What changed in this filing

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Item 1A. Risk Factors

2024-08-09 compared with 2024-05-03 · 44 added, 41 removed, 671 unchanged (11% of the section changed)

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• maintain positive relationships with veterinarians and other lead sources;

• maintain positive relationships with and increase the number and efficiency of Territory Partners in all of our target markets;

• maintain positive relationships with Territory Partners in all of our target markets;

• successfully integrate entities we acquire into our business;

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Our average pet acquisition cost and the number of new pets we enroll depends on a number of factors and assumptions, including 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 increased over time and has significantly varied in the past.

In the future, our average pet acquisition cost may rise or fall and vary significantly period to period based upon specific marketing initiatives.

We also regularly test new member acquisition channels and marketing initiatives, including direct-to-consumer initiatives, which often are more expensive than our traditional veterinarian-focused marketing channels and generally increase our average acquisition costs.

Our average pet acquisition cost has significantly varied over time.

In the future, our average pet acquisition cost may rise or fall and vary significantly period to period based upon the success of specific marketing initiatives.

We also regularly test new member acquisition channels and marketing initiatives, including direct-to-consumer initiatives, which often are more expensive than our traditional veterinary-focused marketing channels and generally increase our average acquisition costs.

In addition, we base our decisions regarding our new pet acquisition expenditures primarily on our internal rate of return generated on an average pet.

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Conversely, if our pricing assumptions differ from actual results such that we overprice risks, our competitiveness and growth prospects could be adversely affected.

In addition, most states require licensure and regulatory approval prior to marketing new insurance products.

In addition, most states require licensure and regulatory approval prior to marketing new insurance products and increasing prices of our existing products.

Our practice has been to 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, who may reduce or disallow our pricing changes.

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In addition, we may be prevented by regulators from implementing significant pricing changes, requiring us to raise rates more often than we otherwise may desire.

This could damage our reputation with our members and reduce our retention rates, which could significantly damage

our brand, result in the loss of expected revenue and otherwise harm our business, operating results and financial condition.

This could damage our reputation with our members and reduce our retention rates, which could significantly damage our brand, result in the loss of expected revenue and otherwise harm our business, operating results and financial condition.

If we are unable to grow our member base and maintain high member retention rates, our growth prospects and revenue will be adversely affected.

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These factors include:

• the pricing and competitiveness of our subscription, including its perceived value, simplicity, and fairness;

• the pricing of our subscription, including its perceived value, simplicity, and fairness;

• our ability to explain and educate consumers regarding the benefits and differences related to our products, including our offerings marketed by third parties, and any potential consumer confusion as we add more products;

• changes in consumer shopping behaviors due to circumstances outside of our control, such as increased inflation and other economic conditions, the COVID-19 pandemic and containment efforts, and consumers’ ability or willingness to pay for our product;

• changes in consumer shopping behaviors due to circumstances outside of our control, such as increased inflation and other economic conditions, and consumers’ ability or willingness to pay for our product;

• legal or regulatory requirements, including those that make the experience on our website cumbersome or difficult to navigate or that hinder our ability to communicate with potential members quickly and in a way that is more conducive to conversion;

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If the expenses that we incur in connection with these activities do not result in sufficient growth in members to offset the cost, our business, operating results and financial condition will be adversely affected.

Generally, we see greater conversion through our contact center and if we are unable to drive more potential members to call our contact center, our conversion rates may decline.

We have historically experienced high average monthly retention rates.

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If we do not retain our existing members or if our marketing initiatives do not result in enrolling more pets or result in enrolling pets that inherently have a lower retention rate, we may not be able to maintain our retention and new pet acquisition rates.

Members we obtain through aggressive promotions or other channels that involve relatively less meaningful contact between us and the member are more likely to terminate their subscription.

Members we obtain through aggressive promotions or other channels that involve relatively less meaningful contact between us and the member and such members are more likely to terminate their subscription.

In the past, we have experienced reduced retention rates during periods of rapid member growth, as our retention rate generally has been lower during the first year of member enrollment.

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We rely significantly on Territory Partners, veterinarians and other third parties, including strategic partners, to generate leads.

In order for us to implement our business strategy and grow our revenue, we must effectively maintain and increase the number and quality of our relationships with Territory Partners, veterinarians and veterinary affiliates, including veterinarian purchasing groups and associations, existing members, complementary online and other businesses, animal shelters, breeders and other referral sources, and continue to scale and improve our processes, programs and procedures that support them.

In order for us to implement our business strategy and grow our revenue, we must effectively maintain and increase the number and quality of our relationships with Territory Partners, veterinarians and veterinary affiliates, including veterinary purchasing groups and associations, existing members, complementary online and other businesses, animal shelters, breeders and other referral sources, and continue to scale and improve our processes, programs and procedures that support them.

Those processes, programs and procedures could become increasingly complex and difficult to manage as we grow.

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For instance, we compete with pet owners that self-finance unexpected veterinary invoices with savings or credit, as well as traditional pet insurance providers and relatively new entrants into our market.

The vast majority of pet owners in the United States and Canada do not currently have medical insurance for their pets.

The vast majority of pet owners in the markets we serve do not currently have medical insurance for their pets.

We are focused primarily on expanding our share of the overall market, and we view our primary competitive challenge as educating pet owners on why our subscription is a better alternative to self-financing.

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If we are listed less prominently in, or removed altogether from, search result listings for any reason, the traffic to our websites would decline and we may not be able to replace this traffic, which in turn would harm our business, operating results and financial condition.

If we decide to attempt to replace this traffic, we may be required to increase our pet acquisition expenditures, including by utilizing paid search advertising.

If we attempt to replace this traffic, we may be required to increase our pet acquisition expenditures, including by utilizing paid search advertising.

Certain of our competitors have spent additional funds to promote their products in search results over us.

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We maintain a recorded reserve for veterinary invoices that is based on our best estimates of the amount of veterinary invoices we expect to pay, inclusive of an estimate for veterinary invoices we have not yet received, after considering internal factors, including data from our proprietary data analytics platform, experience with similar cases, actual veterinary invoices paid, historical trends involving veterinary invoice payment patterns, patterns of receipt of veterinary invoices, seasonality, pending levels of unpaid veterinary invoices, veterinary invoice processing programs and contractual terms.

We may also consider external factors, including changes in the law, court decisions, changes to regulatory requirements and economic conditions, including the current inflationary environment.

We may also consider external factors, including changes in the law, court decisions, changes to regulatory requirements and economic conditions.

Because reserves are estimates of veterinary invoices that have been incurred but are not yet submitted to us, setting appropriate reserves is an inherently uncertain and complex process that involves significant subjective judgment.

Further, in the United States, we do not transfer or cede our risk as an insurer and, therefore, we maintain more risk than we would if we purchased reinsurance.

Rising costs of veterinary care and the increasing availability and usage of more expensive, technologically advanced medical treatments may increase the amount of veterinary invoices we receive, especially in the current inflationary environment.

Similarly, industry trends may emerge that are difficult to identify or to predict their impact on us, such as consolidated ownership of veterinary hospitals that increase prices more rapidly than we estimate.

Rising costs of veterinary care and the increasing availability and usage of more expensive, technologically advanced medical treatments may increase the amount of veterinary invoices we receive.

Similarly, industry trends may emerge that are difficult

to identify or to predict their impact on us, such as consolidated ownership of veterinary hospitals that increase prices more rapidly than we estimate.

Increases in the number and amount of veterinary invoices we receive could arise from unexpected or other events that are inherently difficult to predict or estimate, such as a pandemic that spreads through the pet population, tainted pet food or supplies or an unusually high number of serious injuries or illnesses.

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We may not identify fraudulent or improperly inflated veterinary invoices.

It is possible that we may pay a veterinary invoice which appears authentic but in fact reflects false products or prices.

It is possible that we may pay a veterinary invoice which appears authentic but in fact reflects false services, products or prices.

It is also possible that veterinarians will charge insured customers higher amounts than they would charge their non-insured clients for the same service or product, or may alter medical records or exclude information from records.

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Maintaining adequate internal control over financial reporting is critical to effective and timely completion of our financial statements.

We have reported material weaknesses in internal control in Part II, Item 9A of our Annual Report.

We have reported material weaknesses in internal control in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

As a result, management concluded that our internal control over financial reporting was not effective as of December 31, 2023.

We are currently implementing certain remedial measures and assessing others intended to remediate the material weaknesses, but our efforts may not be successful.

These measures will result in additional expenses associated with technology, finance personnel, training and other costs.

If we are unable to remediate the material weaknesses within a reasonable time or at all, or are otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial or other information accurately, and to prepare financial statements within required time periods, could be

adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.

These measures will result in additional expenses associated with technology, finance personnel, training and other costs and implementation could distract management from current operations.

process and report financial or other information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.

We may in the future identify other material weaknesses and significant deficiencies in our internal control over financial reporting, in addition to those identified as of December 31, 2023, which may result in our not detecting errors on a timely basis and our financial statements being materially misstated.

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If we fail to effectively manage our growth, our business, operating results and financial condition may suffer.

We have recently experienced, and expect to continue to experience, significant growth, which has placed, and may continue to place, significant demands on our management and our operational and financial systems and infrastructure.

We expect that our growth strategy will require us to commit substantial financial, operational and technical resources and this commitment may also result in increased costs (such as member acquisition costs or costs associated with increases in the number or amounts of veterinary invoices received) generated by our business, which could prevent us from achieving profitability and remaining profitable and could impair our ability to compete effectively for business.

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We depend on key personnel to operate our business and, if we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed.

Our success depends to a significant extent on the continued services of our management team, such as Margi Tooth, our President, and Darryl Rawlings, our founder, Chief Executive Officer and Chairperson of the Board.

Our board recently appointed Ms.

Tooth as our new Chief Executive Officer, effective as of August 1, to succeed Mr.

Rawlings who will remain our Chair.

Our success depends to a significant extent on the continued services of our leadership team, such as Margi Tooth, our Chief Executive Officer and President.

Tooth became our new Chief Executive Officer, effective as of August 1, succeeding our founder Darryl Rawlings who remains our Chairperson of the Board.

This transition may not be successful.

Moreover, the loss of key executives or employees within a short time frame could have a material adverse effect on our business.

Moreover, the loss of key executives or employees or the departure of members of our board within a short time frame could have a material adverse effect on our business.

We employ all of our employees, including executive officers and key employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without notice, subject to severance payment obligations.

In order to retain valuable employees, in addition to salary and cash incentives, we have provided stock options and restricted stock that vest over time.

Applicable law might prevent or limit our ability to subject our employees to non-compete obligations.

In order to retain valuable employees, in addition to salary and cash incentives, we have provided stock options and restricted stock units that vest over time.

While we may in the future grant equity awards tied to company performance, if we do not achieve certain financial goals, we will not grant equity awards and this may affect our ability to retain employees.

The value to employees of stock options and restricted stock that vest over time will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to maintain their retention benefit or counteract offers from other companies.

The value to employees of stock options and restricted stock units that vest over time will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to maintain their retention benefit or counteract offers from other companies.

We would be adversely affected if we fail to adequately plan for the succession of our senior management and other key employees.

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Changes to this business may be volatile due to the nature of the relationships.

Further, this business historically has had, and we expect it to continue to have, significantly lower margins than our core business.

Further, this business historically has had, and we expect it to continue to have, significantly lower margins than our subscription business.

As a result of this business, we are subject to additional regulatory requirements and scrutiny, which increase our costs and risks, and may have an adverse effect on our operations.

Further, administration of this business and any similar business in the future may divert our time and attention away from our core business, which could adversely affect our operating results in the aggregate.

Further, administration of this business and any similar business in the future may divert our time and attention away from our subscription business, which could adversely affect our operating results in the aggregate.

In Canada, our medical plan is written by Accelerant Insurance Company of Canada.

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In Canada, our medical insurance for pets subscription is currently written by Accelerant, and we assume all premiums written by Accelerant and the related veterinary invoice expense through an agency agreement and a fronting and administration agreement.

We expect to begin to underwrite our own products in Canada through our wholly-owned subsidiary, GPIC Insurance Company (GPIC).

We expect to begin to underwrite our own products in Canada through our wholly-owned subsidiary, GPIC.

If Accelerant were to terminate our agreement or be unable to write insurance for regulatory or other reasons, in particular before GPIC is duly authorized to write insurance across all Canadian jurisdictions, we may have to terminate subscriptions with our existing Canadian members and/or suspend member enrollment and renewals in Canada.

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For instance, we have entered the Australian market in 2019 through a joint venture.

In August 2022 we purchased Smart Paws, a managing general agent for pet insurance with operations based in Germany and Switzerland, and in November 2022 we acquired PetExpert, a managing general agent for pet insurance with operations based in the Czech Republic and Slovakia.

In August 2022 we purchased Smart Paws, an MGA for pet insurance with operations based in Germany and Switzerland, and in November 2022 we acquired PetExpert, an MGA for pet insurance with operations based in the Czech Republic and Slovakia.

We have limited history of marketing, selling, administering and supporting our subscription product for consumers outside of the North America.

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• our ability to locally hire, integrate and retain highly skilled and motivated employees and establish and improve systems for operational and financial management where appropriate;

• difficulties in managing operations due to language barriers, distance and time zone differences, staffing, cultural differences and business infrastructure constraints, including difficulty in obtaining foreign and domestic visas;

• difficulties in managing operations due to language barriers, distance and time zone differences, staffing, cultural

differences and business infrastructure constraints, including difficulty in obtaining foreign and domestic visas;

• the uncertainty of protection for intellectual property rights in some countries;

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We currently own one of the insurers through which we are issuing products - APIC, a New York domiciled insurer.

We also own and have regulatory approvals for two new insurers domiciled respectively in Missouri and Nebraska, ZPIC Insurance Company and QPIC Insurance Company.

We also own and have regulatory approvals for two U.S.

insurers domiciled respectively in Missouri and Nebraska, ZPIC and QPIC.

We are currently pursuing so-called expansion applications for these entities in most United States jurisdictions.

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An increase in the number of members who utilize credit and debit cards and mobile apps to pay their subscription fees or related credit and debit card fees would reduce our margins and could require us to increase subscription fees, which could cause us to lose members and revenue, or suffer an increase in our operating expenses, either of which could adversely affect our operating results.

If we, or any of our processing vendors or banks have problems with our billing software, or if the billing software malfunctions, it could have an adverse effect on our member satisfaction and could cause one or more of the major credit card companies or banks to disallow our continued use of their payment products.

If we, or any of our processing vendors or banks have problems with our billing software, or if the billing software malfunctions, it could have an adverse effect on our member satisfaction and new member growth and could cause one or more of the major credit card companies or banks to disallow our continued use of their payment products.

In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our members’ credit cards on a timely basis or at all, or a bank withdraws the incorrect amount or fails to timely transfer the correct amount to us, we could lose revenue and harm our member experience, which could adversely affect our business and operating results.

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The SEC has also adopted rules (which it then voluntarily stayed, pending litigation that challenges such rules) requiring disclosure regarding climate-related risks, oversight and management of such risks, and climate-related targets or goals.

Our business may face increased scrutiny related to these activities and our related disclosures, including from the investment community, and our

failure to achieve progress or manage the dynamic public sentiment and legal landscape in these areas on a timely basis, or at all, could adversely affect our reputation, business, and financial performance.

Our business may face

increased scrutiny related to these activities and our related disclosures, including from the investment community, and our failure to achieve progress or manage the dynamic public sentiment and legal landscape in these areas on a timely basis, or at all, could adversely affect our reputation, business, and financial performance.

Failure to adequately protect our intellectual property could substantially harm our business and operating results.

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federal net operating loss carryforwards of approximately $271.6 million that will begin to expire in 2026.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), if a corporation

undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income taxes may be limited.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income taxes may be limited.

In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5-percent stockholders” that exceeds 50 percentage points over a rolling three-year period.

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In addition, we may issue options, restricted stock units, or other stock-based awards to those providing services to us, and to the extent outstanding or future options are exercised or restricted stock units or other stock-based awards are settled for shares of our common stock, there will be further dilution.

These equity incentives are generally granted under our 2014 Equity Incentive Plan, which provides for automatic annual increases in the number of shares or our common stock available for issuance under the plan equal to 4% of our issued and outstanding shares of common stock, or any lesser number determined by our board of directors.

Until June 2024, these equity incentives were generally granted under our 2014 Equity Incentive Plan, which provided for automatic annual increases in the number of shares or our common stock available for issuance under the plan equal to 4% of our issued and outstanding shares of common stock, or any lesser number determined by our board of directors.

Our board of directors most recently approved a 4% increase in 2022.

In June 2024, our stockholders approved our 2024 Equity Incentive Plan, which replaces our 2014 Equity Incentive Plan.

The 2024 Equity Incentive Plan does not provide for automatic annual increases in the number of shares or our common stock available for issuance under the plan.

The amount of dilution could be substantial depending upon the size of our future issuances of securities or exercises or settlement of stock-based awards.

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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 1A. Risk Factors