What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-16 compared with 2022-02-17 · 173 added, 107 removed, 733 unchanged (28% of the section changed)

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Index to Consolidated Financial Statements

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

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Statements of Operations

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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”).

(the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S.

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Description of the Matter The Company’s reserve for veterinary invoices totaled $43.7 million as of December 31, 2022.

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.

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Foreign currency translation adjustments ( 4,412 ) ( 496 ) 2,496

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 )

Net unrealized gain (loss) on available-for-sale debt securities ( 4,966 ) 502 325

Other comprehensive income (loss), net of taxes ( 9,378 ) 6 2,821

Comprehensive income (loss) $ ( 54,050 ) $ ( 35,524 ) $ ( 3,019 )

Trupanion, Inc.

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Short-term investments 156,804 126,012

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

Accounts and other receivables, net of allowance for doubtful accounts of $ 540 at December 31, 2022 and $ 342 at December 31, 2021

232,439 165,217

Prepaid expenses and other assets 14,248 12,325

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Restricted cash 19,032 13,469

Long-term investments, at fair value 7,061 5,566

Long-term investments 7,841 7,061

Property and equipment, net 90,701 77,950

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Deferred revenue 202,692 146,911

Long-term debt - current portion 1,103 —

Total current liabilities 289,616 223,696

Long-term debt 68,354 —

Deferred tax liabilities 3,392 2,827

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$ 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 — —

42,041,344 and 41,013,158 shares issued and outstanding at December 31, 2022 and 41,408,350 and 40,475,185 shares issued and outstanding at December 31, 2021

Preferred stock:

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Treasury stock, at cost:

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

1,028,186 and 933,165 shares at December 31, 2022 and 2021

( 16,534 ) ( 10,779 )

Total stockholders’ equity 305,297 332,200

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Balance at January 1, 2020 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

Other comprehensive income — — — — 1,003 — 1,003

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

Other comprehensive income (loss) — — — — 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 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 — — — — 2,821 — 2,821

Other comprehensive income (loss) — — — — 6 — 6

Net loss — — — ( 35,530 ) — — ( 35,530 )

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Stock-based compensation expense — — 35,026 — — — 35,026

Other comprehensive income — — — — 6 — 6

Repurchases of common stock (95,021) — — — — (5,755) (5,755)

Other comprehensive income (loss) — — — — ( 9,378 ) — ( 9,378 )

Net loss — — — ( 44,672 ) — — ( 44,672 )

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Net loss $ ( 44,672 ) $ ( 35,530 ) $ ( 5,840 )

Adjustments to reconcile net loss to cash provided by operating activities:

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

Depreciation and amortization 10,921 11,965 7,071

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Deferred revenue 56,153 54,385 39,746

Net cash provided by operating activities 7,458 21,544 16,157

Net cash provided by (used in) operating activities ( 8,000 ) 7,458 21,544

Investing activities

Purchases of investment securities ( 273,006 ) ( 95,672 ) ( 65,286 )

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 )

Maturities and sales of investment securities 239,210 57,869 44,066

Cash paid in business acquisitions, net of cash acquired ( 15,034 ) — ( 48,133 )

Purchases of property and equipment ( 17,088 ) ( 12,355 ) ( 7,451 )

Other ( 1,598 ) ( 1,755 ) 57

Net cash used in investing activities ( 51,913 ) ( 76,747 ) ( 28,008 )

Net cash provided by (used in) investing activities ( 67,516 ) ( 51,913 ) ( 76,747 )

Financing activities

Issuance of common stock, net of offering costs — — 192,265

Repurchase of common stock ( 5,755 ) — —

Proceeds from exercise of stock options 2,290 3,607 6,013

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Other — — ( 78 )

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

Net cash provided by (used in) financing activities 60,743 ( 1,125 ) 170,848

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net ( 1,459 ) 252 ( 16 )

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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 1,324 729 861

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(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.

Through the Company's data-driven, vertically-integrated approach, the Company develops and offers high value medical insurance products, priced specifically for each pet’s unique characteristics and coverage level.

Basis of Presentation

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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

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Amortized deferred acquisition costs classified within new pet acquisition expense amounted to $ 4.9 million, $ 4.7 million, and $ 3.2 million and amortized deferred acquisition costs classified within other cost of revenue amounted to $ 33.9 million, $ 30.5 million, and $ 23.2 million, for the years ended December 31, 2022, 2021, and 2020, respectively.

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 invests in investment grade fixed maturity securities of varying maturities.

Available-for-sale securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive loss.

Held-to-maturity securities are reported at amortized cost.

Premiums or discounts on fixed maturity 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 maturity securities.

The Company evaluates whether declines in the fair value of its investments below book value are other-than-temporary.

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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.

Other income, net, was $ 3.1 million, nil , and $ 0.6 million, including interest income of $ 3.0 million, $ 0.3 million, and $ 0.6 million for the years ended December 31, 2022, 2021, and 2020, 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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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.

Cumulative translation adjustments of $ 2.8 million, $( 1.6 ) million, and $( 2.1 ) million were recorded in accumulated other comprehensive loss (income) as of December 31, 2022, 2021, and 2020, respectively.

Insurance Operations

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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.

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents, investments, and debt.

The Company manages its risk by investing cash equivalents and investment securities in money market instruments and securities of the U.S.

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Restricted stock awards and restricted stock units 1,112,552 1,087,627 782,755

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):

Business Combinations

On November 16, 2022, the Company acquired 100% of voting equity interest in Royal Blue s.r.o., the parent company of PetExpert, a veterinary-centric, managing general agent for pet insurance with operations in the Czech Republic, Slovakia, and Belgium for approximately $ 12.3 million in net cash.

The acquisition provides the Company with a foothold in Europe, allowing for expansion within different countries within the region.

Additionally, the acquired technology from PetExpert 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 $ 0.2 million of acquisition-related costs that were recorded in general and administrative expenses.

The acquisition is recorded using the purchase method of accounting in accordance with Accounting Standards Codification (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):

Current assets, net of cash acquired $ 295

Property and equipment 171

Property and equipment and other long-term assets 27

Amortizable intangible assets 5,121

Goodwill 9,541

Other long-term assets 1,421

Current liabilities ( 1,269 )

Current liabilities and short-term loan ( 1,677 )

Deferred tax liability and other liabilities ( 1,056 )

Total consideration transferred, net of cash acquired $ 12,251

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.

The Company acquired intangible assets which included developed technologies and customer relationships with an estimated useful life of 5.0 years.

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.

As of the acquisition date, the Company assumed a credit agreement entered into by PetExpert in 2021 that provides for a revolving line of credit.

The maximum credit limit at December 31, 2022 was $ 0.4 million.

To the extent not previously paid, the line of credit is due on May 31, 2023.

As of December 31, 2022, PetExpert had $ 0.4 million debt issued and outstanding under this assumed credit agreement.

On August 31, 2022, the Company completed an acquisition of 100% of the equity of Smart Paws GmbH (Smart Paws), a managing general agent for pet insurance with operations in Germany and Switzerland, for approximately $ 2.8 million in net cash.

The acquisition of Smart Paws provides the Company with a foothold in Europe, allowing for expansion within different countries within the region.

The Company incurred $ 0.1 million of acquisition related costs that were included in general and administrative expenses during the year ended December 31, 2022.

The Company acquired a definite-lived intangible asset valued at $ 1.1 million with an estimated useful life of 5.0 years.

Goodwill of $ 2.6 million was recognized as a result of the acquisition and attributable primarily to going concern value such as assembled workforce, future customers, and expected synergies from incorporating the operations into the Company’s portfolio.

None of the goodwill associated with this acquisition is expected to be deductible for income tax purposes.

The results of PetExpert and Smart Paws operations have been included in the consolidated financial statements since the acquisition date, but were immaterial to the Company's consolidated financial statements.

Property and Equipment, Net

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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 is a summary of goodwill by reportable segment for the year ended December 31, 2022 (in thousands):

Subscription Business Other Business Total

Balance as of December 31, 2021 $ 32,709 $ — $ 32,709

Acquisitions 12,159 — 12,159

Effects of foreign currency ( 2,885 ) — ( 2,885 )

Balance as of December 31, 2022 $ 41,983 $ — $ 41,983

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

Gross Carrying Value Accumulated Amortization Net Carrying Value Weighted Average Useful Life Remaining as of December 31, 2022

December 31, 2022:

Licenses $ 4,773 $ — $ 4,773

Licenses $ 4,773 $ — $ 4,773 N/A

Leases 2,959 ( 2,866 ) 93 1.0

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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 $ 4.8 million, $ 4.9 million, and $ 1.9 million for the years ended December 31, 2022, 2021, and 2020, respectively.

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Total $ 18,596

Available-for sale securities are classified as short-term versus long-term investments based on whether they represent the investment of funds available for current operations.

All available-for-sale securities are considered short-term in nature, with the exception of certain long-term investments that are being held for statutory requirements.

Held-to-maturity securities are classified as short-term versus long-term investments based on the effective maturity dates.

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, 2022 and 2021 (in thousands):

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Long-term investments:

Available-for-Sale Investments

Foreign deposits $ 7,683 $ — $ — $ 7,683

Municipal bond 1,000 11 — 1,011

$ 7,683 $ — $ — $ 7,683

Held-to-Maturity Investments

Treasury securities $ 158 $ — $ ( 4 ) $ 154

$ 158 $ — $ ( 4 ) $ 154

Short-term investments:

Available-for-Sale Investments

Treasury securities $ 42,833 $ — $ ( 186 ) $ 42,647

Mortgage-backed securities and collateralized mortgage obligations 8,015 — ( 97 ) 7,918

Other asset-backed securities 11,286 — ( 77 ) 11,209

Municipal bond 1,000 — ( 6 ) 994

Corporate bonds 37,793 — ( 262 ) 37,531

$ 100,927 $ — $ ( 628 ) $ 100,299

Held-to-Maturity Investments

Treasury securities $ 12,059 $ — $ ( 58 ) $ 12,001

Certificates of deposit 3,254 — — 3,254

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Long-term investments:

Available-for-Sale Investments

Foreign deposits $ 6,050 $ — $ — $ 6,050

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Short-term investments:

Held-to-Maturity Investments

Treasury securities $ 8,671 $ — $ ( 9 ) $ 8,662

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$ 126,012 $ — $ ( 9 ) $ 126,003

Maturities of debt securities classified as available-for-sale were as follows (in thousands):

Maturities of debt securities classified as available-for-sale and held-to-maturity were as follows (in thousands):

December 31, 2022

Available-for-sale:

Due under one year $ 10,137 $ 10,108

Due after one year through five years 98,473 97,875

$ 108,610 $ 107,983

Held-to-maturity:

Due under one year $ 56,505 $ 56,447

Due after one year through five years 158 154

$ 56,663 $ 56,601

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.

For available-for-sale debt securities, the Company determined that there was $ 0.6 million of unrealized losses and nil for the years ended December 31, 2022 and 2021, respectively.

Further, any available-for-sale debt securities with unrealized losses have been in the loss position for less than twelve months.

The Company does not expect any credit losses from its available-for-sale debt securities, considering the composition of the investment portfolio and the credit rating of these investments.

For those securities, the Company determined it is not likely to, and did not intend to, sell prior to a potential recovery.

Proceeds from the sales of fixed maturities classified as available-for-sale were $ 43.0 million and nil during the years ended December 31, 2022 and 2021, respectively.

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 has invested $ 7.0 million in preferred stock of a variable interest entity, 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.

The Company has the option to purchase all of the outstanding common stock 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 — see Note 8.

Additionally, the Company has extended a $ 5.6 million revolving line of credit to the variable interest entity to fund its inventory purchases.

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Fixed maturities:

Mortgage-backed securities and collateralized mortgage obligations 7,918 — 7,918 —

Other asset-backed securities 11,209 — 11,209 —

Corporate bonds 37,531 — 37,531 —

Foreign deposits 7,683 7,683 — —

Municipal bond 994 — 994 —

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

Treasury securities 42,647 — 42,647 —

Preferred stock in variable interest entity 4,115 — — 4,115

Total $ 113,730 $ 9,316 $ 100,299 $ 4,115

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Municipal bond 1,011 — 1,011 —

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

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

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

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.

Our fixed maturity investments classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including pricing vendors, dealers/market makers, and exchange-quoted prices.

The fair value of our fixed maturity investments classified as Level 2 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.

Held-to-maturity 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 available-for-sale securities and are considered either a Level 1 or Level 2 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.

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Estimated fair value was $ 4.1 million and $ 8.4 million as of December 31, 2022 and 2021, 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.

A $ 4.3 million unrealized loss and a $ 0.5 million unrealized gain was recorded in the statement of other comprehensive income for the year ended December 31, 2022 and 2021, respectively.

The Company considers the unrealized loss of $ 2.9 million as of December 31, 2022 to be temporary in nature.

The Company's other long-term assets balance also included notes receivable of $ 9.3 million and $ 7.6 million as of December 31, 2022 and 2021, 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 estimates the fair value of long-term debt based upon rates currently available to the Company for debt with similar terms and remaining maturities.

This is a Level 3 measurement.

Based upon the terms of the debt, the carrying amount of long-term debt approximated fair value at December 31, 2022.

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.

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Commitments and Contingencies

Legal Proceedings

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.

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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.

The reserve is made for each of the Company's segments, subscription and other business, and is 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.

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Reserve at beginning of year $ 22,407 $ 19,925 $ 15,541

Veterinary invoice expense during the period related to:

Veterinary invoices during the period related to:

Current year 439,679 357,859 278,776

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Reserve at end of period $ 21,543 $ 22,407 $ 19,925

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.

The Company's reserve for the subscription business segment decreased $ 0.9 million from $ 22.4 million at December 31, 2021 to $ 21.5 million at December 31, 2022.

This change was primarily comprised of $ 436.9 million in expense recorded during the period less $ 433.5 million in payments of veterinary invoices.

This $ 436.9 million in veterinary invoice expense incurred included a reduction of $ 2.8 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.

The Company's adjustments to prior year reserves were a reduction of $ 1.4 million and an increase of $ 0.2 million as a result of analysis of payment trends in the years ended December 31, 2021 and 2020, respectively.

Summarized below are the changes in total liability for the Company's other business segment (in thousands):

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Reserve at beginning of year $ 17,264 $ 9,004 $ 5,653

Veterinary invoice expense during the period related to:

Veterinary invoices during the period related to:

Current year 211,729 129,826 72,286

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This change was comprised of $ 212.9 million in expense recorded during the period less $ 207.9 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.

This $ 212.9 million in veterinary invoice expense incurred included an increase of $ 1.1 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 $ 0.2 million as a result of analysis of payment trends in each of the years ended December 31, 2021 and 2020, respectively.

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Total amounts unpaid and recorded as a liability $ 22,191

On March 25, 2022 , the Company entered into a credit agreement with Piper Sandler Finance, LLC that provides the Company with $ 150.0 million in credit (the Credit Facility) consisting of:

(a) an initial term loan in an aggregate principal amount of $ 60.0 million (Initial Term Loan), which was funded at closing;

(b) commitments for delayed draw term loans in an aggregate principal amount not in excess of $ 75.0 million (Delayed Draw Term Loans, and together with the Initial Term Loan, the Term Loans), which may be drawn from time to time until September 25, 2023 .

On December 29, 2022, the Company borrowed a Delayed Draw Term loan of $ 15.0 million;

(c) commitments for revolving loans in an aggregate principal amount at any time outstanding not in excess of $ 15.0 million (Revolving Loans), which may be drawn at any time prior to March 25, 2027 .

The Credit Facility bears interest at a floating base rate plus an applicable margin.

The stated interest rate as of December 31, 2022 was approximately 9.7 % for the original $ 60.0 million term loan and for the $ 15.0 million term loan.

The Company incurred total debt issuance cost of approximately $ 5.9 million, which is reported in the Consolidated Balance Sheet as a direct reduction from the carrying amount of the Credit Facility, and is amortized as interest expense over the term of five years.

The Credit Facility is secured by substantially all assets of the Company and its subsidiaries.

Proceeds from the Credit Facility may be used for permitted acquisitions and investments, working capital and other general corporate purposes.

The Credit Agreement contains financial and other covenants .

As of December 31, 2022 , the Company was in compliance with all financial and non-financial covenants .

To the extent not previously paid, the Initial Term Loan is due and payable on March 25, 2027 , the Delayed Draw Term Loans are due and payable on the earlier of the five-year anniversary of their initial funding or March 25, 2028 , and Revolving Loans are due and payable on March 25, 2027 .

The Company must repay 0.25 % of any then-outstanding Term Loans, together with accrued and unpaid interest, on a quarterly basis.

Future principal payments on outstanding borrowings as of December 31, 2022 are as follows (in thousands):

Year Ending December 31, December 31, 2022

Total $ 74,865

Stock-Based Compensation

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2021 $ — $ 313

Restricted Stock Awards and Restricted Stock Units

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Unvested shares as of December 31, 2022 1,112,552 $ 84.46

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:

Total rental payments $ 2,273

Stockholders ’ Equity

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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.

The Company repurchased 95,021 shares during the year ended December 31, 2022.

The Company did not repurchase any shares under this program during the year ended December 31, 2021.

Accumulated Comprehensive Income (Loss)

A summary of the components of accumulated other comprehensive income (loss) is as follows (in thousands):

For the year ended December 31, 2022 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total

Balance as of December 31, 2021 $ 1,624 $ 1,453 $ 3,077

Other comprehensive income (loss) ( 4,412 ) ( 4,966 ) ( 9,378 )

Balance as of December 31, 2022 $ ( 2,788 ) $ ( 3,513 ) $ ( 6,301 )

For the year ended December 31, 2021 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total

Balance as of December 31, 2020 $ 2,120 $ 951 $ 3,071

Other comprehensive income (loss) ( 496 ) 502 6

Balance as of December 31, 2021 $ 1,624 $ 1,453 $ 3,077

For the year ended December 31, 2020 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total

Balance as of December 31, 2019 $ ( 375 ) $ 625 $ 250

Other comprehensive income (loss) 2,495 326 2,821

Balance as of December 31, 2020 $ 2,120 $ 951 $ 3,071

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 subscription business segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer 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 business 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.

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

The Company is also awaiting final required approvals for a Canadian insurer, GPIC Insurance Company.

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.

Applicable regulations generally restrict the ability of the insurance entities 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.

In the United States, dividends up to specified levels are generally considered ordinary and may be paid without prior approval.

Dividends, in larger amounts, known as extraordinary dividends, are subject to approval by the insurer's domiciliary state regulator.

An extraordinary dividend or distribution is generally 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.

None of the Company's insurance subsidiaries paid dividends to the Company during the years ended December 31, 2022, 2021, and 2020.

The Company's insurance subsidiary in Bermuda is regulated by the Bermuda Monetary Authority.

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As of December 31, 2022, the Company’s insurance subsidiary in New York maintained $ 162.2 million of statutory capital and surplus which was above the required amount of $ 142.4 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.

The Company has funded $ 8.0 million and $ 7.8 million of statutory capital to ZPIC and QPIC, respectively, as of December 31, 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, 2022, 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.

As of December 31, 2022, the Company had $ 13.0 million on deposit with various states in which it is licensed to write policies.

Loss before income taxes was as follows for the years ended December 31, 2022, 2021 and 2020 (in thousands):

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Foreign 814 2,066 45

896 2,124 243

federal & state 11 ( 15 ) ( 9 )

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Change in valuation allowance ( 26.7 ) ( 58.4 ) ( 136.0 )

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

Other, net ( 1.7 ) ( 1.7 ) ( 4.1 )

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The federal net operating loss carryforwards will begin to expire in 2026.

Foreign net operating loss carryforwards will begin to expire in 2023.

federal income tax credits will begin to expire in 2036.

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.

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federal tax jurisdiction for the years ended December 31, 2019 through 2022, 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.

The Company is subject to taxation in various states and countries, 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, 2022, 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.

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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.

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.

In February 2020, the Company entered into a service agreement with the investee, under which the Company incurred $ 3.5 million and $ 2.7 million of expenses for consulting services provided by the investee related to pet acquisition during the years ended December 31, 2022 and 2021, respectively, 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