367 — ( 134 ) 12,233 Municipal bond 1,000 — — 1,000 Corporate bonds 40,695 — ( 517 ) 40,178 $ 102,598 $ — $ ( 1,241 ) $ 101,357 Held-to-maturity investments U.S. treasury securities $ 12,932 $ — $ ( 51 ) $ 12,881 Certificates of deposit 3,359 — — 3,359 $ 16,291 $ — $ ( 51 ) $ 16,240 8 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2022 Long-term investments: Available-for-sale investments Foreign deposits $ 7,683 $ — $ — $ 7,683 $ 7,683 $ — $ — $ 7,683 Held-to-maturity investments U.S. treasury securities $ 158 $ — $ ( 4 ) $ 154 $ 158 $ — $ ( 4 ) $ 154 Short-term investments: Available-for-sale investments U.S. treasury securities $ 42,833 $ — $ ( 186 ) $ 42,647 Mortgage-backed securities and collateralized mortgage obligations 8,015 — ( 97 ) 7,918 Other asset-backed securities 11,286 — ( 77 ) 11,209 Municipal bond 1,000 — ( 6 ) 994 Corporate bonds 37,793 — ( 262 ) 37,531 $ 100,927 $ — $ ( 628 ) $ 100,299 Held-to-maturity investments U.S. treasury securities $ 12,059 $ — $ ( 58 ) $ 12,001 Certificates of deposit 3,254 — — 3,254 U.S. government funds 41,192 — — 41,192 $ 56,505 $ — $ ( 58 ) $ 56,447 Maturities of investments classified as available-for-sale and held-to-maturity were as follows (in thousands): As of June 30, 2023 Amortized Cost Fair Value Available-for-sale: Due under one year $ 3,940 $ 3,919 Due after one year through five years 87,656 86,715 $ 91,596 $ 90,634 Held-to-maturity: Due under one year $ 16,291 $ 16,240 Due after one year through five years 159 154 $ 16,450 $ 16,394 Available-for-sale collateralized: Mortgage-Backed Securities and Collateralized Mortgage Obligations $ 8,294 $ 8,149 Other Asset-Backed Securities 12,367 12,233 $ 20,661 $ 20,382 9 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 investments, the Company determined that there were unrealized losses of $ 1.2 million and $ 0.6 million as of June 30, 2023 and December 31, 2022, respectively. Available-for-sale investments with unrealized losses have been in the loss position for less than twelve months and losses relate to interest rate changes. The Company does not expect any credit losses from its available-for-sale investments, considering the composition of the investment portfolio and the credit rating of these investments. For those securities, the Company determined it is not likely to, and does not intend to, sell prior to a potential recovery. Proceeds from the sales of fixed maturities classified as available-for-sale were $ 58.8 million and nil during the six months ended June 30, 2023 and 2022, respectively. 5. Other Investments The Company has invested $ 7.0 million in the preferred stock of a variable interest entity, Baystride, Inc., a U.S.-based privately held corporation operating in the pet food industry. 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 stock issued by the variable interest entity in August 2027 at an amount approximating its expected fair value. The preferred stock investment in the variable interest entity is accounted for as an available-for-sale debt security, and measured at fair value at each balance sheet date — see Note 6. Additionally, the Company has extended a $ 7.0 million revolving line of credit to the variable interest entity to fund its inventory purchases, which will increase annually by $ 2.0 million until the note’s maturity in 2027. Borrowing amounts are subject to limitations based on Baystride’s forecasted revenues and inventory balances. 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, including accrued interest, was $ 5.2 million and $ 6.3 million as of June 30, 2023 and December 31, 2022, respectively. The Company has also entered into a series of agreements to provide ancillary services to, and receive reimbursement from, the variable interest entity at cost. The Company provided $ 0.3 million and $ 0.4 million of these services for the six months ended June 30, 2023 and 2022, respectively. 10 6. Fair Value Fair Value Disclosures - 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, 2023 Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 1,061 $ 1,061 $ — $ — Fixed maturities: Mortgage-backed securities and collateralized mortgage obligations 8,149 — 8,149 — Other asset-backed securities 12,233 — 12,233 — Corporate bonds 40,178 — 40,178 — Foreign deposits 9,659 9,659 — — Municipal bond 1,000 — 1,000 — U.S. Treasury securities 39,797 — 39,797 — Preferred stock in variable interest entity 4,115 — — 4,115 Total $ 116,192 $ 10,720 $ 101,357 $ 4,115 As of December 31, 2022 Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 1,633 $ 1,633 $ — $ — Fixed maturities: Mortgage-backed securities and collateralized mortgage obligations 7,918 — 7,918 — Other asset-backed securities 11,209 — 11,209 — Corporate bonds 37,531 — 37,531 — Foreign deposits 7,683 7,683 — — Municipal bond 994 — 994 — U.S. Treasury securities 42,647 — 42,647 — Preferred stock in variable interest entity 4,115 — — 4,115 Total $ 113,730 $ 9,316 $ 100,299 $ 4,115 The Company measures the fair value of money market funds and foreign deposits based on quoted prices in active markets for identical assets. The Company's fixed maturity investments classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including pricing vendors, dealers/market makers, and exchange-quoted prices. The fair value of the Company's fixed maturity investments classified as Level 2 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. Held-to-maturity investments are carried at amortized cost and the fair value and changes in unrealized gains (losses) are disclosed in Note 4, Investments. The fair value of these investments is determined in the same manner as available-for-sale securities and are considered either a Level 1 or Level 2 measurement. The Company's preferred stock investment in the variable interest entity (see Note 5) 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. The estimated fair value was $ 4.1 million as of June 30, 2023, unchanged from December 31, 2022, and is recorded in other long-term assets on the Company's consolidated balance sheet. This investment has maintained an unrealized loss position of $ 2.9 million for less than twelve months. 11 Fair Value Disclosures - Other Assets and Liabilities The Company's other long-term assets balance also included notes receivable of $ 8.2 million and $ 9.3 million as of June 30, 2023 and December 31, 2022, respectively, 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. 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, 2023. 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, 2023 and the year ended December 31, 2022. 7. Commitments and Contingencies Legal Proceedings 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. 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 2023 2022 Reserve at beginning of year $ 21,543 $ 22,407 Veterinary invoices during the period related to: Current year 261,249 210,149 Prior years 2,035 ( 2,321 ) Total veterinary invoice expense 263,284 207,828 Amounts paid during the period related to: Current year 236,697 190,348 Prior years 20,168 16,469 Total paid 256,865 206,817 Non-cash expenses 1,771 2,325 Reserve at end of period $ 26,191 $ 21,093 12 The Company's reserve for the subscription business segment increased $ 4.7 million from $ 21.5 million at December 31, 2022 to $ 26.2 million at June 30, 2023. This change was primarily comprised of $ 263.3 million in expense recorded during the period less $ 256.9 million in payments of veterinary invoices. This $ 263.3 million in veterinary invoice expense incurred included an increase of $ 2.0 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, 2022, the Company's adjustment to prior year reserves was a reduction of $ 2.3 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 2023 2022 Reserve at beginning of year $ 22,191 $ 17,264 Veterinary invoices during the period related to: Current year 136,780 94,175 Prior years 811 539 Total veterinary invoice expense 137,591 94,714 Amounts paid during the period related to: Current year 109,389 79,362 Prior years 20,382 17,072 Total paid 129,771 96,434 Non-cash expenses — — Reserve at end of period $ 30,011 $ 15,544 The Company’s reserve for the other business segment increased $ 7.8 million from $ 22.2 million at December 31, 2022 to $ 30.0 million at June 30, 2023. This change was comprised of $ 137.6 million in expense recorded during the period less $ 129.8 million in payments of veterinary invoices. This $ 137.6 million in veterinary invoice expense incurred included an increase of $ 0.8 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, 2022, the Company's adjustment to prior year reserves was an increase of $ 0.5 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, 2023 Year of Occurrence 2021 and prior $ 129 2022 3,280 2023 22,782 $ 26,191 Other Business As of June 30, 2023 Year of Occurrence 2021 and prior $ 250 2022 2,370 2023 27,391 $ 30,011 13 9. Debt On March 25, 2022 , the Company entered into a credit agreement with Piper Sandler Finance, LLC, acting as the administrative agent, that provides the Company with $ 150.0 million in credit (the Credit Facility) consisting of: (a) an initial term loan in an aggregate principal amount of $ 60.0 million (Initial Term Loan), which was funded at closing; (b) commitments for delayed draw term loans in an aggregate principal amount not in excess of $ 75.0 million (Delayed Draw Term Loans, and together with the Initial Term Loan, the Term Loans), which may be drawn from time to time until September 25, 2023 . On December 29, 2022 and February 17, 2023, the Company borrowed Delayed Draw Term loans of $ 15.0 million and $ 35.0 million, respectively; and (c) commitments for revolving loans in an aggregate principal amount at any time outstanding not in excess of $ 15.0 million (Revolving Loans), which may be drawn at any time prior to March 25, 2027 . The Credit Facility bears interest at a floating base rate plus an applicable margin. The stated interest rate as of June 30, 2023 was approximately 10.39 % for the original $ 60.0 million term loan, the $ 15.0 million term loan, and the $ 35.0 million term loan. The Company incurred total debt issuance cost of approximately $ 5.9 million, which is reported in the consolidated balance sheet as a direct reduction from the carrying amount of the Credit Facility, and is amortized as interest expense over the term of five years. The Credit Facility is secured by substantially all assets of the Company and its subsidiaries. Proceeds from the Credit Facility may be used for permitted acquisitions and investments, working capital and other general corporate purposes. The Credit Agreement contains financial and other covenants . As of June 30, 2023, the Company was in compliance with all financial and other covenants . To the extent not previously paid, the Initial Term Loan is due and payable on March 25, 2027 , the Delayed Draw Term Loans are due and payable on the earlier of the five-year anniversary of their initial funding or March 25, 2028 , and Revolving Loans are due and payable on March 25, 2027 . The Company must repay 0.25 % of any then-outstanding Term Loans, together with accrued and unpaid interest, on a quarterly basis. Future principal payments on outstanding borrowings as of June 30, 2023 are as follows (in thousands): Year Ending December 31, June 30, 2023 2023 $ 550 2024 1,100 2025 1,100 2026 1,100 2027 71,863 Thereafter 33,250 Total $ 108,963 14 10. Stock-Based Compensation Stock-based compensation expense includes stock options 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 each category of the consolidated statements of operations was as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Veterinary invoice expense $ 866 $ 1,047 $ 1,719 $ 2,234 Other cost of revenue 441 783 906 1,432 Technology and development 627 1,101 1,335 2,009 General and administrative 2,948 3,066 11,167 5,489 New pet acquisition expense 1,755 2,637 3,841 5,019 Total expensed stock-based compensation 6,637 8,634 18,968 16,183 Capitalized stock-based compensation 531 366 1,159 602 Total stock-based compensation $ 7,168 $ 9,000 $ 20,127 $ 16,785 As of June 30, 2023, the Company had 695,574 unvested restricted stock units. Stock-based compensation expenses of $ 54.9 million related to unvested restricted stock units are expected to be recognized over a weighted average period of approximately 2.2 years. In March 2023, two executives terminated employment with the Company and one executive signed a separation agreement effective June 1, 2023. In conjunction with these departures, the Company accelerated the vesting of certain RSUs as of the termination date and extended the purchase date of certain vested options from 90 to 365 days. These award modifications resulted in the recognition of $ 4.8 million share-based compensation expense during the six months ended June 30, 2023. 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, 2022 629,650 $ 13.53 $ 21,410 Granted — — — Exercised ( 55,039 ) 12.03 1,089 Forfeited ( 460 ) 15.64 — Outstanding as of June 30, 2023 574,151 13.67 3,465 Exercisable as of June 30, 2023 574,151 $ 13.67 $ 3,465 As of June 30, 2023, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 2.4 years. 15 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, 2022 1,112,552 $ 84.46 Granted 63,079 34.50 Vested ( 425,192 ) 80.23 Forfeited ( 54,865 ) 87.37 Unvested shares as of June 30, 2023 695,574 $ 82.24 11. Stockholders' Equity Common Stock and Preferred Stock As of June 30, 2023, the Company had 100,000,000 shares of common stock authorized and 41,470,738 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, 2023, 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 (the Board), 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 does not intend to declare or pay any cash dividends in the foreseeable future. Share Repurchase Program In April 2021, the Board approved a share repurchase program, pursuant to which the Company may, between May 2021 and May 2026, repurchase outstanding shares of the Company's common stock. The Company repurchased no shares during the three and six months ended June 30, 2023 and 94,959 shares during the three and six months ended June 30, 2022. 16 12. Accumulated Comprehensive Income (Loss) A summary of the components of accumulated other comprehensive income (loss) is as follows (in thousands): For the three months ended June 30, 2023 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of April 1, 2023 $ ( 1,233 ) $ ( 3,022 ) $ ( 4,255 ) Other comprehensive income (loss) 1,256 ( 1,103 ) 153 Balance as of June 30, 2023 $ 23 $ ( 4,125 ) $ ( 4,102 ) For the three months ended June 30, 2022 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of April 1, 2022 $ 726 $ 1,453 $ 2,179 Other comprehensive income (loss) ( 3,349 ) ( 1 ) ( 3,350 ) Balance as of June 30, 2022 $ ( 2,623 ) $ 1,452 $ ( 1,171 ) For the six months ended June 30, 2023 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of January 1, 2023 $ ( 2,788 ) $ ( 3,513 ) $ ( 6,301 ) Other comprehensive income (loss) 2,811 ( 612 ) 2,199 Balance as of June 30, 2023 $ 23 $ ( 4,125 ) $ ( 4,102 ) For the six months ended June 30, 2022 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of January 1, 2022 $ 1,624 $ 1,453 $ 3,077 Other comprehensive income (loss) ( 4,247 ) ( 1 ) ( 4,248 ) Balance as of June 30, 2022 $ ( 2,623 ) $ 1,452 $ ( 1,171 ) 17 13. Segments The Company has two reporting segments: subscription business and other business. The 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. The other business segment generates revenue primarily by underwriting policies on behalf of third parties. The Company does not undertake marketing efforts for these policies and has a business-to-business relationship with these third-parties. The other business segment also includes other products and software solutions that have a different margin profile from the Company’s subscription business segment. The chief operating decision maker reviews revenue and operating income (loss) to evaluate segment performance. Revenue, veterinary invoice expense, other cost of revenue, and new pet acquisition expenses are generally directly attributed to each segment. Other operating expenses, such as technology and development expense, general and administrative expense, and depreciation and amortization, are generally 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, 2023 2022 2023 2022 Subscription business: Revenue $ 173,253 $ 145,808 $ 338,463 $ 285,647 Veterinary invoice expense 134,295 107,238 263,283 207,828 Other cost of revenue 17,225 15,202 34,328 29,875 Technology and development 3,350 4,250 6,508 7,800 General and administrative 8,411 6,132 19,484 12,490 New pet acquisition expense 20,707 22,796 42,298 44,314 Depreciation and amortization 2,083 1,799 4,147 3,643 Subscription business operating loss ( 12,818 ) ( 11,609 ) ( 31,585 ) ( 20,303 ) Other business: Revenue 97,313 73,603 188,432 139,763 Veterinary invoice expense 72,443 50,378 137,592 94,714 Other cost of revenue 17,230 18,010 35,973 34,516 Technology and development 1,882 2,146 3,624 3,825 General and administrative 4,725 3,095 14,669 6,103 New pet acquisition expense 62 186 113 295 Depreciation and amortization 1,170 908 2,308 1,781 Other business operating income (loss) ( 199 ) ( 1,120 ) ( 5,847 ) ( 1,471 ) Gain (loss) from investment in joint venture ( 73 ) ( 42 ) ( 144 ) ( 111 ) Total operating loss $ ( 13,090 ) $ ( 12,771 ) $ ( 37,576 ) $ ( 21,885 ) 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, 2023 2022 2023 2022 United States $ 228,673 $ 184,790 $ 445,598 $ 357,538 Canada and other 41,893 34,621 81,297 67,872 Total revenue $ 270,566 $ 219,411 $ 526,895 $ 425,410 Substantially all of the Company’s long-lived assets were located in the United States as of June 30, 2023 and December 31, 2022. 18 14. 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 $ 1.5 million and $ 1.8 million of expenses for consulting services provided by the investee related to pet acquisition during the six months ended June 30, 2023 and 2022, respectively, recorded as new pet acquisition expense on the Company's consolidated statement of operations. 19