What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-17 compared with 2021-02-12 · 111 added, 164 removed, 729 unchanged (27% of the section changed)

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Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Fir m (PCAOB ID:

Consolidated Statements of Operations

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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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

Reserve for Veterinary Invoices

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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.

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

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Veterinary invoice expense (1)

486,062 351,124 270,947

Other cost of revenue (1)

108,583 69,003 48,065

Total cost of revenue 594,645 420,127 319,012

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Technology and development (1)

16,866 9,947 7,025

General and administrative (1)

Sales and marketing 47,837 35,451 24,999

31,893 21,847 18,384

New pet acquisition expense (1)

78,647 47,837 35,451

Depreciation and amortization 11,965 7,071 5,632

Total operating expenses 139,371 86,702 66,492

Gain (loss) from investment in joint venture ( 126 ) ( 352 ) —

Loss from investment in joint venture ( 171 ) ( 126 ) ( 352 )

Operating loss ( 35,196 ) ( 4,927 ) ( 1,920 )

Interest expense 10 1,381 1,349

Other income, net ( 581 ) ( 1,629 ) ( 1,309 )

Other expense (income), net 14 ( 581 ) ( 1,629 )

Loss before income taxes ( 35,220 ) ( 5,727 ) ( 1,640 )

Income tax expense (benefit) 113 169 ( 7 )

Income tax expense 310 113 169

Net loss $ ( 35,530 ) $ ( 5,840 ) $ ( 1,809 )

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Basic and diluted 40,137,505 35,858,869 34,645,345

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

Veterinary invoice expense 4,538 1,118 697

Other cost of revenue 2,610 468 353

Technology and development 3,056 758 364

General and administrative 8,862 3,795 3,312

New pet acquisition expense 9,160 2,773 2,120

Trupanion, Inc.

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Foreign currency translation adjustments ( 496 ) 2,496 359

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 )

Net unrealized gain on available-for-sale debt securities 502 325 644

Other comprehensive income, net of taxes 6 2,821 1,003

Comprehensive loss $ ( 35,524 ) $ ( 3,019 ) $ ( 806 )

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Short-term investments 126,012 89,862

Accounts and other receivables 99,065 54,408

Accounts and other receivables, net of allowance for doubtful accounts of $342 and $271 165,217 99,065

Prepaid expenses and other assets 12,325 8,222

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Total current liabilities 223,696 150,399

Long-term debt — 26,086

Deferred tax liabilities 2,827 4,705

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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;

$0.00001 par value per share, 100,000,000 shares authorized;

41,408,350 and 40,475,185 shares issued and outstanding at December 31, 2021;

40,383,972 and 39,450,807 shares issued and outstanding at December 31, 2020 — —

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 — —

$0.00001 par value per share, 10,000,000 shares authorized;

no shares issued and outstanding — —

Additional paid-in capital 466,792 439,007

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Treasury stock, at cost:

933,165 shares at December 31, 2020 and 929,865 shares at December 31, 2019 ( 10,779 ) ( 10,701 )

933,165 shares at December 31, 2021 and 2020 ( 10,779 ) ( 10,779 )

Total stockholders’ equity 332,200 339,939

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Balance at January 1, 2019 34,025,136 $ — $ 219,838 $ ( 83,711 ) $ ( 753 ) $ ( 6,201 ) $ 129,173

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 306,120 — 4,800 — — ( 4,500 ) 300

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Stock-based compensation expense — — 7,050 — — — 7,050

Other comprehensive loss — — — — ( 661 ) — ( 661 )

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

Exercise of warrants, net 306,120 — 4,800 — — ( 4,500 ) 300

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

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Balance at December 31, 2020 39,450,807 — 439,007 ( 91,360 ) 3,071 ( 10,779 ) 339,939

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 1,024,378 — ( 1,117 ) — — — ( 1,117 )

Stock-based compensation expense — — 28,902 — — — 28,902

Repurchase of common stock ( 3,300 ) — — — — ( 78 ) ( 78 )

Other comprehensive income — — — — 6 — 6

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Purchases of other investments — — ( 4,000 )

Acquisition of lease intangibles, related to corporate real estate acquisition — — ( 2,959 )

Purchases of property and equipment ( 12,355 ) ( 7,451 ) ( 5,373 )

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Repayment of debt financing — ( 32,450 ) —

Other financing ( 78 ) ( 438 ) 365

Net cash provided by financing activities 170,848 14,044 71,229

Other — ( 78 ) ( 438 )

Net cash (used in) provided by financing activities ( 1,125 ) 170,848 14,044

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net 252 ( 16 ) 423

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Issuance of common stock for cashless exercise of warrants — — 4,500

Issuance of common stock for acquisition of corporate real estate — — 9,640

Purchases of property and equipment included in accounts payable and accrued liabilities 729 861 485

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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.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

Actual results could differ from such estimates.

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.

Depreciation and amortization expenses have been reclassified as a separate line item in the consolidated statement of operations since 2020 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 item to better align with management's view of the Company's operating results.

Cash, Cash Equivalents and Restricted Cash

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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.

The Company is required to maintain certain restricted cash balances to comply with insurance company regulations.

As of December 31, 2021, the Company was in compliance with all requirements.

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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.

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 new pet acquisition expense or other cost of revenue.

Deferred acquisition costs as of December 31, 2021 and 2020 were $ 4.3 million and $ 2.9 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.

Amortized deferred acquisition costs classified within new pet acquisition expense amounted to $ 4.7 million, $ 3.2 million, and $ 2.5 million and amortized deferred acquisition costs classified within other cost of revenue amounted to $ 30.5 million, $ 23.2 million, and $ 19.2 million, for the years ended December 31, 2021, 2020, and 2019, respectively.

The Company invests in investment grade fixed income securities of varying maturities.

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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.

New Pet Acquisition Expense

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

New pet acquisition expense was previously termed “sales and marketing” on the consolidated statement of operations.

This update represents a change in name only.

It does not denote a change in method of accounting.

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.

Other income, net, was nil , $ 0.6 million, and $ 1.6 million, including interest income of $ 0.3 million, $ 0.6 million, and $ 1.7 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Advertising costs are expensed as incurred, with the exception of television advertisements, which are expensed the first time each advertisement is aired.

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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.

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:

Diluted net loss per share is calculated using the weighted average number of shares of common stock plus, when dilutive, potential shares of common stock outstanding using the treasury-stock method.

Potential shares of common stock outstanding include stock options, unvested restricted stock awards and restricted stock units.

The following potentially dilutive equity securities were not included in the diluted earnings per share of common stock calculation because they would have had an antidilutive effect:

As of December 31,

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Restricted stock awards and restricted stock units 1,087,627 782,755 581,943

Warrants — — 480,000

Business Combination

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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 Company incurred $ 0.5 million acquisition-related costs that were recorded in general and administrative expenses.

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):

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Current assets, net of cash acquired $ 1,469

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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 Company acquired intangible assets which included trade name, developed technologies, and customer relationships.

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.

It has been assigned to the subscription business segment.

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.

The results of Aquarium’s operations have been included in the consolidated financial statements since the acquisition date, but have been immaterial to the Company's consolidated financial statements.

Property and Equipment, Net

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Depreciation expense related to property and equipment was $ 7.1 million, $ 5.2 million and $ 4.7 million for the years ended December 31, 2021, 2020 and 2019, 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.

Goodwill and Intangible Assets

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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 carrying amount of goodwill was $ 32.7 million and $ 33.0 million as of December 31, 2021 and 2020, respectively, due to a foreign exchange translation fluctuation of $( 0.3 ) million during the year ended December 31, 2021.

The following table presents the detail of intangible assets other than goodwill for the periods presented (in thousands):

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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

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Total $ 17,363

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):

The amortized cost, gross unrealized holding gains and losses, and estimates of fair value of long-term and short-term investments by major security type and class of security were as follows as of December 31, 2021 and 2020 (in thousands):

As of December 31, 2021

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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.

For available-for-sale debt securities, the Company determined that there were no unrealized losses.

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.

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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 has invested $ 7.0 million in preferred stock of Baystride, Inc., a U.S.-based privately held corporation operating in the pet food industry.

The Company does not have power over the activities that most significantly impact the economic performance of the variable interest entity and is, therefore, not the primary beneficiary.

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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.

The outstanding loan balance under the line of credit, including accrued interest, was $ 4.5 million and $ 2.8 million as of December 31, 2021 and 2020, respectively.

The Company has also entered into a series of agreements to provide ancillary services to, and receive reimbursement from, the variable interest entity at cost.

The Company provided $ 0.9 million and $ 1.2 million of these services for the years ended December 31, 2021 and 2020, respectively.

Investment in Joint Venture

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Fair Value Level 1 Level 2 Level 3

Restricted cash $ 6,319 $ 6,319 $ — $ —

Money market funds 32,255 32,255 — —

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Municipal bond 1,011 — 1,011 —

Investment in variable interest entity 7,949 — — 7,949

Preferred shares in variable interest entity 8,442 — — 8,442

Total $ 47,758 $ 38,305 $ 1,011 $ 8,442

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Fair Value Level 1 Level 2 Level 3

Restricted cash $ 1,400 $ 1,400 $ — $ —

Money market funds 99,054 99,054 — —

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Municipal bond 1,002 — 1,002 —

Investment in variable interest entity 7,625 — — 7,625

Preferred shares in variable interest entity 7,949 — — 7,949

Total $ 112,569 $ 103,618 $ 1,002 $ 7,949

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 Company measures the fair value of 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.

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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 Company's 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.

Estimated fair value was $ 8.4 million and $ 7.9 million as of December 31, 2021 and 2020, respectively, recorded in other long-term assets on the Company's consolidated balance sheet.

The changes in fair value, due entirely to unrealized gains, were $ 0.5 million and $ 0.3 million for the years ended December 31, 2021 and 2020, 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's other long-term assets balance included notes receivable of $ 7.6 million and $ 6.1 million as of December 31, 2021 and 2020, respectively, recorded at their estimated collectible amount.

The Company estimates that the carrying value of the notes receivable approximates the fair value.

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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.

There were no transfers between levels for the years ended December 31, 2021 and 2020.

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.

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.

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The reserve estimate involves actuarial projections, and is based on management's assessment of facts and circumstances currently known, and assumptions about anticipated patterns.

The Company uses generally accepted actuarial methodologies, such as paid loss development methods, in estimating the amount of the reserve for veterinary invoices.

The reserve is made for each of the Company's segments, subscription and other business, and are continually refined as the Company receives and pays veterinary invoices.

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This change was comprised of $ 356.4 million in expense recorded during the period less $ 349.3 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.

This $ 356.4 million in veterinary invoice expense incurred included a reduction of $ 1.4 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 $ 0.2 million and $ 0.6 million as a result of analysis of payment trends in the years ended December 31, 2020 and 2019, respectively.

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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.

In the following tables, amounts are by the 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.

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Total amounts unpaid and recorded as a liability $ 17,264

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.

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):

Stock-based compensation expense includes stock options and restricted stock units granted to employees and other service providers and has been reported in the Company’s consolidated statements of operations depending on the function performed by the employee or other service provider.

Stock-based compensation expense recognized in each category of the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands):

Year Ended December 31,

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General and administrative 8,862 3,795 3,312

Sales and marketing 2,773 2,120 1,335

New pet acquisition expense 9,160 2,773 2,120

Total expensed stock-based compensation 28,226 8,912 6,846

1 unchanged sentence

Total stock-based compensation $ 28,902 $ 9,147 $ 7,050

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.

As of December 31, 2021, the Company had 1,087,627 unvested restricted stock units.

Stock-based compensation expenses of $ 71.6 million related to unvested restricted stock units are expected to be recognized over a weighted average period of approximately 2.8 years.

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.

The Company did not grant any new stock options during the years ended December 31, 2021, 2020, and 2019.

The following table presents information regarding stock options granted, exercised and forfeited for the periods presented:

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Exercisable at December 31, 2021 807,205 $ 13.39 $ 95,765

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.

As of December 31, 2021, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 4.2 years.

The fair value of options vested were as follows for the years ended December 31, 2021, 2020, and 2019.

The Company didn't grant any stock options in these three years.

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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.

For operating leases with an initial term of over 12 months, the Company recorded $ 0.8 million and $ 0.9 million right-of-use assets and lease liabilities on its consolidated balance sheets, within the other liabilities line item, as of December 31, 2021 and 2020, respectively.

Leases with an initial term of 12 months or less are not recorded on its consolidated balance sheets.

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These leases have remaining lease terms of up to 5 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 Company recorded rental income of $ 1.1 million, $ 1.9 million, and $ 2.2 million for the years ended December 31, 2021, 2020, and 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, 2021 (in thousands):

Year ending December 31:

Thereafter 100

Total rental payments $ 2,273

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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.

At December 31, 2021, the Company had 10,000,000 shares of undesignated preferred stock authorized for future issuance and did not have any outstanding shares of preferred stock.

The holders of common stock are also entitled to receive dividends as and when declared by the board of directors of the Company (the Board), whenever funds are legally available.

These rights are subordinate to the dividend rights of holders of any senior classes of stock outstanding at the time.

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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.

The issued shares were 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.

In April 2021, the Board approved a share repurchase program, pursuant to which the Company may, between May 2021 and May 2026, repurchase outstanding shares of the Company's common stock.

The Company has not repurchased any shares under this program.

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 subscription business segment generates revenue primarily from subscription fees related to the Company's “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 a different margin profile 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.

Revenue, veterinary invoice expense, other cost of revenue, and new pet acquisition expenses are generally directly attributed to each segment.

Other operating expenses, such as technology and development expense, general and administrative expense, and depreciation and amortization, are allocated proportionately based on revenue in each segment.

10 unchanged sentences

General and administrative 22,579 16,866 15,397

Sales and marketing 47,017 35,037 24,623

New pet acquisition expense 78,148 47,017 35,037

Depreciation and amortization 8,494 5,451 4,725

Subscription business operating income (loss) ( 4,150 ) ( 2,014 ) ( 672 )

Subscription business operating loss ( 33,965 ) ( 4,150 ) ( 2,014 )

Other business:

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General and administrative 9,314 4,981 2,987

Sales and marketing 820 414 376

New pet acquisition expense 499 820 414

Depreciation and amortization 3,471 1,620 907

Other business operating income (loss) ( 1,060 ) ( 651 ) 446

Gain (loss) from investment in joint venture ( 126 ) ( 352 ) —

Total operating income (loss) $ ( 4,927 ) $ ( 1,920 ) $ ( 1,045 )

Loss from investment in joint venture ( 171 ) ( 126 ) ( 352 )

Total operating loss $ ( 35,196 ) $ ( 4,927 ) $ ( 1,920 )

The following table presents the Company’s revenue by geographic region of the member (in thousands):

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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.

The Company’s business operations are conducted through subsidiaries, one of which is an insurance company domiciled in New York, American Pet Insurance Company (APIC), and one of which is a segregated cell business, Wyndham Segregated Account AX, located in Bermuda.

In 2021, the Company established two new wholly-owned insurance subsidiaries, ZPIC Insurance Company (ZPIC) and QPIC Insurance Company (QPIC), domiciled in Missouri and Nebraska, respectively.

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.

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As of December 31, 2021, the Company’s insurance subsidiary in New York maintained $ 124.2 million of statutory capital and surplus which was above the required amount of $ 116.0 million of statutory capital and surplus to avoid additional regulatory oversight.

The Company has funded $ 7.8 million of statutory capital to ZPIC in 2021, and $ 7.8 million of statutory capital to QPIC in January 2022.

ZPIC and QPIC will each be required to maintain a level of surplus as determined by their respective domiciliary regulators.

As of December 31, 2021, neither ZPIC nor QPIC has begun underwriting any insurance policies.

As of December 31, 2021, the Company had $ 9.2 million on deposit with various states in which it writes policies.

Income (l oss) before income taxes was as follows for the years ended December 31, 2020, 2019 and 2018 (in thousands):

Loss before income taxes was as follows for the years ended December 31, 2021, 2020 and 2019 (in thousands):

Year Ended December 31,

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Change in valuation allowance ( 58.4 ) ( 136.0 ) ( 184.2 )

Meals and entertainment ( 0.5 ) ( 4.9 ) ( 5.4 )

Nondeductible fines and settlements ( 0.2 ) ( 1.1 ) ( 9.2 )

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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.

Federal and the majority of its U.S.

State deferred tax assets as of December 31, 2021, 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, 2021, the Company recognized a net increase of $ 20.6 million in valuation allowance against its net deferred tax assets associated with U.S.

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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.

federal tax jurisdiction for the years ended December 31, 2018 through 2021, and is also open to examination for 2006 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, as well as in Canada, Ireland, and the United Kingdom, and may be subject to audit or examination by the relevant authorities in respect to those particular jurisdictions primarily for 2017 and thereafter.

For the year ended December 31, 2021, the Company intends to invest substantially all of its foreign subsidiary earnings, as well as its capital in its foreign subsidiaries, indefinitely outside of the U.S.

in those jurisdictions in which it would incur significant, additional costs upon repatriation of such amounts.

A deferred tax liability related to taxes due upon repatriation to the U.S.

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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.

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 taxing authority is recognized in the financial statements.

No significant changes in uncertain tax positions are expected in the next twelve months.

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The investee is considered to be a related party, as the Company has the ability to exercise significant influence over the investee.

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

31, 2020 Sept.

30, 2020 Jun.

30, 2020 Mar.

31, 2020 Dec.

31, 2019 Sept.

30, 2019 Jun.

30, 2019 Mar.

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

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 related to pet acquisition during the years ended December 31, 2021 and 2020, recorded as new pet acquisition expense on the Company's consolidated statement of operations.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data