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 Fir m (PCAOB ID: 42 ) 60 Consolidated Statements of Operations 62 Consolidated Statements of Comprehensive Loss 63 Consolidated Balance Sheets 64 Consolidated Statements of Stockholders' Equity 65 Consolidated Statements of Cash Flows 66 Notes to Consolidated Financial Statements 67 59 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 17, 2022 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 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. 60 Reserve for Veterinary Invoices Description of the Matter The Company’s reserve for veterinary invoices totaled $39.7 million as of December 31, 2021. 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. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2012. Seattle, Washington February 17, 2022 61 Trupanion, Inc. Consolidated Statements of Operations (in thousands, except per share data) Year Ended December 31, 2021 2020 2019 Revenue $ 698,991 $ 502,028 $ 383,936 Cost of revenue: 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 Operating expenses: Technology and development (1) 16,866 9,947 7,025 General and administrative (1) 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 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 expense (income), net 14 ( 581 ) ( 1,629 ) Loss before income taxes ( 35,220 ) ( 5,727 ) ( 1,640 ) Income tax expense 310 113 169 Net loss $ ( 35,530 ) $ ( 5,840 ) $ ( 1,809 ) Net loss per share: Basic and diluted $ ( 0.89 ) $ ( 0.16 ) $ ( 0.05 ) Weighted average shares of common stock outstanding: 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 62 Trupanion, Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 35,530 ) $ ( 5,840 ) $ ( 1,809 ) Other comprehensive income (loss): Foreign currency translation adjustments ( 496 ) 2,496 359 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 ) 63 Trupanion, Inc. Consolidated Balance Sheets (in thousands, except share data) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 87,400 $ 139,878 Short-term investments 126,012 89,862 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 Total current assets 390,954 337,027 Restricted cash 13,469 6,319 Long-term investments, at fair value 7,061 5,566 Property and equipment, net 77,950 72,602 Intangible assets, net 22,663 27,134 Other long-term assets 17,776 16,557 Goodwill 32,709 33,045 Total assets $ 562,582 $ 498,250 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 8,952 $ 6,059 Accrued liabilities and other current liabilities 28,162 22,864 Reserve for veterinary invoices 39,671 28,929 Deferred revenue 146,911 92,547 Total current liabilities 223,696 150,399 Deferred tax liabilities 2,827 4,705 Other liabilities 3,859 3,207 Total liabilities 230,382 158,311 Stockholders’ equity: Common stock: $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; no shares issued and outstanding — — Additional paid-in capital 466,792 439,007 Accumulated other comprehensive income (loss) 3,077 3,071 Accumulated deficit ( 126,890 ) ( 91,360 ) Treasury stock, at cost: 933,165 shares at December 31, 2021 and 2020 ( 10,779 ) ( 10,779 ) Total stockholders’ equity 332,200 339,939 Total liabilities and stockholders’ equity $ 562,582 $ 498,250 64 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, 2019 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 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 Other comprehensive income — — — — 6 — 6 Net loss — — — ( 35,530 ) — — ( 35,530 ) Balance at December 31, 2021 40,475,185 $ — $ 466,792 $ ( 126,890 ) $ 3,077 $ ( 10,779 ) $ 332,200 65 Trupanion, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 2019 Operating activities Net loss $ ( 35,530 ) $ ( 5,840 ) $ ( 1,809 ) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 11,965 7,071 5,632 Stock-based compensation expense 28,226 8,912 6,846 Other, net ( 1,927 ) 153 105 Changes in operating assets and liabilities: Accounts and other receivables ( 66,170 ) ( 43,272 ) ( 22,772 ) Prepaid expenses and other assets ( 3,055 ) ( 2,839 ) ( 432 ) Accounts payable, accrued liabilities, and other liabilities 8,796 9,951 4,110 Reserve for veterinary invoices 10,768 7,662 5,059 Deferred revenue 54,385 39,746 19,418 Net cash provided by operating activities 7,458 21,544 16,157 Investing activities Purchases of investment securities ( 95,672 ) ( 65,286 ) ( 65,506 ) Maturities of investment securities 57,869 44,066 49,762 Cash paid in business acquisition, net of cash acquired — ( 48,133 ) — Purchases of other investments — — ( 4,000 ) Purchases of property and equipment ( 12,355 ) ( 7,451 ) ( 5,373 ) Other ( 1,755 ) 57 ( 2,891 ) Net cash used in investing activities ( 51,913 ) ( 76,747 ) ( 28,008 ) Financing activities Issuance of common stock, net of offering costs — 192,265 — Proceeds from exercise of stock options 3,607 6,013 2,982 Shares withheld to satisfy tax withholding ( 4,732 ) ( 1,115 ) ( 1,667 ) Proceeds from debt financing, net of financing fees — 6,213 13,167 Repayment of debt financing — ( 32,450 ) — 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 Net change in cash, cash equivalents, and restricted cash ( 45,328 ) 115,629 2,616 Cash, cash equivalents, and restricted cash at beginning of period 146,197 30,568 27,952 Cash, cash equivalents, and restricted cash at end of period $ 100,869 $ 146,197 $ 30,568 Supplemental disclosures Income taxes paid (refund) $ 282 $ ( 31 ) $ 158 Interest paid 16 1,363 1,188 Noncash investing and financing activities: Issuance of common stock for cashless exercise of warrants — — 4,500 Purchases of property and equipment included in accounts payable and accrued liabilities 729 861 485 Acquisition-related contingent consideration recorded as a liability $ — $ 162 $ — 66 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 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 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 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 balances to comply with insurance company regulations. As of December 31, 2021, 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 $ 159.4 million and $ 94.2 million accounts receivable associated with underwriting these policies as of December 31, 2021 and 2020, 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 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 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. 67 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, 2021, 2020, and 2019. 68 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. 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 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. 69 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 $ 23.6 million, $ 13.4 million and $ 7.8 million, in the years ended December 31, 2021, 2020 and 2019, respectively. 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 $( 1.6 ) million, $( 2.1 ) million, and $ 0.4 million were recorded in accumulated other comprehensive loss as of December 31, 2021, 2020, and 2019, 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. 70 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 2021, 2020, and 2019 was $ 112.0 million, $ 81.3 million and $ 67.5 million, respectively, and deferred revenue relating to this arrangement at December 31, 2021 and 2020 was $ 4.7 million and $ 3.6 million, respectively. Reinsurance revenue was 16 %, 16 %, and 18 % of total revenue in 2021, 2020, and 2019, respectively. Cash designated for the purpose of paying claims related to this reinsurance agreement was $ 7.7 million and $ 6.5 million at December 31, 2021 and 2020, 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, 2021, the account balance was CAD $ 7.7 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. 2. Net Loss per Share Basic net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated using the weighted average number of shares of common stock plus, when dilutive, potential shares of common stock outstanding using the treasury-stock method. Potential shares of common stock outstanding include stock options, unvested restricted stock awards and restricted stock units. The following potentially dilutive equity securities were not included in the diluted earnings per share of common stock calculation because they would have had an antidilutive effect: As of December 31, 2021 2020 2019 Stock options 807,205 1,459,290 2,097,978 Restricted stock awards and restricted stock units 1,087,627 782,755 581,943 71 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 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 following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): October 30, 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 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 have been 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, 2021 2020 Land and improvements $ 15,911 $ 15,854 Building and improvements 48,547 46,682 Software 37,984 27,707 Office equipment and other 6,258 4,146 Construction in progress 540 2,855 Property and equipment, at cost 109,240 97,244 Less: Accumulated depreciation ( 31,290 ) ( 24,642 ) Property and equipment, net $ 77,950 $ 72,602 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. 72 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 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): Gross Carrying Value Accumulated Amortization Net Carrying Value December 31, 2021: Licenses $ 4,773 $ — $ 4,773 Leases 2,959 ( 2,539 ) 420 Trade name 1,373 ( 160 ) 1,213 Developed technologies 11,516 ( 2,721 ) 8,795 Customer relationships 7,589 ( 1,771 ) 5,818 Patents, trademarks, and other 2,373 ( 729 ) 1,644 Total Intangibles $ 30,583 $ ( 7,920 ) $ 22,663 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 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 1.4 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 4.1 years. Patents, trademarks, and other intangible assets have a remaining weighted average useful life of 5.0 years. Amortization expense associated with intangible assets was $ 4.9 million, $ 1.9 million, and $ 0.9 million for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, 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: 2022 $ 4,775 2023 4,411 2024 3,988 2025 3,293 2026 163 Thereafter 733 Total $ 17,363 73 6. Investments 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): Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2021 Long-term investments: Foreign deposits $ 6,050 $ — $ — $ 6,050 Municipal bond 1,000 11 — 1,011 $ 7,050 $ 11 $ — $ 7,061 Short-term investments: U.S. Treasury securities $ 8,671 $ — $ ( 9 ) $ 8,662 Certificates of deposit 3,295 — — 3,295 U.S. government funds 114,046 — — 114,046 $ 126,012 $ — $ ( 9 ) $ 126,003 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 Maturities of debt securities classified as available-for-sale were as follows (in thousands): December 31, 2021 Amortized Cost Fair Value Available-for-sale: Due after one year through five years $ 7,050 $ 7,061 $ 7,050 $ 7,061 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 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. 74 7. Other Investments Investment in Variable Interest Entity 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. 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 $ 4.1 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, 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 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, 2021, the Company has contributed $ 0.8 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. 75 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, 2021 Fair Value Level 1 Level 2 Level 3 Assets Money market funds 32,255 32,255 — — Fixed maturities: Foreign deposits 6,050 6,050 — — Municipal bond 1,011 — 1,011 — Preferred shares in variable interest entity 8,442 — — 8,442 Total $ 47,758 $ 38,305 $ 1,011 $ 8,442 As of December 31, 2020 Fair Value Level 1 Level 2 Level 3 Assets Money market funds 99,054 99,054 — — Fixed maturities: Foreign deposits 4,564 4,564 — — Municipal bond 1,002 — 1,002 — 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 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 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 $ 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 $ 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. 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, 2021. 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 years ended December 31, 2021 and 2020. 76 9. Commitments and Contingencies 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 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. 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 2021 2020 2019 Reserve at beginning of year $ 19,925 $ 15,541 $ 13,875 Veterinary invoice expense during the period related to: Current year 357,859 278,776 231,831 Prior years ( 1,411 ) 229 585 Total veterinary invoice expense 356,448 279,005 232,416 Amounts paid during the period related to: Current year 333,182 259,971 217,538 Prior years 16,109 13,387 12,494 Total paid 349,291 273,358 230,032 Non-cash expenses 4,675 1,263 718 Reserve at end of period $ 22,407 $ 19,925 $ 15,541 The Company's reserve for the subscription business segment increased $ 2.5 million from $ 19.9 million at December 31, 2020 to $ 22.4 million at December 31, 2021. This change was comprised of $ 356.4 million in expense recorded during the period less $ 349.3 million in payments of veterinary invoices. 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. 77 Summarized below are the changes in total liability for the Company's other business segment (in thousands): Year Ended December 31, Other Business 2021 2020 2019 Reserve at beginning of year $ 9,004 $ 5,653 $ 2,187 Veterinary invoice expense during the period related to: Current year 129,826 72,286 38,881 Prior years ( 212 ) ( 167 ) ( 350 ) Total veterinary invoice expense 129,614 72,119 38,531 Amounts paid during the period related to: Current year 112,574 63,359 33,254 Prior years 8,780 5,409 1,811 Total paid 121,354 68,768 35,065 Non-cash expenses — — — Reserve at end of period $ 17,264 $ 9,004 $ 5,653 The Company’s reserve for the other business segment increased $ 8.3 million from $ 9.0 million at December 31, 2020 to $ 17.3 million at December 31, 2021. This change was comprised of $ 129.6 million in expense recorded during the period less $ 121.4 million in payments of veterinary invoices. This $ 129.6 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 $ 0.2 million and $ 0.4 million as a result of analysis of payment trends in each of the years ended December 31, 2020 and 2019, respectively. Veterinary invoice expenses In the following tables, the cumulative number of veterinary invoices represents the total number received as of December 31, 2021, 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 2018 through 2020 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, 2021. 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 2018 2019 2020 2021 2021 2021 Year of Occurrence (unaudited) (unaudited) (unaudited) 2018 $ 191,211 $ 191,696 $ 191,792 $ 191,302 $ — 886,880 2019 $ 233,629 $ 234,006 $ 233,824 $ 664 1,054,693 2020 $ 281,272 $ 280,343 $ 1,741 1,179,573 2021 $ 356,725 $ 20,002 1,348,961 $ 1,062,194 $ 22,407 78 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 2018 2019 2020 2021 2021 2021 Year of Occurrence (unaudited) (unaudited) (unaudited) 2018 $ 23,786 $ 23,375 $ 23,470 $ 23,440 $ — 175,091 2019 $ 38,885 $ 38,610 $ 38,682 $ — 282,499 2020 $ 72,297 $ 72,035 $ 12 532,306 2021 $ 129,822 $ 17,252 843,354 $ 263,979 $ 17,264 Cumulative paid veterinary invoice expense 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. The cumulative amounts paid as of the end of each year are revalued using the currency exchange rate as of December 31, 2021. Information for years 2018 through 2020 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 2018 2019 2020 2021 Year of Occurrence (unaudited) (unaudited) (unaudited) 2018 $ 178,570 $ 190,327 $ 191,090 $ 191,302 2019 $ 220,013 $ 232,326 $ 233,159 2020 $ 263,729 $ 278,602 2021 $ 336,724 $ 1,039,787 Total amounts unpaid and recorded as a liability $ 22,407 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 2018 2019 2020 2021 Year of Occurrence (unaudited) (unaudited) (unaudited) 2018 $ 21,617 $ 23,355 $ 23,425 $ 23,440 2019 $ 33,258 $ 38,578 $ 38,682 2020 $ 63,371 $ 72,023 2021 $ 112,570 $ 246,715 Total amounts unpaid and recorded as a liability $ 17,264 79 11. Stock-Based Compensation Stock-based compensation expense includes stock options and restricted stock units granted to employees and other service providers and has been reported in the Company’s consolidated statements of operations depending on the function performed by the employee or other service provider. Stock-based compensation expense recognized in each category of the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands): Year Ended December 31, 2021 2020 2019 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 Total expensed stock-based compensation 28,226 8,912 6,846 Capitalized stock-based compensation 676 235 204 Total stock-based compensation $ 28,902 $ 9,147 $ 7,050 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 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: Number of Options Weighted Average Exercise Price per Share Aggregate Intrinsic Value (in thousands) Outstanding as of January 1, 2019 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 Granted — — — Exercised ( 647,164 ) 5.59 58,200 Forfeited ( 4,921 ) 13.66 — Outstanding as of December 31, 2021 807,205 13.39 95,765 Exercisable at December 31, 2021 807,205 $ 13.39 $ 95,765 As of December 31, 2021, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 4.2 years. 80 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. Weighted Average Grant Date Fair Value per Share Fair Value of Options Vested (in thousands) Year: 2019 $ — $ 1,591 2020 $ — $ 1,105 2021 $ — $ 313 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, 2021, 2020 and 2019: Number of Shares Weighted Average Grant Date Fair Value per Share Unvested shares as of January 1, 2019 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 Granted 787,730 101.32 Vested ( 426,725 ) 40.10 Forfeited ( 56,133 ) 72.93 Unvested shares as of December 31, 2021 1,087,627 $ 78.94 81 12. 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 $ 0.8 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. Rental expense for operating leases was $ 0.2 million, $ 0.2 million and $ 0.4 million for the years ended December 31, 2021, 2020 and 2019, 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 5 years, some of which give tenants options to terminate the leases early, with termination fees required. 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: 2022 $ 1,173 2023 669 2024 163 2025 168 2026 100 Thereafter — Total rental payments $ 2,273 13. Stockholders ’ Equity Common Stock and Preferred Stock As of December 31, 2021, the Company had 100,000,000 shares of common stock authorized and 40,475,185 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, 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. 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 issued shares were subject to a minimum holding period of three years. Share Repurchase Program In April 2021, the Board approved a share repurchase program, pursuant to which the Company may, between May 2021 and May 2026, repurchase outstanding shares of the Company's common stock. The Company has not repurchased any shares under this program. 82 14. Segments The Company has two reporting segments: subscription business and other business. 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 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. 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, 2021 2020 2019 Subscription business: Revenue $ 494,862 $ 387,732 $ 321,163 Veterinary invoice expense 356,448 279,005 232,415 Other cost of revenue 51,216 35,870 29,724 Technology and development 11,942 7,673 5,879 General and administrative 22,579 16,866 15,397 New pet acquisition expense 78,148 47,017 35,037 Depreciation and amortization 8,494 5,451 4,725 Subscription business operating loss ( 33,965 ) ( 4,150 ) ( 2,014 ) Other business: Revenue 204,129 114,296 62,773 Veterinary invoice expense 129,614 72,119 38,532 Other cost of revenue 57,367 33,133 18,341 Technology and development 4,924 2,274 1,146 General and administrative 9,314 4,981 2,987 New pet acquisition expense 499 820 414 Depreciation and amortization 3,471 1,620 907 Other business operating income (loss) ( 1,060 ) ( 651 ) 446 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): Year Ended December 31, 2021 2020 2019 United States $ 580,966 $ 419,162 $ 316,138 Canada and other 118,025 82,866 67,798 Total revenue $ 698,991 $ 502,028 $ 383,936 Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2021 and 2020. 83 15. 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 (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. 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, 2021, 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 $ 0.2 million. This insurance subsidiary did not pay dividends to the Company during the years ended December 31, 2021, 2020, and 2019. 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 $ 5.6 million, $ 4.7 million, and $ 3.9 million during the years ended December 31, 2021, 2020 and 2019, respectfully. The statutory net income for 2021, 2020 and 2019 and statutory capital and surplus at December 31, 2021, 2020 and 2019, for the Company’s insurance subsidiary in New York were as follows (in thousands): As of December 31, 2021 2020 2019 Statutory net income $ 24,409 $ 17,547 $ 16,311 Statutory capital and surplus $ 124,189 $ 93,171 $ 73,810 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. 84 16. Income Taxes Loss before income taxes was as follows for the years ended December 31, 2021, 2020 and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 United States $ ( 34,052 ) $ ( 5,408 ) $ ( 1,783 ) Foreign ( 1,168 ) ( 319 ) 143 $ ( 35,220 ) $ ( 5,727 ) $ ( 1,640 ) The components of income tax expense (benefit) were as follows (in thousands): Year Ended December 31, 2021 2020 2019 Current: U.S. federal & state $ 58 $ 198 $ 12 Foreign 2,066 45 52 2,124 243 64 Deferred: U.S. federal & state ( 15 ) ( 9 ) 116 Foreign ( 1,799 ) ( 121 ) ( 11 ) ( 1,814 ) ( 130 ) 105 Income tax expense (benefit) $ 310 $ 113 $ 169 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, 2021 2020 2019 Federal income taxes at statutory rate 21.0 % 21.0 % 21.0 % U.S. state income taxes 7.5 ( 2.6 ) ( 7.8 ) Equity compensation 30.4 122.3 177.2 Change in valuation allowance ( 58.4 ) ( 136.0 ) ( 184.2 ) Nondeductible fines and settlements ( 0.2 ) ( 1.1 ) ( 9.2 ) Other, net ( 1.5 ) ( 3.0 ) ( 16.5 ) Credits 0.3 ( 2.6 ) 9.2 Effective income tax rate ( 0.9 ) % ( 2.0 ) % ( 10.3 ) % 85 The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands): As of December 31, 2021 2020 Deferred tax assets: Deferred revenue $ 6,232 $ 3,921 Accruals and reserves 2,294 1,822 Net operating loss carryforwards 52,796 37,070 Depreciation and amortization 833 27 Equity compensation 4,126 1,776 Credits 847 697 Other 381 706 Total deferred tax assets 67,509 46,019 Deferred tax liabilities: Deferred costs ( 887 ) ( 637 ) Intangible assets ( 2,802 ) ( 4,895 ) Other ( 1,817 ) ( 960 ) Total deferred tax liabilities ( 5,506 ) ( 6,492 ) Total deferred taxes 62,003 39,527 Less deferred tax asset valuation allowance ( 64,791 ) ( 44,194 ) Net deferred tax liability $ ( 2,788 ) $ ( 4,667 ) At December 31, 2021, the Company had U.S. federal and state net operating loss carryforwards of $ 52.8 million (tax-effected) and U.S. federal income tax credits of $ 0.8 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 2026. 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, 2021, 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. 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 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. 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, 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. 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. 86 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 taxing 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, 2021 2020 2019 Balance, beginning of year $ 133 $ 113 $ 89 Increases (decreases) to tax positions related to prior periods — 15 19 Increases to tax positions related to the current year 5 5 5 Balance, end of year $ 138 $ 133 $ 113 17. 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. 18. 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 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. 87 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.