What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-04 · 121 added, 105 removed, 437 unchanged (34% of the section changed)

10 unchanged sentences

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

Our other business segment also includes other products and insurance 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.

8 unchanged sentences

Key Operating Metrics

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,

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

Nine Months Ended September 30,

Total Business:

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Three Months Ended

30, 2023 Jun.

30, 2023 Mar.

4 unchanged sentences

31, 2022 Dec.

31, 2021 Sept.

Total Business:

34 unchanged sentences

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 June 30, 2023 is an average of each month’s retention from July 1, 2022 through June 30, 2023.

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

11 unchanged sentences

We define non-GAAP development expenses as operating expenses incurred to develop new products and offerings that are pre-revenue.

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.

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

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,

Nine Months Ended September 30,

Veterinary invoice expense $ 613,316 $ 473,654

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Non-recurring transaction or restructuring expenses (2)

(4,175) (179)

Development expenses (3,417) (5,705)

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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.

Stock-based compensation associated with bonuses was approximately $0.6 million for the nine months ended September 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 Jun.

30, 2023 Mar.

4 unchanged sentences

31, 2022 Dec.

31, 2021 Sept.

Veterinary invoice expense $ 212,441 $ 206,738 $ 194,137 $ 176,083 $ 171,112 $ 157,616 $ 144,926 $ 132,852

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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 $0.1 million for the three months ended June 30, 2023.

Stock-based compensation associated with bonuses was approximately $0.3 million for the three months ended September 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.

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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 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,

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

Nine Months Ended September 30,

New pet acquisition expense $ 60,183 $ 67,043

5 unchanged sentences

Three Months Ended

30, 2023 Jun.

30, 2023 Mar.

4 unchanged sentences

31, 2022 Dec.

31, 2021 Sept.

New pet acquisition expense $ 17,772 $ 20,769 $ 21,642 $ 22,457 $ 22,434 $ 22,982 $ 21,627 $ 19,845

11 unchanged sentences

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.

The other business segment also includes other products and insurance 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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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.

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

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

Cost of Revenue

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Veterinary invoice expense

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.

Veterinary invoice expense includes our costs to review and pay 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 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.

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

Other cost of revenue

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Our performance depends on our ability to continue to retain our existing and newly enrolled pets and is impacted by our ability to provide a best-in-class value and member experience.

Our ability to retain enrolled pets depends on a number of factors, including the actual and perceived value of our services and the quality of our member experience, the ease and transparency of the process for reviewing and paying veterinary invoices for our members, and the competitive environment.

In addition, other initiatives across our business may temporarily impact retention and make it difficult for us to improve or maintain this metric.

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Our subscription business’s cost-plus model depends on our ability to estimate our operating costs and expenses, including veterinary invoice expenses, and to adjust our pricing to achieve our target returns.

We regularly reevaluate and adjust the price of our subscriptions, with a goal of achieving our targeted payout ratio, subject to the review and approval of applicable state regulators.

This makes it important for us to accurately estimate our costs and to promptly pursue and obtain regulatory approval of pricing adjustments, which generally roll onto our book of insured pets over the next twelve months.

We may, though, have timing mismatches during which our pricing does not reflect our current expense profile.

We regularly reevaluate and adjust the price of our subscriptions, with a goal of achieving our targeted payout ratio, subject to the review and approval of regulators where applicable.

This makes it important for us to accurately estimate our costs and to promptly implement pricing adjustments, which generally roll onto our book of insured pets over the succeeding twelve months.

As a result, we may have timing mismatches during which our pricing does not reflect our current expense profile.

In periods of rapid increases in veterinary invoice expenses, including periods of significant inflation, this timing mismatch may have a significant impact on our margin profile.

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Mix of sales.

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

The relative mix of our business by geography, pet age, species, 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 or whether the pet is a dog or a cat.

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

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

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

2023 2022 2023 2022

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Interest expense 3,053 1,408 8,380 2,680

Other expense (income), net (2,078) (365) (3,980) (679)

Other income, net (2,465) (889) (6,445) (1,568)

Loss before income taxes (4,079) (12,418) (43,002) (34,896)

2 unchanged sentences

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

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

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

2023 2022 2023 2022

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Total stock-based compensation expense $ 6,892 $ 8,643 $ 25,860 $ 24,826

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

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

2023 2022 2023 2022

11 unchanged sentences

Interest expense 1 1 1 —

Other expense (income), net (1) — (1) —

Other income, net (1) — (1) —

Loss before income taxes (1) (5) (5) (5)

2 unchanged sentences

Stock-based compensation expense:

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

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

2023 2022 2023 2022

5 unchanged sentences

Total stock-based compensation expense 2 % 4 % 3 % 4 %

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

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

2023 2022 2023 2022

2 unchanged sentences

Subscription business cost of revenue 86 84 87 84

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

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

11 unchanged sentences

Average monthly retention 98.55 % 98.71 % 98.55 % 98.71 %

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.

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

Total revenue increased by $52.1 million, or 22%, to $285.9 million for the three months ended September 30, 2023.

Revenue from our subscription business segment increased by $30.5 million, or 20%, to $182.9 million for the three months ended September 30, 2023 .

This in crease was primarily due to a 16% increase in pet months (the sum of pets enrolled for each month during a period) for policies underwritten by Trupanion during the respective periods and a 3% increase in monthly average revenue per pet.

Revenue from our other business segment increased by $21.6 million to $102.9 million, or 27%, for the three months ended September 30, 2023, primarily due to a 21% increase in pet months and a 5% increase in monthly average revenue per pet in this segment.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Total revenue increased by $153.6 million, or 23%, to $812.7 million for the nine months ended September 30, 2023.

Revenue from our subscription business segment increased by $83.3 million, or 19%, to $521.4 million for the nine months ended September 30, 2023.

This increase was primarily due to an 18% increase in pet months for policies underwritten by Trupanion during the respective periods and a 1% increase in monthly average revenue per pet.

Revenue from our other business segment increased by $70.3 million to $291.4 million, or 32%, for the nine months ended September 30, 2023, due to a 28% increase in pet months and a 4% increase in monthly average revenue per pet in this segment.

Cost of Revenue

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

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

21 unchanged sentences

Monthly average revenue per pet $ 65.82 $ 63.80 3 $ 64.63 $ 64.09 1

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 $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.

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

Cost of revenue for our subscription business segment was $157.4 million, or 86% of revenue, for the three months ended September 30, 2023, compared to $128.2 million, or 84% of revenue, for the three months ended September 30, 2022.

This increase of 23% in subscription cost of r evenue was primarily due to an 16% increase in pet months for policies underwritten by Trupanion during the respective periods.

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

Cost of revenue for our other business segment increased by $17.6 million, or 23%, to $93.2 million for the three months ended September 30, 2023, primarily due to the 21% increase in pet months in this segment.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Cost of revenue for our subscription business segment was $455.1 million, or 87% of revenue, for the nine months ended September 30, 2023, compared to $365.9 million, or 84% of revenue, for the nine months ended September 30, 2022.

This increase of 24% in subscription cost of revenue was primarily due to an 18% increase in pet months for policies underwritten by Trupanion during the respective periods.

The increase in cost of revenue was also attributable to a 6% 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 $62.0 million, or 30%, to $266.7 million for the nine months ended September 30, 2023, primarily due to the 28% increase in pet months in this segment.

Technology and Development Expenses

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

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

2 unchanged sentences

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

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.

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

Technology and development expenses decreased by $1.3 million, or 19%, to $5.3 million for the three months ended September 30, 2023, due to a decrease of $1.3 million in development expense as several initiatives that were pre-revenue in the prior year were launched and have begun generating revenue.

Expenses associated with these initiatives are now recorded within the income statement based on the underlying nature of the expense.

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.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Technology and development expenses decreased by $2.7 million, or 15%, to $15.4 million for the nine months ended September 30, 2023, driven primarily by a decrease of $3.9 million in development expense as several initiatives that were pre-revenue in the prior year were launched and have begun generating revenue.

Expenses associated with these initiatives are now recorded within the income statement based on the underlying nature of the expense .

This decrease was partially offset by a $0.5 million increase in contractor expenses and a $0.5 million increase in IT system hosting expenses.

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

General and Administrative Expenses

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

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

2 unchanged sentences

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

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.

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

General and administrative expenses increased by $2.4 million, or 23%, to $12.7 million for the three months ended September 30, 2023.

The increase was primarily due to a $1.2 million increase in compensation and employee-related expenses, a $0.4 million increase in professional services, and a $0.3 million increase in licensing fees.

General and administrative expenses remained at a consistent 4% of total revenue year over year.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

General and administrative expenses increased by $17.9 million, or 62%, to $46.8 million for the nine months ended September 30, 2023.

The increase in expense was primarily due to a $5.2 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.

Additionally, there was a $4.5 million increase in general compensation and other employee-related expenses, a $1.3 million increase in consulting services, and a $0.7 million increase in licensing and regulatory fees.

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

New Pet Acquisition Expense

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

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

5 unchanged sentences

Average pet acquisition cost (PAC) $ 212 $ 268 (21) $ 232 $ 291 (20)

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.

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

New pet acquisition expenses decreased by $4.7 million, or 21%, to $17.8 million for the three months ended September 30, 2023 driven primarily by a decrease in expenses to generate leads and conversion, as we focused on growth in our more efficient channels.

New pet acquisition expenses as a percentage of revenue was 6% for the three months ended September 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.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

New pet acquisition expenses decreased by $6.9 million, or 10%, to $60.2 million for the nine months ended September 30, 2023 driven primarily by a decrease in expenses to generate leads and conversion, as we focused on growth in our more efficient channels.

New pet acquisition expenses as a percentage of revenue was 7% for the nine months ended September 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 June 30, % Change Six Months Ended June 30, % Change

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

2 unchanged sentences

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

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.

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

Depreciation and amortization expense increased by $0.4 million, or 15%, to $3.0 million for the three months ended September 30, 2023 primarily driven by the amortization of acquired intangible assets.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Depreciation and amortization expense increased by $1.4 million, or 18%, to $9.4 million for the nine months ended September 30, 2023 primarily driven by the amortization of acquired intangible assets.

Total Other (Income) Expense, Net

Three Months Ended September 30, % Change Nine Months Ended September 30, % Change

2023 2022 2023 2022

(in thousands)

Interest expense $ 3,053 $ 1,408 117% $ 8,380 $ 2,680 213%

Other income, net (2,465) (889) 177% (6,445) (1,568) 311%

Total other (income) expense, net $ 588 $ 519 13% $ 1,935 $ 1,112 74%

Percentage of total revenue — % — % — % — %

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

Total other (income) expense, net increased by $0.1 million to $0.6 million for the three months ended September 30, 2023 primarily due to an increase in interest expense incurred on the Credit Facility which was partially offset by an increase in interest earned on our investment portfolio.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Total other (income) expense, net increased by $0.8 million to $1.9 million for the nine months ended September 30, 2023 primarily due to an increase in interest expense incurred on the Credit Facility which was partially offset by an increase in interest earned on our investment portfolio.

Stock-Based Compensation

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.

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

Stock-based compensation expense decreased by $1.8 million, or 20%, to $6.9 million for the three months ended September 30, 2023.

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.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Stock-based compensation increased by $1.0 million, or 4%, to $25.9 million for the nine months ended September 30, 2023.

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

2 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by (used in) operating activities $ 1,131 $ (9,019)

6 unchanged sentences

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.

Our primary sources of liquidity are cash provided by operations and available borrowings from our Credit Facility.

Our primary sources of liquidity have been cash provided by operations and available borrowings from our Credit Facility.

We believe these sources are sufficient to fund our operations and capital requirements for the next 12 months.

2 unchanged sentences

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

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.

As our capital surplus grows relative to the rate of growth of our business, we may also generate cash, via dividends or other methods, from one or more of our underwriting entities.

As of September 30, 2023, the Company had $265.9 million in cash, cash equivalents and short-term investments, of which $228.0 million was held by the Company's insurance entities.

Outside of insurance entities, the Company held $37.9 million in cash, cash equivalents and short-term investments with an additional $15.0 million available under its Credit Facility.

The Company's insurance entities maintained $227.0 million of capital surplus, which was $60.8 million in excess of the estimated risk-based capital requirement of $166.2 million.

The ability to distribute any portion of this estimated $60.8 million excess to our parent company, and the timing of any distribution, may be subject to regulatory limitations.

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, 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.

We repurchased no shares under this program during the nine months ended September 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 $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.

Net cash provided by operating activities was $1.1 million for the nine months ended September 30, 2023, compared to $9.0 million net cash used for the nine months ended September 30, 2022.

The change was primarily driven by an increase in cash collections from members, a decrease in acquisition cost, and timing differences in other working capital activities.

Investing Cash Flows

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.

Net cash provided by investing activities was $25.1 million for the nine months ended September 30, 2023, primarily consisting of $38.0 million in maturities of investment securities, net of purchases, offset by $14.3 million of capital expenditures primarily related to the development of internal-use software focused on member experience improvements.

Net cash used by investing activities was $37.0 million for the nine months ended September 30, 2022, primarily consisting of $21.2 million of purchases of investment securities, net of maturities, and $11.6 million of capital expenditures primarily related to the development of internal-use software focused on member experience improvements.

Financing Cash Flows

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.

Net cash provided by financing activities was $58.6 million for the nine months ended September 30, 2023, primarily consisting of $60.1 million in proceeds from the Credit Facility, offset by $1.4 million in repayments on the Credit Facility.

Net cash provided by financing activities was $46.1 million for the nine months ended September 30, 2022, primarily consisting of $54.3 million in proceeds from the Credit Facility, offset by $5.8 million in repurchases of common stock, and $3.8 million in shares withheld to satisfy tax withholdings.

Long-Term Debt

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

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

As of September 30, 2023, we issued term loans totaling $135.0 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 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.

As of September 30, 2023, our insurance entities collectively held $115.5 million in short-term investments and $390.6 million in other current assets, including $112.5 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.

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APIC must hold certain capital amounts in order to comply with the statutory regulations and, therefore, we cannot use these amounts for general operating purposes without regulatory approval.

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 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.

As our business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly, though risk-based capital requirements also take our overall rate of growth into consideration.

As of September 30, 2023, APIC was required to maintain at least $134.6 million of risk-based capital to avoid this additional regulatory oversight.

As of that date, APIC maintained $191.0 million of risk-based capital surplus.

The increase of capital surplus at APIC during the quarter was due to retained earnings from APIC's underwriting profit.

ZPIC Insurance Company (ZPIC), QPIC Insurance Company (QPIC), and GPIC Insurance Company (GPIC)

In 2021, we established two new wholly-owned insurance subsidiaries, ZPIC and QPIC, domiciled in Missouri and Nebraska, respectively, and in 2023 we established a new wholly-owned insurance subsidiary, GPIC, domiciled in Canada.

We have funded required statutory capital to these new subsidiaries.

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

We have funded required statutory capital to each of these new subsidiaries.

As of September 30, 2023, neither ZPIC, QPIC nor GPIC have begun underwriting any insurance policies, accordingly, each of these entities currently is overcapitalized relative to traditional risk-based capital requirements.

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

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

As of September 30, 2023, the account held CAD $14.2 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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We enter into long-term contractual obligations and commitments in the normal course of business, primarily debt obligations and non-cancellable vendor service agreements.

In March 2022, we entered into a credit agreement that provides us with up to $150.0 million of credit, including a $60.0 million initial term loan that was funded at closing and an aggregate $50.0 million of delayed draw term loans funded between December 2022 and February 2023.

In March 2022, we entered into a credit agreement that provides us with up to $ 150.0 million of credit, including a $ 60.0 million initial term loan that was funded at closing and an aggregate $ 75.0 million of delayed draw term loans funded between December 2022 and September 2023.

Refer to Note 9, Debt, included in Item 1 of Part I of this report, for further details, including interest and future principal payments.

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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