TRUPANION, INC. 10-K

Item 8. Financial Statements and Supplementary Data Trupanion, Inc. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 56 Consolidated Statements of Operations 59 Consolidated Statements of Comprehensive Loss 60 Consolidated Balance Sheets 61 Consolidated Statements of Stockholders' Equity 62 Consolidated Statements of Cash Flows 63 Notes to Consolidated Financial Statements 64 55 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Trupanion, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Trupanion, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 11, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 56 Reserve for Veterinary Invoices Description of the Matter The Company’s reserve for veterinary invoices totaled $28.9 million as of December 31, 2020. As discussed in Note 1 to the financial statements, the Company’s reserve for veterinary invoices is based on an actuarial analysis of the Company’s historical experience including the number of veterinary invoices it expects to receive, the average cost of those veterinary invoices, the length of time between the date of the veterinary invoice and the date the Company receives the veterinary invoice, the members’ chosen deductibles and the Company’s expected cost to process and administer payments. Auditing the Company’s reserve for veterinary invoices is complex due to the sensitivity of the estimated reserve to management assumptions including frequency and severity of loss and development factors applied to paid and reported invoices. How We Addressed the Matter in Our Audit We evaluated the design and tested the operating effectiveness of controls over the reserve for veterinary invoices process, including controls over the completeness and accuracy of the data used in management’s actuarial projections and the review and approval processes that management has in place for the methods and assumptions used by management’s actuaries in estimating the reserves. To evaluate the reserve for veterinary invoices, our audit procedures included, among others, testing the completeness and accuracy of the underlying invoice data and related contracts. We involved our actuarial specialists to assist in our evaluation of management’s methodologies and assumptions used in the calculation of the reserve and compared the Company’s recorded reserve to a range of reasonable estimates developed independently by our actuarial specialists. 57 Business Combination Description of the Matter During 2020, the Company completed its acquisition of Aquarium Software Limited (Aquarium) for consideration of $48.3 million, as disclosed in Note 3 to the consolidated financial statements. The transaction was accounted for as a business combination. Auditing the Company's accounting for its acquisition of Aquarium was complex due to the estimation uncertainty in the Company’s determination of the fair value of identified intangible assets of $19.5 million, which principally consisted of developed technology and customer relationships. The estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business on which those assumptions were based. The Company used a discounted cash flow model to measure the developed technology and customer relationships intangible assets. The key assumptions used to estimate the fair value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g., revenue growth and attrition rates). These significant assumptions are forward looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We tested the Company's controls over its accounting for acquisitions. Our tests included controls over the estimation process supporting the recognition and measurement of consideration transferred, and technology and customer-related intangible assets. We also tested management’s review of assumptions used in the valuation models. To test the estimated fair value of the technology and customer-related intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. For example, we compared the key assumptions to third-party industry projections for similar market participants. Specifically, when assessing the key assumptions, we focused on revenue growth rates, attrition assumptions and basis for the discount rate used. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2012. Seattle, Washington February 11, 2021 58 Trupanion, Inc. Consolidated Statements of Operations (in thousands, except per share data) Year Ended December 31, 2020 2019 2018 Revenue $ 502,028 $ 383,936 $ 303,956 Cost of revenue: Veterinary invoice expense 351,124 270,947 214,539 Other cost of revenue 69,003 48,065 38,051 Total cost of revenue 420,127 319,012 252,590 Operating expenses: Technology and development 9,947 7,025 5,796 General and administrative 21,847 18,384 17,104 Sales and marketing 47,837 35,451 24,999 Depreciation and amortization 7,071 5,632 4,512 Total operating expenses 86,702 66,492 52,411 Gain (loss) from investment in joint venture ( 126 ) ( 352 ) — Operating loss ( 4,927 ) ( 1,920 ) ( 1,045 ) Interest expense 1,381 1,349 1,198 Other income, net ( 581 ) ( 1,629 ) ( 1,309 ) Loss before income taxes ( 5,727 ) ( 1,640 ) ( 934 ) Income tax expense (benefit) 113 169 ( 7 ) Net loss $ ( 5,840 ) $ ( 1,809 ) $ ( 927 ) Net loss per share: Basic and Diluted $ ( 0.16 ) $ ( 0.05 ) $ ( 0.03 ) Weighted average shares of common stock outstanding: Basic and Diluted 35,858,869 34,645,345 31,961,192 59 Trupanion, Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2020 2019 2018 Net loss $ ( 5,840 ) $ ( 1,809 ) $ ( 927 ) Other comprehensive income (loss): Foreign currency translation adjustments 2,496 359 ( 642 ) Net unrealized gain (loss) on available-for-sale debt securities 325 644 ( 19 ) Other comprehensive income (loss), net of taxes 2,821 1,003 ( 661 ) Comprehensive loss $ ( 3,019 ) $ ( 806 ) $ ( 1,588 ) 60 Trupanion, Inc. Consolidated Balance Sheets (in thousands, except share data) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 139,878 $ 29,168 Short-term investments 89,862 69,732 Accounts and other receivables 99,065 54,408 Prepaid expenses and other assets 8,222 5,513 Total current assets 337,027 158,821 Restricted cash 6,319 1,400 Long-term investments, at fair value 5,566 4,323 Property and equipment, net 72,602 70,372 Intangible assets, net 27,134 7,731 Other long-term assets 16,557 14,553 Goodwill 33,045 — Total assets $ 498,250 $ 257,200 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 6,059 $ 4,087 Accrued liabilities and other current liabilities 22,864 13,798 Reserve for veterinary invoices 28,929 21,194 Deferred revenue 92,547 52,546 Total current liabilities 150,399 91,625 Long-term debt — 26,086 Deferred tax liabilities 4,705 1,118 Other liabilities 3,207 1,611 Total liabilities 158,311 120,440 Stockholders’ equity: Common stock: $0.00001 par value per share, 100,000,000 shares authorized at December 31, 2020 and December 31, 2019, 40,383,972 and 39,450,807 shares issued and outstanding at December 31, 2020; 35,876,882 and 34,947,017 shares issued and outstanding at December 31, 2019 — — Preferred stock: $0.00001 par value per share, 10,000,000 shares authorized at December 31, 2020 and December 31, 2019, and 0 shares issued and outstanding at December 31, 2020 and December 31, 2019 — — Additional paid-in capital 439,007 232,731 Accumulated other comprehensive income (loss) 3,071 250 Accumulated deficit ( 91,360 ) ( 85,520 ) Treasury stock, at cost: 933,165 shares at December 31, 2020 and 929,865 shares at December 31, 2019 ( 10,779 ) ( 10,701 ) Total stockholders’ equity 339,939 136,760 Total liabilities and stockholders’ equity $ 498,250 $ 257,200 61 Trupanion, Inc. Consolidated Statements of Stockholders ’ Equity (in thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2018 30,121,496 $ — $ 134,511 $ ( 82,784 ) $ ( 92 ) $ ( 3,201 ) $ 48,434 Issuance of common stock from follow-on public offering 2,090,909 — 65,638 — — — 65,638 Issuance of common stock for acquisition of corporate real estate 303,030 — 9,633 — — — 9,633 Exercise of warrants, net 231,315 — 3,300 — — ( 3,000 ) 300 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 1,278,386 — 1,806 — — — 1,806 Stock-based compensation expense — — 4,950 — — — 4,950 Other comprehensive loss — — — — ( 661 ) — ( 661 ) Net loss — — — ( 927 ) — — ( 927 ) Balance at December 31, 2018 34,025,136 — 219,838 ( 83,711 ) ( 753 ) ( 6,201 ) 129,173 Exercise of warrants, net 306,120 — 4,800 — — ( 4,500 ) 300 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 615,761 — 1,043 — — — 1,043 Stock-based compensation expense — — 7,050 — — — 7,050 Other comprehensive income — — — — 1,003 — 1,003 Net loss — — — ( 1,809 ) — — ( 1,809 ) Balance at December 31, 2019 34,947,017 — 232,731 ( 85,520 ) 250 ( 10,701 ) 136,760 Issuance of common stock from private placement 3,636,364 — 192,265 — — — 192,265 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 870,726 — 4,864 — — — 4,864 Stock-based compensation expense — — 9,147 — — — 9,147 Repurchase of common stock ( 3,300 ) — — — — ( 78 ) ( 78 ) Other comprehensive income — — — — 2,821 — 2,821 Net loss — — — ( 5,840 ) — — ( 5,840 ) Balance at December 31, 2020 39,450,807 $ — $ 439,007 $ ( 91,360 ) $ 3,071 $ ( 10,779 ) $ 339,939 62 Trupanion, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 2018 Operating activities Net loss $ ( 5,840 ) $ ( 1,809 ) $ ( 927 ) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 7,071 5,632 4,512 Stock-based compensation expense 8,912 6,846 4,775 Other, net 153 105 ( 240 ) Changes in operating assets and liabilities: Accounts and other receivables ( 43,272 ) ( 22,772 ) ( 11,248 ) Prepaid expenses and other assets ( 2,839 ) ( 432 ) ( 2,628 ) Accounts payable, accrued liabilities, and other liabilities 9,951 4,110 4,531 Reserve for veterinary invoices 7,662 5,059 3,440 Deferred revenue 39,746 19,418 10,465 Net cash provided by operating activities 21,544 16,157 12,680 Investing activities Purchases of investment securities ( 65,286 ) ( 65,506 ) ( 52,862 ) Maturities of investment securities 44,066 49,762 35,413 Cash paid in business acquisition, net of cash acquired ( 48,133 ) — — Purchases of other investments — ( 4,000 ) ( 3,000 ) Acquisition of lease intangibles, related to corporate real estate acquisition — — ( 2,959 ) Purchases of property and equipment ( 7,451 ) ( 5,373 ) ( 56,936 ) Other 57 ( 2,891 ) ( 1,107 ) Net cash used in investing activities ( 76,747 ) ( 28,008 ) ( 81,451 ) Financing activities Issuance of common stock, net of offering costs 192,265 — 65,671 Proceeds from exercise of stock options 6,013 2,982 3,601 Shares withheld to satisfy tax withholding ( 1,115 ) ( 1,667 ) ( 1,839 ) Proceeds from debt financing, net of financing fees 6,213 13,167 13,431 Repayment of debt financing ( 32,450 ) — ( 10,000 ) Other financing ( 78 ) ( 438 ) 365 Net cash provided by financing activities 170,848 14,044 71,229 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net ( 16 ) 423 ( 812 ) Net change in cash, cash equivalents, and restricted cash 115,629 2,616 1,646 Cash, cash equivalents, and restricted cash at beginning of period 30,568 27,952 26,306 Cash, cash equivalents, and restricted cash at end of period $ 146,197 $ 30,568 $ 27,952 Supplemental disclosures Income taxes paid (refund) $ ( 31 ) $ 158 $ 216 Interest paid 1,363 1,188 1,019 Noncash investing and financing activities: Issuance of common stock for cashless exercise of warrants — 4,500 3,000 Issuance of common stock for acquisition of corporate real estate — — 9,640 Purchases of property and equipment included in accounts payable and accrued liabilities 861 485 106 Acquisition-related contingent consideration recorded as a liability $ 162 $ — $ — 63 Trupanion, Inc. Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Description of Business Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the "Company") provides medical insurance for cats and dogs throughout the United States, Canada, 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. Basis of Presentation The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from such estimates. Reclassifications Depreciation and amortization expenses have been reclassified as a separate line item in the consolidated statement of operations and prior period amounts have been reclassified from their original presentation to conform to the current period presentation. The Company has elected to present depreciation and amortization expenses as a separate line to better align with management's view of the Company's operating results. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may be in excess of the applicable federal deposit insurance corporation limits. The Company considers any cash account that is contractually restricted to withdrawal or use to be restricted cash. The Company is required to maintain certain restricted cash balance to comply with insurance company regulations. As of December 31, 2020, the Company was in compliance with all requirements. Accounts and Other Receivables Receivables are comprised of trade receivables and other miscellaneous receivables. Accounts and other receivables are carried at their estimated collectible amounts. Accounts receivable balance is primarily related to the Company’s other business segment where the Company generates revenue from underwriting policies through unaffiliated general agents. These policies are typically annual policies, with monthly payment terms through the end of the twelve-month period. The Company had $ 94.2 million and $ 50.0 million accounts receivable associated with underwriting these policies as of December 31, 2020 and 2019, respectively. Deferred Acquisition Costs The Company incurs certain costs, including premium taxes, fees and enrollment-based bonuses, and referral fees that directly relate to the successful acquisition of new or renewal customer contracts. These costs are deferred and are included in prepaid expenses and other assets on the consolidated balance sheet and amortized over the related policy term to the applicable financial statement line item, either sales and marketing expense or other cost of revenue. Deferred acquisition costs as of December 31, 2020 and 2019 were $ 2.9 million and $ 1.8 million, respectively. Amortized deferred acquisition costs classified within sales and marketing amounted to $ 3.2 million, $ 2.5 million, and $ 2.1 million and amortized deferred acquisition costs classified within other cost of revenue amounted to $ 23.2 million, $ 19.2 million, and $ 15.9 million, for the years ended December 31, 2020, 2019, and 2018, respectively. 64 Investments The Company invests in investment grade fixed income securities of varying maturities. Long-term investments are classified as available-for-sale and reported at fair value with unrealized gains and losses included in accumulated other comprehensive loss. Short-term investments are classified as held-to-maturity and reported at amortized cost. Premiums or discounts on fixed income securities are amortized or accreted over the life of the security and included in interest income. There have been no realized gains and losses on sales of fixed income securities. The Company evaluates whether declines in the fair value of its investments below book value are other-than-temporary. This evaluation includes the Company's ability and intent to hold the security until an expected recovery occurs, the severity and duration of the unrealized loss, as well as all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts, when developing estimates of cash flows expected to be collected. Fair Value of Financial Instruments The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs: Level 1 - Quoted prices in active markets for identical assets or liabilities Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly Level 3 - Unobservable inputs that reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability The Company's financial instruments, in addition to those presented in Note 8, Fair Value, include cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities. The carrying amounts of accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments. Property and Equipment Property and equipment primarily consists of building, land and land improvements, office equipment, internally-developed software related to the Company’s website, and internal support systems, capitalized during the application development stage of the project. Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the respective asset: Land Not depreciable Land improvements 10 years Building 39 years Software 3 to 5 years Office equipment 3 to 5 years Goodwill and Intangible Assets Goodwill and indefinite-lived intangible assets are not amortized. The Company reviews these assets for impairment at least annually or if indicators of potential impairment exist. Acquired finite-lived intangibles are amortized on a straight-line basis over the estimated useful lives of the assets. Asset Impairment Long-lived assets, including property, equipment, and intangible assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured as the amount the asset's carrying value exceeds its fair value. The Company has recognized no impairment loss on long-lived assets for the years ended December 31, 2020, 2019, and 2018. 65 Reserve for Veterinary Invoices 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. To determine the accrual, the Company makes assumptions based on its historical experience, including the number of veterinary invoices it expects to receive, the average cost of those veterinary invoices, the length of time between the date of the veterinary invoice and the date the Company receives it, the member's chosen deductible, and the Company's expected cost to process and administer the payments. As of each balance sheet date, the Company reevaluates its reserve and may adjust the estimate for new information. Deferred Revenue Deferred revenue is primarily related to the Company’s other business segment where the Company generates revenue from underwriting policies through unaffiliated general agents. These policies are typically annual policies, with monthly payment terms through the end of the twelve-month period. Deferred revenue also consists of subscription fees received or billed in advance of the subscription services within the Company's subscription business. Revenue Recognition The Company generates revenue primarily from subscription fees and through underwriting policies for unaffiliated general agents. Revenue is recognized pro-rata over the terms of the customer contracts. Veterinary Invoice Expense Veterinary invoice expense includes the Company’s costs to review veterinary invoices, administer the payments, and provide member services, and other operating expenses directly or indirectly related to this process. The Company also accrues for veterinary invoices that have been incurred but not yet received or paid. This also includes amounts paid by unaffiliated general agents, and an estimate of amounts incurred and not yet paid for the other business segment. Other Cost of Revenue Other cost of revenue for the subscription business segment includes direct and indirect member service expenses, Territory Partner renewal fees, credit card transaction fees and premium tax expenses. Other cost of revenue for the other business segment includes the commissions the Company pays to unaffiliated general agents and costs to administer the programs in the other business segment. Technology and Development Technology and development expenses primarily consist of personnel costs and related expenses for the Company's technology staff, which includes information technology development and infrastructure support and third-party services. It also includes expenses associated with development of new products and offerings. General and Administrative General and administrative expenses consist primarily of personnel costs and related expenses for the Company’s finance, actuarial, human resources, legal, regulatory, and general management functions, as well as facilities and professional services. Sales and Marketing Sales and marketing expenses consist of costs to educate veterinarians and consumers about the benefits of Trupanion, to generate leads, and to convert leads to enrolled pets, as well as print, online and promotional advertising costs, and employee compensation and related costs. Other Income, Net Other income, net, was $ 0.6 million, $ 1.6 million, and $ 1.3 million, including interest income of $ 0.6 million, $ 1.7 million, and $ 0.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. Advertising Advertising costs are expensed as incurred, with the exception of television advertisements, which are expensed the first time each advertisement is aired. Advertising costs amounted to $ 13.4 million, $ 7.8 million and $ 6.3 million, in the years ended December 31, 2020, 2019 and 2018, respectively. 66 Stock-Based Compensation Compensation expense related to stock-based transactions, including employee and non-employee stock option awards, restricted stock awards, and restricted stock units, is measured and recognized in the financial statements based on fair value. The fair value of restricted stock awards and restricted stock units is the common stock price as of the measurement date. The fair value of stock options is estimated on the measurement date using the Black-Scholes option-pricing model that requires management to apply judgment and make estimates, including: • Expected volatility —The Company estimates the expected volatility based on the historical volatility of a representative group of publicly traded companies with similar characteristics to the Company, and its own historical volatility; • Expected term for awards granted to employees —The Company has based its expected term for awards issued to employees on the simplified method, as permitted by the SEC Staff Accounting Bulletin Topic 14, Share-Based Payment; • Risk-free interest rate —The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options; and • Expected dividend yield —The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero. Stock-based compensation expense for stock options, restricted stock awards, and restricted stock units is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. The Company recognizes forfeitures when they occur. Income Taxes The Company uses the asset and liability approach for accounting and reporting income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases, operating loss, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a tax rate change is recognized in the period that includes the enactment date. Valuation allowances are provided for when it is considered more likely than not that deferred tax assets will not be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than a 50% likelihood of being realized. Penalties and interest are classified as a component of income taxes. Foreign Currency Translation The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities denominated in foreign currencies were translated to U.S. dollars, the reporting currency, at the exchange rates in effect on the balance sheet date. Revenue and expenses denominated in foreign currencies were translated to U.S. dollars using a weighted-average rate for the relevant reporting period. Cumulative translation adjustments of $( 2.1 ) million, $ 0.4 million, and $ 0.7 million were recorded in accumulated other comprehensive loss as of December 31, 2020, 2019, and 2018, respectively. Insurance Operations Effective January 1, 2015, the Company formed a segregated account in Bermuda as part of Wyndham Insurance Company (SAC) Limited (WICL), and entered into a revised fronting and reinsurance arrangement with Omega General Insurance Company (Omega) to include its newly formed segregated account. The Company maintains all risk with the business written in Canada and consolidates the entity in its financial statements. Dividends are allowed subject to the Segregated Accounts Company Act of 2000, which allows for dividends only to the extent that the entity remains solvent and the value of its assets remain greater than the aggregate of its liabilities and its issued share capital and share premium accounts. 67 For the Company’s Canadian business, all plans are written by Omega and the risk is assumed by the Company through a fronting and reinsurance agreement. Premiums are recognized and earned pro rata over the terms of the related customer contracts. Revenue recognized from the agreement in 2020, 2019, and 2018 was $ 81.3 million, $ 67.5 million and $ 57.4 million, respectively, and deferred revenue relating to this arrangement at December 31, 2020 and 2019 was $ 3.6 million and $ 2.7 million, respectively. Reinsurance revenue was 16 %, 18 %, and 19 % of total revenue in 2020, 2019, and 2018, respectively. Cash designated for the purpose of paying claims related to this reinsurance agreement was $ 6.5 million and $ 4.6 million at December 31, 2020 and 2019, respectively. In addition, as required by the Office of the Superintendent of Financial institutions regulations related to the Company’s reinsurance agreement with Omega, the Company is required to fund 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 December 31, 2020, the account balance was CAD $ 5.8 million and the Company was in compliance with all requirements. The Company has not transferred any risk to third-party reinsurers. Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and investments. The Company manages its risk by investing cash equivalents and investment securities in money market instruments and securities of the U.S. government, U.S. government agencies and high-credit-quality issuers of debt securities. Recently Adopted Accounting Pronouncements The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), using the modified retrospective approach on January 1, 2020. The ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The new standard did not have a material impact on the Company's consolidated statements of operations, balance sheets, stockholders' equity, or cash flows. The Company did not record any cumulative-effect adjustment to its retained earnings upon the adoption. 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 common shares outstanding using the treasury-stock method. Potential common shares outstanding include stock options, unvested restricted stock awards and restricted stock units, and warrants. The following potentially dilutive equity securities were not included in the diluted earnings per common share calculation because they would have had an antidilutive effect: As of December 31, 2020 2019 2018 Stock options 1,459,290 2,097,978 2,621,503 Restricted stock awards and restricted stock units 782,755 581,943 451,160 Warrants — — 480,000 68 3. Business Combination On October 30, 2020, the Company completed an acquisition of 100% of the equity of Aquarium Software Limited (Aquarium), a U.K.-based insurance software provider, for approximately $ 48.3 million in net cash. The acquired technology from Aquarium focuses on the pet space and, along with the acquired personnel, is intended to enable the Company to improve its back-end software to help facilitate growth opportunities. The Company incurred $ 0.5 million of acquisition related costs that were included in general and administrative expenses during the year ended December 31, 2020. The acquisition is recorded using the purchase method of accounting in accordance with ASC 805, Business Combinations, which requires that the assets acquired and liabilities assumed to be recorded at their respective fair values at the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the purchase method of accounting resulted in the recognition of intangible assets, the estimated fair values of which involved a discounted cash flow model and certain assumptions and estimates, including but not limited to, revenue growth rates and margins, attrition rates, and discount rates. These estimates are inherently uncertain and unanticipated events and circumstances may occur which could affect the accuracy or validity of estimates used in purchase accounting. The purchase price allocation recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): December 31, 2020 Current assets, net of cash acquired $ 1,469 Property and equipment 171 Amortizable intangible assets 19,512 Goodwill 31,352 Other long-term assets 1,421 Current liabilities ( 1,269 ) Deferred tax liability and other liabilities ( 4,361 ) Total Consideration Transferred, net of cash acquired $ 48,295 Acquired intangible assets included trade name, developed technologies, and customer relationships. These definite-lived intangible assets had weighted-average estimated useful lives of approximately 5.3 years. The goodwill recognized is attributable primarily to going concern value such as assembled workforce, future technology development, future customers, and expected synergies from incorporating the operations into Trupanion’s portfolio. None of the goodwill associated with this acquisition is expected to be deductible for income tax purposes. The results of Aquarium’s operations have been included in the consolidated financial statements since the acquisition date, but were immaterial to the Company's consolidated financial statements. 4. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2020 2019 Land and improvements $ 15,854 $ 15,854 Building and improvements 46,682 47,558 Software 27,707 22,976 Office equipment and other 4,146 3,384 Construction in progress 2,855 247 Property and equipment, at cost 97,244 90,019 Less: Accumulated depreciation ( 24,642 ) ( 19,647 ) Property and equipment, net $ 72,602 $ 70,372 69 Depreciation expense related to property and equipment was $ 5.2 million, $ 4.7 million and $ 4.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Acquisition of Real Estate In August 2018, the Company purchased a real property that houses the company headquarters located at 6100 Fourth Avenue South, Seattle, Washington. The real estate acquisition was determined to be an asset acquisition, with the purchase price allocated based on relative fair value of the assets acquired. Additionally, acquisition-related expenses were capitalized as part of the purchase price. The purchase price was $ 65.2 million, consisting of $ 55.0 million in cash, 303,030 shares of common stock with an estimated fair value of $ 9.6 million, and transaction costs totaling $ 0.6 million. 5. Goodwill and Intangible Assets Goodwill arises from business acquisitions in which the purchase price exceeds the fair value of tangible and intangible assets acquired less assumed liabilities. As discussed in Note 3—Business Combination, the Company recognized $ 31.4 million in goodwill on October 30, 2020. The carrying amount of goodwill as of December 31, 2020 was $ 33.0 million, due to a foreign exchange translation fluctuation of $ 1.6 million between the acquisition date and December 31, 2020. The following table presents the detail of intangible assets other than goodwill for the periods presented (in thousands): Gross Carrying Value Accumulated Amortization Net Carrying Value December 31, 2020: Licenses $ 4,773 $ — $ 4,773 Leases 2,959 ( 2,213 ) 746 Trade name 1,387 ( 23 ) 1,364 Developed technologies 11,512 ( 352 ) 11,160 Customer relationships 7,667 ( 256 ) 7,411 Patents, trademarks, and other 2,037 ( 357 ) 1,680 Total Intangibles $ 30,335 $ ( 3,201 ) $ 27,134 December 31, 2019: Licenses $ 4,773 $ — $ 4,773 Leases 2,959 ( 1,084 ) 1,875 Patents, trademarks, and other 1,287 ( 204 ) 1,083 Total Intangibles $ 9,019 $ ( 1,288 ) $ 7,731 The Company acquired an insurance company in 2007, which originally included licenses in 23 states. These licenses were valued at $ 4.8 million. The Company is currently licensed in all 50 states, the District of Columbia and Puerto Rico. Most licenses are renewed annually upon payment of various fees assessed by the issuing state. Renewal costs are expensed as incurred. This is considered an indefinite-lived intangible asset given the planned renewal of the certificates of authority and applicable licenses for the foreseeable future. The lease-related intangible assets relate to in-place lease agreements associated with the building acquisition in August 2018 and have a remaining weighted-average useful life of 2.4 years. Intangible assets acquired from the Aquarium acquisition included trade name, developed technologies, and customer relationships. These definite-lived intangible assets have a remaining weighted-average useful life of 5.1 years. Patents, trademarks, and other intangible assets have a remaining weighted-average useful life of 6.3 years. Amortization expense associated with intangible assets was $ 1.9 million, $ 0.9 million, and $ 0.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. 70 As of December 31, 2020, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows (in thousands): Year ending December 31: 2021 $ 4,725 2022 4,692 2023 4,359 2024 3,982 2025 3,288 Thereafter 905 Total $ 21,951 6. Investments The amortized cost, gross unrealized holding gains and losses, and fair value of long-term and short-term investments by major security type and class of security were as follows as of December 31, 2020 and 2019 (in thousands): Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2020 Long-term investments: Foreign deposits $ 4,564 $ — $ — $ 4,564 Municipal bond 1,000 2 — 1,002 $ 5,564 $ 2 $ — $ 5,566 Short-term investments: U.S. Treasury securities $ 6,494 $ — $ ( 2 ) $ 6,492 Certificates of deposit 1,696 — — 1,696 U.S. government funds 81,672 — — 81,672 $ 89,862 $ — $ ( 2 ) $ 89,860 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2019 Long-term investments: Foreign deposits $ 3,323 $ — $ — $ 3,323 Municipal bond 1,000 — — 1,000 $ 4,323 $ — $ — $ 4,323 Short-term investments: U.S. Treasury securities $ 6,156 $ — $ ( 1 ) $ 6,155 Certificates of deposit 440 — — 440 U.S. government funds 63,136 — — 63,136 $ 69,732 $ — $ ( 1 ) $ 69,731 71 Maturities of debt securities classified as available-for-sale were as follows (in thousands): December 31, 2020 Amortized Cost Fair Value Available-for-sale: Due after one year through five years $ 5,564 $ 5,566 $ 5,564 $ 5,566 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 debt securities, the Company determined that the unrealized losses were immaterial and due to non-credit factors. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell, the securities prior to maturity or prior to the recovery of the amortized cost basis. 7. Other Investments Investment in Variable Interest Entity The Company has invested $ 7.0 million in preferred stock of a privately held corporation with a complementary business line. 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 shares issued by the variable interest entity in 2023 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. Additionally, the Company has extended a $ 2.5 million revolving line of credit to the variable interest entity to fund its inventory purchases. The Company's investment and amounts loaned under the line of credit are recorded in other long-term assets on its consolidated balance sheet. The outstanding loan balance under the line of credit was $ 2.5 million as of December 31, 2020 and 2019. The Company has also entered into a series of agreements to provide ancillary services to the variable interest entity at cost. The Company provided $ 1.2 million and $ 1.4 million of these services for the years ended December 31, 2020 and 2019, respectively, which were recorded against its operating expenses. Investment in Joint Venture In September 2018, the Company acquired a non-controlling equity interest in a joint venture in Australia, whereby it has committed to licensing certain intellectual property and contributing up to $ 2.2 million AUD upon the achievement of specific operational milestones over a period of at least four years from the agreement execution date. As of December 31, 2020, the Company has contributed $ 0.5 million AUD. This equity investment is accounted for using the equity method and is classified in other long-term assets on the Company's consolidated balance sheet. The Company's share of income and losses from this equity method investment is included in gain (loss) from investment in joint venture on its consolidated statement of operations. Also included in this line item are income and expenses associated with administrative services provided to the joint venture. 72 8. Fair Value 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 December 31, 2020 Fair Value Level 1 Level 2 Level 3 Assets Restricted cash $ 6,319 $ 6,319 $ — $ — Money market funds 99,054 99,054 — — Fixed maturities: Foreign deposits 4,564 4,564 — — Municipal bond 1,002 — 1,002 — Investment in variable interest entity 7,949 — — 7,949 Total $ 118,888 $ 109,937 $ 1,002 $ 7,949 As of December 31, 2019 Fair Value Level 1 Level 2 Level 3 Assets Restricted cash $ 1,400 $ 1,400 $ — $ — Money market funds 1,050 1,050 — — Fixed maturities: Foreign deposits 3,323 3,323 — — Municipal bond 1,000 — 1,000 — Investment in variable interest entity 7,625 — — 7,625 Total $ 14,398 $ 5,773 $ 1,000 $ 7,625 The Company measures the fair value of restricted cash, money market funds, and foreign deposits based on quoted prices in active markets for identical assets. The fair value of the municipal bond 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. Short-term investments are carried at amortized cost and the fair value and changes in unrealized gains (losses) are disclosed in Note 6, Investments. The fair value of these investments is determined in the same manner as for available-for-sale securities and is considered a Level 1 measurement. The preferred stock investment in the variable interest entity (see Note 7) 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. Estimated fair value was $ 7.9 million and $ 7.6 million as of December 31, 2020 and December 31, 2019, respectively, recorded in other long-term assets on the Company's consolidated balance sheet. Unrealized gains of $ 0.3 million and $ 0.6 million were recorded in other comprehensive income in the year ended December 31, 2020, and 2019, respectively. Fair Value Disclosures The Company's other long-term assets balance included notes receivable of $ 6.1 million as of December 31, 2020 and 2019, recorded at their estimated collectible amount. The Company estimates that the carrying value of the notes receivable approximates the fair value. The estimated fair value represents a Level 3 measurement within the fair value hierarchy, and is based on market interest rates and the assessed creditworthiness of the third party. There was no significant activity in Level 3 of the hierarchy during the year ended December 31, 2020. 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 year ended December 31, 2020 and 2019. 73 9. Commitments and Contingencies The following summarizes the Company's contractual commitments as of December 31, 2020 (in thousands): Year Ending December 31, 2021 2022 2023 2024 2025 Thereafter Total Lease obligations $ 176 $ 146 $ 136 $ 136 $ 136 $ 477 $ 1,207 Outstanding purchase commitments 5,592 1,692 422 168 330 2,128 10,332 Total $ 5,768 $ 1,838 $ 558 $ 304 $ 466 $ 2,605 $ 11,539 Legal Proceedings Certain state insurance regulators in the United States have contacted the Company regarding whether employees who had helped prospective members enroll by telephone in prior years were required to have an insurance license to conduct such telephone conversations. To date, the Company has resolved each of these matters in non-material amounts and believes it is compliant with the applicable regulations. The Company is currently engaged with a limited number of state insurance regulators to resolve this same legacy issue and believes it has adequately reserved for these matters. In addition, 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. 10. 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 reserve is made for each of the Company's segments, subscription and other business, and are 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): Year Ended December 31, Subscription 2020 2019 2018 Reserve at beginning of year $ 15,541 $ 13,875 $ 11,059 Veterinary invoice expense during the period related to: Current year 278,776 231,831 190,642 Prior years 229 585 409 Total veterinary invoice expense 279,005 232,416 191,051 Amounts paid during the period related to: Current year 259,971 217,538 177,418 Prior years 13,387 12,494 10,130 Total paid 273,358 230,032 187,548 Non-cash expenses 1,263 718 687 Reserve at end of period $ 19,925 $ 15,541 $ 13,875 74 The Company's reserve for the subscription business segment increased $ 4.4 million from $ 15.5 million at December 31, 2019 to $ 19.9 million at December 31, 2020. This change was comprised of $ 279.0 million in expense recorded during the period less $ 273.4 million in payments of veterinary invoices. This $ 279.0 million in veterinary invoice expense incurred included an increase of $ 0.2 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. The Company's adjustments to prior year reserves were an increase of $ 0.6 million and $ 0.4 million as a result of analysis of payment trends in the years ended December 31, 2019 and 2018, respectively. Summarized below are the changes in total liability for the Company's other business segment (in thousands): Year Ended December 31, Other Business 2020 2019 2018 Reserve at beginning of year $ 5,653 $ 2,187 $ 1,697 Veterinary invoice expense during the period related to: Current year 72,286 38,881 23,784 Prior years ( 167 ) ( 350 ) ( 296 ) Total veterinary invoice expense 72,119 38,531 23,488 Amounts paid during the period related to: Current year 63,359 33,254 21,615 Prior years 5,409 1,811 1,383 Total paid 68,768 35,065 22,998 Non-cash expenses — — — Reserve at end of period $ 9,004 $ 5,653 $ 2,187 The Company’s reserve for the other business segment increased $ 3.4 million from $ 5.7 million at December 31, 2019 to $ 9.0 million at December 31, 2020. This change was comprised of $ 72.1 million in expense recorded during the period less $ 68.8 million in payments of veterinary invoices. This $ 72.1 million in veterinary invoice expense incurred included a reduction of $ 0.2 million to the reserves relating to prior years, which was the result of ongoing analysis of recent payment trends. The Company's adjustments to decrease prior year reserves were $ 0.4 million and $ 0.3 million as a result of analysis of payment trends in each of the years ended December 31, 2019 and 2018, respectively. Veterinary invoice expenses In the following tables, the cumulative number of veterinary invoices represents the total number received as of December 31, 2020, by year the veterinary invoice relates to, referred to as the year of occurrence. If a pet is injured or becomes ill, multiple trips to the veterinarian may result in several invoices. Each of these veterinary invoices is included in the cumulative number, regardless of whether the veterinary invoice was paid. Information for years 2017 through 2019 is provided as required supplementary information. Amounts in these tables are presented on a constant currency basis to remove the impact of changes in the foreign currency exchange rate on development. The cumulative expenses as of the end of each year are revalued using the currency exchange rate as of December 31, 2020. 75 The following table summarizes the development of veterinary invoice expense, on a constant currency basis, for the Company's subscription business segment by year of occurrence (in thousands, except for cumulative number of veterinary invoices data): Cumulative veterinary invoice expenses Reserve Cumulative number of veterinary invoices As of December 31, As of December 31, Subscription 2017 2018 2019 2020 2020 2020 Year of Occurrence (unaudited) (unaudited) (unaudited) 2017 $ 156,139 $ 156,414 $ 156,416 $ 156,172 $ — 730,136 2018 $ 191,194 $ 191,679 $ 191,775 $ 702 881,595 2019 $ 233,609 $ 233,986 $ 1,681 1,042,392 2020 $ 281,248 $ 17,542 1,086,816 $ 863,181 $ 19,925 The following table summarizes the development of veterinary invoice expense, on a constant currency basis, for the Company's other business segment by year of occurrence (in thousands, except for cumulative number of veterinary invoices data): Cumulative veterinary invoice expenses Reserve Cumulative number of veterinary invoices As of December 31, As of December 31, Other Business 2017 2018 2019 2020 2020 2020 Year of Occurrence (unaudited) (unaudited) (unaudited) 2017 $ 14,740 $ 14,422 $ 14,473 $ 14,482 $ — 106,124 2018 $ 23,786 $ 23,375 $ 23,469 $ 45 174,778 2019 $ 38,885 $ 38,610 $ 32 281,215 2020 $ 72,297 $ 8,927 497,165 $ 148,858 $ 9,004 Cumulative paid veterinary invoice expense In the following tables, amounts are by year the veterinary invoice relates to, referred to as the year of occurrence. Amounts in these tables are presented on a constant currency basis to remove the impact of changes in the foreign currency exchange rate. The cumulative amounts paid as of the end of each year are revalued using the currency exchange rate as of December 31, 2020. Information for years 2017 through 2019 is provided as required supplementary information. The following table summarizes the amounts paid for veterinary invoices, inclusive of related internal processing costs and reported on a constant currency basis, for the subscription segment (in thousands): Year Ended December 31, Subscription 2017 2018 2019 2020 Year of Occurrence (unaudited) (unaudited) (unaudited) 2017 $ 145,793 $ 155,412 $ 155,951 $ 156,172 2018 $ 178,554 $ 190,311 $ 191,073 2019 $ 219,993 $ 232,305 2020 $ 263,706 $ 843,256 Total amounts unpaid and recorded as a liability $ 19,925 76 The following table summarizes the amounts paid for veterinary invoices, inclusive of related internal processing costs and reported on a constant currency basis, for the other business segment (in thousands): Year Ended December 31, Other Business 2017 2018 2019 2020 Year of Occurrence (unaudited) (unaudited) (unaudited) 2017 $ 13,054 $ 14,410 $ 14,468 $ 14,482 2018 $ 21,617 $ 23,355 $ 23,424 2019 $ 33,258 $ 38,578 2020 $ 63,370 $ 139,854 Total amounts unpaid and recorded as a liability $ 9,004 11. Debt The Company had a revolving line of credit of up to $ 50.0 million with a maturity date in June 2022. The debt balance, net of unamortized financing fees, was $ 26.1 million as of December 31, 2019. In December 2020, the Company elected to terminate the line of credit and repaid all of the outstanding obligations. 12. Stock-Based Compensation Stock-based compensation expense includes stock options, restricted stock awards, and restricted stock units granted to employees and non-employees and has been reported in the Company’s consolidated statements of operations depending on the function performed by the employee or non-employee. Stock-based compensation expense recognized in each category of the consolidated statement of operations for the years ended December 31, 2020, 2019 and 2018 was as follows (in thousands): Year Ended December 31, 2020 2019 2018 Veterinary invoice expense $ 1,118 $ 697 $ 571 Other cost of revenue 468 353 356 Technology and development 758 364 209 General and administrative 3,795 3,312 2,304 Sales and marketing 2,773 2,120 1,335 Total expensed stock-based compensation 8,912 6,846 4,775 Capitalized stock-based compensation 235 204 175 Total stock-based compensation $ 9,147 $ 7,050 $ 4,950 As of December 31, 2020, the Company had 41,521 unvested stock options and 782,755 unvested restricted stock awards and restricted stock units. Total stock-based compensation expense of $ 0.3 million related to unvested stock options and $ 24.5 million related to unvested restricted stock awards and restricted stock units is expected to be recognized over a weighted-average period of approximately 0.4 years and 2.8 years, respectively. Stock Options The grant date fair value of stock option awards are estimated on the date of grant using the Black-Scholes option-pricing model. The Company did not grant any stock options during the years ended December 31, 2020, 2019, and 2018. 77 The following table presents information regarding stock options granted, exercised and forfeited for the periods presented: Number of Options Weighted Average Exercise Price per Share Aggregate Intrinsic Value (in thousands) Outstanding as of January 1, 2018 4,006,399 $ 7.16 $ 88,578 Granted — — — Exercised ( 1,292,037 ) 2.82 36,625 Forfeited ( 92,859 ) 15.36 — Outstanding as of December 31, 2018 2,621,503 9.01 43,136 Granted — — — Exercised ( 510,268 ) 5.28 13,151 Forfeited ( 13,257 ) 18.23 — Outstanding as of December 31, 2019 2,097,978 9.86 57,907 Granted — — — Exercised ( 626,554 ) 9.54 35,696 Forfeited ( 12,134 ) 17.41 — Outstanding as of December 31, 2020 1,459,290 9.93 160,200 Exercisable at December 31, 2020 1,417,769 $ 9.69 $ 155,984 As of December 31, 2020, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 4.1 years and 4.0 years, respectively. T he fair value of options vested were as follows for the years ended December 31, 2020, 2019, and 2018. The Company didn't grant any stock options in these three years. Weighted Average Grant Date Fair Value per Share Fair Value of Options Vested (in thousands) Year: 2018 $ — $ 2,665 2019 $ — $ 1,591 2020 $ — $ 1,105 78 Restricted Stock Awards and Restricted Stock Units The below table summarizes the Company’s restricted stock award and restricted stock unit activity for the years ended December 31, 2020, 2019 and 2018: Number of Shares Weighted Average Grant Date Fair Value per Share Unvested shares as of January 1, 2018 256,842 $ 4.77 Granted 375,313 28.10 Vested ( 149,213 ) 9.74 Forfeited ( 31,782 ) 28.57 Unvested shares as of December 31, 2018 451,160 22.16 Granted 459,523 30.03 Vested ( 276,184 ) 18.20 Forfeited ( 52,556 ) 29.85 Unvested shares as of December 31, 2019 581,943 29.56 Granted 535,184 37.60 Vested ( 266,640 ) 29.77 Forfeited ( 67,732 ) 31.51 Unvested shares as of December 31, 2020 782,755 $ 34.81 13. Leases The Company leases certain office space and equipment from third parties and recognizes lease expense on a straight-line basis over the lease term. For operating leases with an initial term of over 12 months, the Company recorded $ 0.9 million and $ 0.1 million right-of-use assets and lease liabilities on its consolidated balance sheets as of December 31, 2020 and 2019, respectively. Leases with an initial term of 12 months or less are not recorded on its consolidated balance sheets. Rental expense for operating leases was $ 0.2 million, $ 0.4 million and $ 1.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company also leases a portion of its home office building to third parties and records related rental income within general and administrative expense in the consolidated statements of operations. These leases have remaining lease terms of up to 6 years, some of which give tenants options to terminate the leases early, with termination fees required. The Company recorded rental income of $ 1.9 million and $ 2.2 million for the years ended December 31, 2020 and December 31, 2019, respectively. The following table summarizes the Company's future rental payments to be received from non-cancellable leases in place as of December 31, 2020 (in thousands): Year ending December 31: 2021 $ 1,303 2022 1,345 2023 882 2024 384 2025 319 Thereafter 100 Total rental payments $ 4,333 79 14. Stockholders ’ Equity Common Stock and Preferred Stock As of December 31, 2020, the Company had 100,000,000 shares of common stock authorized and 39,450,807 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 December 31, 2020, the Company had 10,000,000 shares of undesignated shares of preferred stock authorized for future issuance and did not have any outstanding shares of preferred stock. The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company, whenever funds are legally available. These rights are subordinate to the dividend rights of holders of any senior classes of stock outstanding at the time. The Company does not intend to declare or pay any cash dividends in the foreseeable future. Issuance of Common Stock in a Private Placement The Company issued 3,636,364 shares of common stock through a private placement in the fourth quarter of 2020 for net proceeds of $ 192.3 million. The newly issued shares are subject to a minimum holding period of three years. Share Repurchase Program In November 2019, the Company's board of directors approved a share repurchase program, pursuant to which the Company may repurchase up to $ 15.0 million of its outstanding shares over the twelve-month period following the approval. The Company repurchased 3,300 shares during year ended December 31, 2020. The share repurchase program expired in November 2020. 80 15. Segments The Company has two reporting segments: subscription business and other business. The subscription business segment currently includes revenue from subscription fees related to our “Trupanion” branded products, while the other business segment is comprised of revenue from other product offerings that generally have a business-to-business relationship and different margin profiles than our subscription segment, including revenue from writing policies on behalf of third parties and revenue from other products and software solutions. The chief operating decision maker reviews revenue and operating income (loss) to evaluate segment performance. Revenue, veterinary invoice expense, other cost of revenue, and sales and marketing 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 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): Year Ended December 31, 2020 2019 2018 Subscription business: Revenue $ 387,732 $ 321,163 $ 263,738 Veterinary invoice expense 279,005 232,415 191,051 Other cost of revenue 35,870 29,724 24,941 Technology and development 7,673 5,879 5,031 General and administrative 16,866 15,397 14,853 Sales and marketing 47,017 35,037 24,623 Depreciation and amortization 5,451 4,725 3,911 Subscription business operating income (loss) ( 4,150 ) ( 2,014 ) ( 672 ) Other business: Revenue 114,296 62,773 40,218 Veterinary invoice expense 72,119 38,532 23,488 Other cost of revenue 33,133 18,341 13,110 Technology and development 2,274 1,146 765 General and administrative 4,981 2,987 2,251 Sales and marketing 820 414 376 Depreciation and amortization 1,620 907 601 Other business operating income (loss) ( 651 ) 446 ( 373 ) Gain (loss) from investment in joint venture ( 126 ) ( 352 ) — Total operating income (loss) $ ( 4,927 ) $ ( 1,920 ) $ ( 1,045 ) The following table presents the Company’s revenue by geographic region of the member (in thousands): Year Ended December 31, 2020 2019 2018 United States $ 419,162 $ 316,138 $ 246,280 Canada and Other 82,866 67,798 57,676 Total revenue $ 502,028 $ 383,936 $ 303,956 Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2020 and 2019. 81 16. Dividend Restrictions and Statutory Surplus The Company’s business operations are conducted through subsidiaries, one of which is an insurance company domiciled in New York, American Pet Insurance Company, and one of which is a segregated cell business, Wyndham Segregated Account AX, located in Bermuda. In addition to general state law restrictions on payments of dividends and other distributions to stockholders applicable to all corporations, insurance companies are subject to further regulations that, among other things, may require such companies to maintain certain levels of equity and restrict the amount of dividends and other distributions that may be paid to their parent corporations. New York law restricts the ability of the Company's insurance subsidiary in New York to pay dividends to its holding company parent. These restrictions are based in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval, and dividends in larger amounts, or extraordinary dividends, are subject to approval by the New York State Department of Financial Services, the subsidiary's primary regulator. An extraordinary dividend or distribution is defined as a dividend or distribution that, in the aggregate in any 12-month period, exceeds the lesser of (i) 10% of surplus as of the preceding December 31 or (ii) the insurer’s adjusted net investment income for such 12-month period, not including realized capital gains. Under regulatory requirements at December 31, 2020, the amount of dividends that may be paid by the Company’s insurance subsidiary in New York to the Company without prior approval by regulatory authorities was $ 0.5 million. This insurance subsidiary did not pay dividends to the Company during the years ended December 31, 2020, 2019, and 2018. The Company's insurance subsidiary in Bermuda is regulated by the Bermuda Monetary Authority. Under the Bermuda Companies Act of 1981, as amended, a Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would be after the payment, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities. The Segregated Accounts Company Act of 2000 further requires that dividends out of a segregated account can only be paid to the extent that the cell remains solvent. The value of its assets must remain greater than the aggregate of its liabilities, issued share capital, and share premium accounts. Per our contractual agreements with Wyndham Insurance Company (SAC) Limited, the allowable dividend is equivalent to the positive undistributed profit attributable to the shares. This insurance subsidiary paid the Company a dividend of $ 4.7 million, $ 3.9 million, and $ 2.2 million during the years ended December 31, 2020, 2019 and 2018, respectfully. The statutory net income for 2020, 2019 and 2018 and statutory capital and surplus at December 31, 2020, 2019 and 2018, for the Company’s insurance subsidiary in New York were as follows (in thousands): As of December 31, 2020 2019 2018 Statutory net income $ 17,547 $ 16,311 $ 11,021 Statutory capital and surplus $ 93,171 $ 73,810 $ 56,244 As of December 31, 2020, the Company’s insurance subsidiary in New York maintained $ 93.2 million of statutory capital and surplus which was above the required amount of $ 79.1 million of statutory capital and surplus to avoid additional regulatory oversight. As of December 31, 2020, the Company had $ 6.7 million on deposit with various states in which it writes policies. 17. Income Taxes Income (l oss) before income taxes was as follows for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 United States $ ( 5,408 ) $ ( 1,783 ) $ ( 1,054 ) Foreign ( 319 ) 143 120 $ ( 5,727 ) $ ( 1,640 ) $ ( 934 ) 82 The components of income tax expense (benefit) were as follows (in thousands): Year Ended December 31, 2020 2019 2018 Current: U.S. federal & state $ 198 $ 12 $ ( 10 ) Foreign 45 52 37 243 64 27 Deferred: U.S. federal & state ( 9 ) 116 ( 32 ) Foreign ( 121 ) ( 11 ) ( 2 ) ( 130 ) 105 ( 34 ) Income tax expense (benefit) $ 113 $ 169 $ ( 7 ) A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements is presented below: Year Ended December 31, 2020 2019 2018 Federal income taxes at statutory rate 21.0 % 21.0 % 21.0 % U.S. state income taxes ( 2.6 ) ( 7.8 ) 4.6 Equity compensation 122.3 177.2 828.5 Change in valuation allowance ( 136.0 ) ( 184.2 ) ( 857.4 ) Meals and entertainment ( 0.5 ) ( 4.9 ) ( 5.4 ) Nondeductible fines and settlements ( 1.1 ) ( 9.2 ) ( 2.1 ) Other, net ( 2.5 ) ( 11.6 ) ( 8.6 ) Credits ( 2.6 ) 9.2 20.2 Effective income tax rate ( 2.0 ) % ( 10.3 ) % 0.8 % The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands): As of December 31, 2020 2019 Deferred tax assets: Deferred revenue $ 3,921 $ 2,219 Accruals and reserves 1,822 885 Net operating loss carryforwards 37,070 30,569 Depreciation and amortization 27 240 Equity compensation 1,776 2,102 Credits 697 547 Other 706 243 Total deferred tax assets 46,019 36,805 Deferred tax liabilities: Deferred costs ( 637 ) ( 398 ) Intangible assets ( 4,895 ) ( 1,117 ) Other ( 960 ) ( 775 ) Total deferred tax liabilities ( 6,492 ) ( 2,290 ) Total deferred taxes 39,527 34,515 Less deferred tax asset valuation allowance ( 44,194 ) ( 35,609 ) Net deferred tax liability $ ( 4,667 ) $ ( 1,094 ) 83 At December 31, 2020, the Company had U.S. federal and state net operating loss carryforwards of $ 37.0 million (tax-effected) and U.S. federal income tax credits of $ 0.7 million. Use of carryforwards is limited based on the future income of the Company. The federal net operating loss carryforwards will begin to expire in 2027. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss carryforwards and credit carryforwards may be limited if the Company experiences an ownership change. As of December 31, 2020, the utilization of approximately $ 0.5 million of net operating losses are subject to limitation as a result of prior ownership changes; however, subsequent ownership changes may further affect the limitation in future years. Additionally, the Company has foreign net operating loss carryforwards of $ 0.1 million which may be carried forward indefinitely. A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its U.S. Federal deferred tax assets as of December 31, 2020 and 2019 because the Company’s management has determined that it is more likely than not that these assets will not be fully realized. For the year ended December 31, 2020, the Company recognized a net increase of $ 8.6 million in valuation allowance against its net deferred tax assets associated with U.S. federal and certain state jurisdictions, primarily attributable to current year activity. The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2017 through 2020. The Company is also open to examination for 2007 and forward with respect to net operating loss carryforwards generated and carried forward from those years in the United States. The Company is subject to taxation in various states and foreign jurisdictions, and may be subject to audit or examination by the relevant authorities in respect to those particular jurisdictions primarily for 2016 and thereafter. For the year ended December 31, 2020, the Company considers its foreign earnings to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. A deferred tax liability related to taxes due upon repatriation to the U.S. has not been recorded. The Company is booking Global Intangible Low-Taxed Income ("GILTI") on a current basis and is not booking deferred taxes related to GILTI. The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. If the tax position meets the more-likely-than-not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement with the relevant tax authority is recognized in the financial statements. No significant changes in uncertain tax positions are expected in the next twelve months. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2020 2019 2018 Balance, beginning of year $ 113 $ 89 $ 327 Increases (decreases) to tax positions related to prior periods 15 19 ( 243 ) Increases to tax positions related to the current year 5 5 5 Balance, end of year $ 133 $ 113 $ 89 18. Employee Benefits The Company has a 401(k) plan for its U.S. employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows the Company to make a matching contribution, subject to certain limitations. To date, the Company has made no contributions to the 401(k) plan. 84 19. 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 $ 2.7 million of expenses for consulting services provided by the investee during the year ended December 31, 2020. 20. Quarterly Financial Information (Unaudited) The following table contains quarterly financial data for the years ended December 31, 2020 and 2019 (in thousands, except per share data). The unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements and includes all adjustments that the Company considers necessary for a fair presentation of the information shown. The operating results for any fiscal quarter are not necessarily indicative of the operating results for a full fiscal year or any future period and there can be no assurances that any trend reflected in such results will continue in the future. Three Months Ended Dec. 31, 2020 Sept. 30, 2020 Jun. 30, 2020 Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 Jun. 30, 2019 Mar. 31, 2019 Total revenues $ 142,687 $ 130,120 $ 117,920 $ 111,301 $ 105,483 $ 99,276 $ 92,199 $ 86,978 Operating income (loss) ( 3,169 ) ( 2,257 ) 1,509 ( 1,010 ) 633 843 ( 2,113 ) ( 1,283 ) Net income (loss) $ ( 3,502 ) $ ( 2,558 ) $ 1,353 $ ( 1,133 ) $ 636 $ 782 $ ( 1,931 ) $ ( 1,296 ) Net income (loss) per share: Basic $ ( 0.09 ) $ ( 0.07 ) $ 0.04 $ ( 0.03 ) $ 0.02 $ 0.02 $ ( 0.06 ) $ ( 0.04 ) Diluted $ ( 0.09 ) $ ( 0.07 ) $ 0.04 $ ( 0.03 ) $ 0.02 $ 0.02 $ ( 0.06 ) $ ( 0.04 ) Weighted-average common shares outstanding: Basic 37,841,055 35,426,742 35,143,592 35,007,052 34,876,438 34,876,782 34,610,709 34,292,367 Diluted 37,841,055 35,426,742 36,688,167 35,007,052 36,354,620 36,399,136 34,610,709 34,292,367 85 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.