TRUPANION, INC. 10-Q

Item 1. Financial Statements TRUPANION, INC. Condensed Consolidated Statements of Operations (in thousands, except share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue $ 285,853 $ 233,760 $ 812,748 $ 659,170 Cost of revenue: Veterinary invoice expense (1) 212,441 171,112 613,316 473,654 Other cost of revenue (1) 38,179 32,589 108,480 96,980 Total cost of revenue 250,620 203,701 721,796 570,634 Operating expenses: Technology and development (1) 5,302 6,553 15,434 18,178 General and administrative (1) 12,664 10,314 46,817 28,907 New pet acquisition expense (1) 17,772 22,434 60,183 67,043 Depreciation and amortization 2,990 2,600 9,445 8,024 Total operating expenses 38,728 41,901 131,879 122,152 Gain (loss) from investment in joint venture 4 ( 57 ) ( 140 ) ( 168 ) Operating loss ( 3,491 ) ( 11,899 ) ( 41,067 ) ( 33,784 ) Interest expense 3,053 1,408 8,380 2,680 Other income, net ( 2,465 ) ( 889 ) ( 6,445 ) ( 1,568 ) Loss before income taxes ( 4,079 ) ( 12,418 ) ( 43,002 ) ( 34,896 ) Income tax expense (benefit) ( 43 ) 496 ( 472 ) 491 Net loss $ ( 4,036 ) $ ( 12,914 ) $ ( 42,530 ) $ ( 35,387 ) Net loss per share: Basic and diluted $ ( 0.10 ) $ ( 0.32 ) $ ( 1.03 ) $ ( 0.87 ) Weighted average shares of common stock outstanding: Basic and diluted 41,536,575 40,799,819 41,344,195 40,707,677 (1) Includes stock-based compensation expense as follows: Veterinary invoice expense $ 895 $ 998 $ 2,614 $ 3,232 Other cost of revenue 281 474 1,187 1,906 Technology and development 650 1,184 1,985 3,193 General and administrative 3,281 3,792 14,448 9,281 New pet acquisition expense 1,785 2,195 5,626 7,214 See accompanying notes to the condensed consolidated financial statements. 1 TRUPANION, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss $ ( 4,036 ) $ ( 12,914 ) $ ( 42,530 ) $ ( 35,387 ) Other comprehensive income (loss): Foreign currency translation adjustments ( 2,763 ) ( 3,946 ) 48 ( 8,193 ) Net unrealized gain (loss) on available-for-sale investments ( 243 ) ( 900 ) ( 855 ) ( 901 ) Other comprehensive income (loss), net of taxes ( 3,006 ) ( 4,846 ) ( 807 ) ( 9,094 ) Comprehensive income (loss) $ ( 7,042 ) $ ( 17,760 ) $ ( 43,337 ) $ ( 44,481 ) See accompanying notes to the condensed consolidated financial statements. 2 TRUPANION, INC. Condensed Consolidated Balance Sheets (in thousands, except share data) September 30, 2023 December 31, 2022 Assets (unaudited) Current assets: Cash and cash equivalents $ 150,336 $ 65,605 Short-term investments 115,570 156,804 Accounts and other receivables, net of allowance for doubtful accounts of $ 690 at September 30, 2023 and $ 540 at December 31, 2022 277,913 232,439 Prepaid expenses and other assets 17,386 14,248 Total current assets 561,205 469,096 Restricted cash 18,245 19,032 Long-term investments 11,434 7,841 Property, equipment, and internal-use software, net 100,730 90,701 Intangible assets, net 19,770 24,031 Other long-term assets 18,645 18,943 Goodwill 42,005 41,983 Total assets $ 772,034 $ 671,627 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 8,967 $ 9,471 Accrued liabilities and other current liabilities 29,422 32,616 Reserve for veterinary invoices 61,338 43,734 Deferred revenue 246,511 202,692 Long-term debt - current portion 1,350 1,103 Total current liabilities 347,588 289,616 Long-term debt 127,580 68,354 Deferred tax liabilities 2,583 3,392 Other liabilities 4,818 4,968 Total liabilities 482,569 366,330 Stockholders’ equity: Common stock: $ 0.00001 par value per share, 100,000,000 shares authorized; 42,655,394 and 41,627,208 issued and outstanding at September 30, 2023; 42,041,344 and 41,013,158 shares issued and outstanding at December 31, 2022 — — Preferred stock: $ 0.00001 par value per share, 10,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 527,199 499,694 Accumulated other comprehensive income (loss) ( 7,108 ) ( 6,301 ) Accumulated deficit ( 214,092 ) ( 171,562 ) Treasury stock, at cost: 1,028,186 shares at September 30, 2023 and December 31, 2022 ( 16,534 ) ( 16,534 ) Total stockholders’ equity 289,465 305,297 Total liabilities and stockholders’ equity $ 772,034 $ 671,627 See accompanying notes to the condensed consolidated financial statements. 3 Trupanion, Inc. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at July 1, 2023 41,470,738 $ — $ 519,450 $ ( 210,056 ) $ ( 4,102 ) $ ( 16,534 ) $ 288,758 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 156,470 — 356 — — — 356 Stock-based compensation expense — — 7,393 — — — 7,393 Other comprehensive income (loss) — — — — ( 3,006 ) — ( 3,006 ) Net income (loss) — — — ( 4,036 ) — — ( 4,036 ) Balance at September 30, 2023 41,627,208 $ — $ 527,199 $ ( 214,092 ) $ ( 7,108 ) $ ( 16,534 ) $ 289,465 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at July 1, 2022 40,745,298 $ — $ 481,818 $ ( 149,363 ) $ ( 1,171 ) $ ( 16,530 ) $ 314,754 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 128,126 — ( 437 ) — — — ( 437 ) Stock-based compensation expense — — 9,185 — — — 9,185 Repurchases of common stock ( 62 ) — — — — ( 4 ) ( 4 ) Other comprehensive income (loss) — — — — ( 4,846 ) — ( 4,846 ) Net income (loss) — — — ( 12,914 ) — — ( 12,914 ) Balance at September 30, 2022 40,873,362 $ — $ 490,566 $ ( 162,277 ) $ ( 6,017 ) $ ( 16,534 ) $ 305,738 4 Trupanion, Inc. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2023 41,013,158 $ — $ 499,694 $ ( 171,562 ) $ ( 6,301 ) $ ( 16,534 ) $ 305,297 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 614,050 — ( 15 ) — — — ( 15 ) Stock-based compensation expense — — 27,520 — — — 27,520 Other comprehensive income (loss) — — — — ( 807 ) — ( 807 ) Net income (loss) — — — ( 42,530 ) — — ( 42,530 ) Balance at September 30, 2023 41,627,208 $ — $ 527,199 $ ( 214,092 ) $ ( 7,108 ) $ ( 16,534 ) $ 289,465 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Shares Amount Balance at January 1, 2022 40,475,185 $ — $ 466,792 $ ( 126,890 ) $ 3,077 $ ( 10,779 ) $ 332,200 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 493,198 — ( 2,196 ) — — — ( 2,196 ) Stock-based compensation expense — — 25,970 — — — 25,970 Repurchases of common stock ( 95,021 ) — — — — ( 5,755 ) ( 5,755 ) Other comprehensive income (loss) — — — — ( 9,094 ) — ( 9,094 ) Net income (loss) — — — ( 35,387 ) — — ( 35,387 ) Balance at September 30, 2022 40,873,362 $ — $ 490,566 $ ( 162,277 ) $ ( 6,017 ) $ ( 16,534 ) $ 305,738 See accompanying notes to the condensed consolidated financial statements. 5 TRUPANION, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine Months Ended September 30, 2023 2022 Operating activities Net loss $ ( 42,530 ) $ ( 35,387 ) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 9,445 8,024 Stock-based compensation expense 25,860 24,826 Other, net ( 1,134 ) 28 Changes in operating assets and liabilities: Accounts and other receivables ( 45,593 ) ( 58,948 ) Prepaid expenses and other assets ( 2,761 ) ( 4,420 ) Accounts payable, accrued liabilities, and other liabilities ( 3,832 ) 748 Reserve for veterinary invoices 17,697 63 Deferred revenue 43,979 56,047 Net cash provided by (used in) operating activities 1,131 ( 9,019 ) Investing activities Purchases of investment securities ( 109,389 ) ( 125,660 ) Maturities and sales of investment securities 147,365 104,492 Cash paid in business acquisition, net of cash acquired — ( 2,755 ) Purchases of property, equipment, and internal-use software ( 14,310 ) ( 11,610 ) Other 1,420 ( 1,431 ) Net cash provided by (used in) investing activities 25,086 ( 36,964 ) Financing activities Proceeds from debt financing, net of financing fees 60,102 54,312 Repayment of debt financing ( 1,380 ) ( 300 ) Repurchases of common stock — ( 5,755 ) Proceeds from exercise of stock options 1,281 1,584 Shares withheld to satisfy tax withholding ( 1,296 ) ( 3,780 ) Other ( 150 ) — Net cash provided by (used in) financing activities 58,557 46,061 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net ( 830 ) ( 1,964 ) Net change in cash, cash equivalents, and restricted cash 83,944 ( 1,886 ) Cash, cash equivalents, and restricted cash at beginning of period 84,637 100,869 Cash, cash equivalents, and restricted cash at end of period $ 168,581 $ 98,983 Supplemental disclosures Noncash investing and financing activities: Purchases of property, equipment, and internal-use software included in accounts payable and accrued liabilities $ 741 $ 1,838 See accompanying notes to the condensed consolidated financial statements. 6 TRUPANION, INC. Notes to the Condensed Consolidated Financial Statements (unaudited) 1. Nature of Operations and Significant Accounting Policies Description of Business and Basis of Presentation Trupanion, Inc. (collectively with its wholly-owned subsidiaries, the "Company") provides medical insurance for cats and dogs throughout the United States, Canada, Europe, 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. The financial data as of December 31, 2022 was derived from the Company's audited consolidated financial statements. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and, in management's opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations, comprehensive income (loss), stockholders' equity and cash flows for the interim periods. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on February 16, 2023 (the 2022 10-K). The Company's accounting policies are described in Note 1 to the audited financial statements included in the 2022 10-K. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year or any other interim period. 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. See Note 1 to the audited financial statements included in the 2022 10-K for additional discussion of these estimates and assumptions. Accounts and Other Receivabl es Accounts and other receivables are comprised of trade receivables and other miscellaneous receivables and are carried at their estimated collectible amounts. Trade receivables are primarily related to the Company’s other business segment where the Company generates revenue from underwriting policies through unaffiliated general agents. During the nine months ended September 30, 2023, the Company incurred a non-recurring $ 3.8 million settlement of accounts receivable due to uncollected premiums in connection with the transition of underwriting a third-party business to other insurers. 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: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Stock options 522,830 679,889 522,830 679,889 Restricted stock awards and restricted stock units 735,163 1,167,569 735,163 1,167,569 7 3. Goodwill Goodwill arises from business acquisitions in which the purchase price exceeds the fair value of tangible and intangible assets acquired less assumed liabilities. The following is a summary of goodwill by reportable segment for the nine months ended September 30, 2023 (in thousands): Subscription Business Other Business Total Balance as of December 31, 2022 $ 41,983 $ — $ 41,983 Acquisitions — — — Effects of foreign currency 22 — 22 Balance as of September 30, 2023 $ 42,005 $ — $ 42,005 4. Investments 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 September 30, 2023 and December 31, 2022 (in thousands): Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of September 30, 2023 Long-term investments: Available-for-sale investments Foreign deposits $ 10,437 $ — $ — $ 10,437 $ 10,437 $ — $ — $ 10,437 Held-to-maturity investments U.S. treasury securities $ 997 $ — $ ( 4 ) $ 993 $ 997 $ — $ ( 4 ) $ 993 Short-term investments: Available-for-sale investments U.S. treasury securities $ 44,056 $ — $ ( 724 ) $ 43,332 Mortgage-backed securities and collateralized mortgage obligations 7,359 — ( 164 ) 7,195 Other asset-backed securities 12,400 — ( 135 ) 12,265 Corporate bonds 36,752 — ( 459 ) 36,293 $ 100,567 $ — $ ( 1,482 ) $ 99,085 Held-to-maturity investments U.S. treasury securities $ 13,195 $ — $ ( 129 ) $ 13,066 Certificates of deposit 3,290 — — 3,290 $ 16,485 $ — $ ( 129 ) $ 16,356 8 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2022 Long-term investments: Available-for-sale investments Foreign deposits $ 7,683 $ — $ — $ 7,683 $ 7,683 $ — $ — $ 7,683 Held-to-maturity investments U.S. treasury securities $ 158 $ — $ ( 4 ) $ 154 $ 158 $ — $ ( 4 ) $ 154 Short-term investments: Available-for-sale investments U.S. 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 U.S. treasury securities $ 12,059 $ — $ ( 58 ) $ 12,001 Certificates of deposit 3,254 — — 3,254 U.S. government funds 41,192 — — 41,192 $ 56,505 $ — $ ( 58 ) $ 56,447 Maturities of investments classified as available-for-sale and held-to-maturity were as follows (in thousands): As of September 30, 2023 Amortized Cost Fair Value Available-for-sale: Due under one year $ 2,657 $ 2,612 Due after one year through five years 88,588 87,450 $ 91,245 $ 90,062 Held-to-maturity: Due under one year $ 16,485 $ 16,356 Due after one year through five years 997 993 $ 17,482 $ 17,349 Available-for-sale collateralized: Mortgage-backed securities and collateralized mortgage obligations $ 7,359 $ 7,195 Other asset-backed securities 12,400 12,265 $ 19,759 $ 19,460 9 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 investments, the Company determined that there were unrealized losses of $ 1.5 million and $ 0.6 million as of September 30, 2023 and December 31, 2022, res pectively. As of September 30, 2023, $ 20.1 million in available-for-sale investments have been in a loss position for more than twelve months, with total unrealized losses of $ 0.5 million . As of September 30, 2023, $ 72.4 million available-for-sale investments have been in a loss position for less than twelve months, with total unrealized losses of $ 1.0 million . These losses relate to interest rate changes. The Company does not expect any credit losses from its available-for-sale investments, 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 does not intend to, sell prior to a potential recovery. Proceeds from the sales of fixed maturities classified as available-for-sale were $ 83.9 million and $ 5.9 million during the nine months ended September 30, 2023 and 2022, respectively. 5. Other Investments The Company has invested $ 7.0 million in the 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 stock issued by the variable interest entity in August 2027 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 6. Additionally, the Company has extended a $ 7.0 million revolving line of credit to the variable interest entity to fund its inventory purchases, which will increase annually by $ 2.0 million until the note’s maturity in 2027. Borrowing amounts are subject to limitations based on Baystride’s forecasted revenues and inventory balances. 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 $ 4.6 million and $ 6.3 million as of September 30, 2023 and December 31, 2022, 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 $ 0.3 million and $ 0.6 million of these services for the nine months ended September 30, 2023 and 2022, respectively. 10 6. Fair Value Fair Value Disclosures - 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 September 30, 2023 Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 1,764 $ 1,764 $ — $ — Fixed maturities: Mortgage-backed securities and collateralized mortgage obligations 7,195 — 7,195 — Other asset-backed securities 12,265 — 12,265 — Corporate bonds 36,293 — 36,293 — Foreign deposits 10,437 10,437 — — U.S. Treasury securities 43,332 — 43,332 — Preferred stock in variable interest entity 4,115 — — 4,115 Total $ 115,401 $ 12,201 $ 99,085 $ 4,115 As of December 31, 2022 Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 1,633 $ 1,633 $ — $ — 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 — U.S. 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 The Company measures the fair value of money market funds and foreign deposits, classified as Level 1, based on quoted prices in active markets for identical assets. The Company's 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 the Company's 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 4, 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 5) 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. The estimated fair value was $ 4.1 million as of September 30, 2023, unchanged from December 31, 2022, and is recorded in other long-term assets on the Company's consolidated balance sheet. This investment has maintained an unrealized loss position of $ 2.9 million for less than twelve months. 11 Fair Value Disclosures - Other Assets and Liabilities The Company's other long-term assets balance also included notes receivable of $ 7.5 million and $ 9.3 million as of September 30, 2023 and December 31, 2022, 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. 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 September 30, 2023. 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 nine months ended September 30, 2023 and the year ended December 31, 2022. 7. 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. 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. 8. 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 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. Reserve for veterinary invoices Summarized below are the changes in the total liability for the Company's subscription business segment (in thousands): Nine Months Ended September 30, Subscription 2023 2022 Reserve at beginning of year $ 21,543 $ 22,407 Veterinary invoices during the period related to: Current year 400,604 323,724 Prior years 2,426 ( 2,981 ) Total veterinary invoice expense 403,030 320,743 Amounts paid during the period related to: Current year 368,269 301,730 Prior years 21,829 17,814 Total paid 390,098 319,544 Non-cash expenses 2,794 3,295 Reserve at end of period $ 31,681 $ 20,311 12 The Company had an unfavorable development on veterinary invoice reserves for the subscription business segment of $ 2.4 million for the nine months ended September 30, 2023, and a favorable development on veterinary invoice reserves of $ 3.0 million for the nine months ended September 30, 2022, both of which were the result of ongoing analysis of recent payment trends. Summarized below are the changes in total liability for the Company's other business segment (in thousands): Nine Months Ended September 30, Other Business 2023 2022 Reserve at beginning of year $ 22,191 $ 17,264 Veterinary invoices during the period related to: Current year 209,635 152,358 Prior years 651 553 Total veterinary invoice expense 210,286 152,911 Amounts paid during the period related to: Current year 181,535 133,333 Prior years 21,285 17,611 Total paid 202,820 150,944 Non-cash expenses — — Reserve at end of period $ 29,657 $ 19,231 The Company had an unfavorable development on veterinary invoice reserves for the other business segment of $ 0.7 million for the nine months ended September 30, 2023, and an unfavorable development on veterinary invoice reserves of $ 0.6 million for the nine months ended September 30, 2022, both of which were the result of ongoing analysis of recent payment trends. Reserve for veterinary invoices, by year of occurrence In the following tables, the reserve for veterinary invoices for each segment is presented as the amount (in thousands) by the year to which the veterinary invoice relates, referred to as the year of occurrence. Subscription As of September 30, 2023 Year of Occurrence 2021 and prior $ 39 2022 2,101 2023 29,541 $ 31,681 Other Business As of September 30, 2023 Year of Occurrence 2021 and prior $ 113 2022 1,444 2023 28,100 $ 29,657 9. Debt On March 25, 2022 , the Company entered into a credit agreement with Piper Sandler Finance, LLC, acting as the administrative agent, 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; 13 (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, February 17, 2023, and September 21, 2023, the Company borrowed Delayed Draw Term loans of $ 15.0 million, $ 35.0 million, and $ 25.0 million, respectively; and (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 September 30, 2023 was approximately 10.54 % for the original $ 60.0 million term loan and for the aggregate $ 75.0 million term loans. 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 September 30, 2023, the Company was in compliance with all financial and other 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 September 30, 2023 are as follows (in thousands): Year Ending December 31, September 30, 2023 2023 $ 338 2024 1,350 2025 1,350 2026 1,350 2027 72,113 Thereafter 57,188 Total $ 133,689 10. 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 was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Veterinary invoice expense $ 895 $ 998 $ 2,614 $ 3,232 Other cost of revenue 281 474 1,187 1,906 Technology and development 650 1,184 1,985 3,193 General and administrative 3,281 3,792 14,448 9,281 New pet acquisition expense 1,785 2,195 5,626 7,214 Total expensed stock-based compensation 6,892 8,643 25,860 24,826 Capitalized stock-based compensation 501 542 1,660 1,144 Total stock-based compensation $ 7,393 $ 9,185 $ 27,520 $ 25,970 As of September 30, 2023, the Company had 735,163 unvested restricted stock units. Stock-based compensation expenses of $ 51.1 million related to unvested restricted stock units are expected to be recognized over a weighted average period of approximately 2.3 years. 14 In March 2023, two executives terminated employment with the Company and one executive signed a separation agreement effective June 1, 2023. In conjunction with these departures, the Company accelerated the vesting of certain RSUs as of the termination date and extended the purchase date of certain vested options from 90 to 365 days. These award modifications resulted in the recognition of $ 4.8 million share-based compensation expense during the nine months ended September 30, 2023. Stock Options A summary of the Company's stock option activity is as follows: Number of Options Weighted Average Exercise Price per Share Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2022 629,650 $ 13.53 $ 21,410 Granted — — — Exercised ( 103,805 ) 12.43 1,964 Forfeited ( 3,015 ) 20.58 — Outstanding as of September 30, 2023 522,830 13.70 7,579 Exercisable as of September 30, 2023 522,830 $ 13.70 $ 7,579 As of September 30, 2023, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 2.3 years. Restricted Stock Awards and Restricted Stock Units A summary of the Company’s restricted stock award and restricted stock unit activity is as follows: Number of Shares Weighted Average Grant Date Fair Value per Share Unvested shares as of December 31, 2022 1,112,552 $ 84.46 Granted 236,964 29.99 Vested ( 540,651 ) 76.55 Forfeited ( 73,702 ) 83.51 Unvested shares as of September 30, 2023 735,163 $ 72.78 11. Stockholders' Equity Common Stock and Preferred Stock As of September 30, 2023, the Company had 100,000,000 shares of common stock authorized and 41,627,208 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 September 30, 2023, 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. 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 repurchased no shares during the three and nine months ended September 30, 2023 and 62 and 95,021 shares during the three and nine months ended September 30, 2022, respectively. 15 12. Accumulated Comprehensive Income (Loss) A summary of the components of accumulated other comprehensive income (loss) is as follows (in thousands): For the three months ended September 30, 2023 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of July 1, 2023 $ 23 $ ( 4,125 ) $ ( 4,102 ) Other comprehensive income (loss) ( 2,763 ) ( 243 ) ( 3,006 ) Balance as of September 30, 2023 $ ( 2,740 ) $ ( 4,368 ) $ ( 7,108 ) For the three months September 30, 2022 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of July 1, 2022 $ ( 2,623 ) $ 1,452 $ ( 1,171 ) Other comprehensive income (loss) ( 3,946 ) ( 900 ) ( 4,846 ) Balance as of September 30, 2022 $ ( 6,569 ) $ 552 $ ( 6,017 ) For the nine months ended September 30, 2023 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of January 1, 2023 $ ( 2,788 ) $ ( 3,513 ) $ ( 6,301 ) Other comprehensive income (loss) 48 ( 855 ) ( 807 ) Balance as of September 30, 2023 $ ( 2,740 ) $ ( 4,368 ) $ ( 7,108 ) For the nine months ended September 30, 2022 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of January 1, 2022 $ 1,624 $ 1,453 $ 3,077 Other comprehensive income (loss) ( 8,193 ) ( 901 ) ( 9,094 ) Balance as of September 30, 2022 $ ( 6,569 ) $ 552 $ ( 6,017 ) 16 13. Segments The Company has two reporting segments: subscription business and other business. The subscription business segment consists of products that have been created to meet the needs of their distribution channels and have similar target margin profiles. This segment generates revenue primarily from subscription fees related to the Company's direct-to-consumer products. The other business segment generates revenue primarily by underwriting policies on behalf of third parties. The Company does not undertake marketing efforts for these policies and has a business-to-business relationship with these third-parties. The other business segment also includes other products and insurance software solutions that have a different margin profile from the Company’s subscription business segment. 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 generally 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): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Subscription business: Revenue $ 182,906 $ 152,401 $ 521,369 $ 438,048 Veterinary invoice expense 139,747 112,915 403,030 320,743 Other cost of revenue 17,697 15,243 52,025 45,118 Technology and development 3,393 4,272 9,901 12,072 General and administrative 8,103 6,724 27,587 19,214 New pet acquisition expense 17,762 22,253 60,060 66,567 Depreciation and amortization 1,913 1,695 6,060 5,338 Subscription business operating loss ( 5,709 ) ( 10,701 ) ( 37,294 ) ( 31,004 ) Other business: Revenue 102,947 81,359 291,379 221,122 Veterinary invoice expense 72,694 58,197 210,286 152,911 Other cost of revenue 20,482 17,346 56,455 51,862 Technology and development 1,909 2,281 5,533 6,106 General and administrative 4,561 3,590 19,230 9,693 New pet acquisition expense 10 181 123 476 Depreciation and amortization 1,077 905 3,385 2,686 Other business operating income (loss) 2,214 ( 1,141 ) ( 3,633 ) ( 2,612 ) Gain (loss) from investment in joint venture 4 ( 57 ) ( 140 ) ( 168 ) Total operating loss $ ( 3,491 ) $ ( 11,899 ) $ ( 41,067 ) $ ( 33,784 ) The following table presents the Company’s revenue by geographic region of the member (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 United States $ 241,064 $ 197,812 $ 686,662 $ 555,350 Canada and other 44,789 35,948 126,086 103,820 Total revenue $ 285,853 $ 233,760 $ 812,748 $ 659,170 Substantially all of the Company’s long-lived assets were located in the United States as of September 30, 2023 and December 31, 2022. 17 14. 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 $ 1.9 million and $ 2.5 million of expenses for consulting services provided by the investee related to pet acquisition during the nine months ended September 30, 2023 and 2022, respectively, recorded as new pet acquisition expense on the Company's consolidated statement of operations. 18