TRUPANION, INC. 10-K

Item 8. Financial Statements and Supplementary Data Trupanion, Inc. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 61 Consolidated Statements of Operations 63 Consolidated Statements of Comprehensive Loss 64 Consolidated Balance Sheets 65 Consolidated Statements of Stockholders' Equity 66 Consolidated Statements of Cash Flows 67 Notes to Consolidated Financial Statements 68 60 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, 2023 and 2022, 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, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 26, 2024 expressed an adverse 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. 61 Reserve for Veterinary Invoices Description of the Matter The Company’s reserve for veterinary invoices totaled $63.2 million as of December 31, 2023. As discussed in Note 1 and Note 10 to the financial statements, the Company’s reserve for veterinary invoices is based on an actuarial analysis of the Company’s historical experience where the Company makes assumptions to estimate the amount the Company will pay for veterinary invoices that haven't been processed or received but that are dated as of, or prior to, its balance sheet date. The estimate of veterinary invoice reserves is subject to a number of variables, including historical trends involving payment patterns and amounts. Auditing the Company’s reserve for veterinary invoices is complex and required the involvement of our actuarial specialists due to the sensitivity of the estimated reserve to management's assumptions. Estimating the ultimate cost to settle the veterinary invoice reserve is subjective due to the possibility that the actual veterinary invoice payments may not be comparable to historical trends experienced by the Company. How We Addressed the Matter in Our Audit To evaluate the reserve for veterinary invoices, our audit procedures included, among others, testing the completeness and accuracy of the historical veterinary paid invoice data used in management's actuarial projections. 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 26, 2024 62 Trupanion, Inc. Consolidated Statements of Operations (in thousands, except share data) Year Ended December 31, 2023 2022 2021 Revenue $ 1,108,605 $ 905,179 $ 698,991 Cost of revenue: Veterinary invoice expense (1) 831,055 649,737 486,062 Other cost of revenue (1) 146,534 133,257 108,583 Total cost of revenue 977,589 782,994 594,645 Operating expenses: Technology and development (1) 21,403 25,133 16,866 General and administrative (1) 60,207 39,379 31,893 New pet acquisition expense (1) 77,372 89,500 78,647 Depreciation and amortization 12,474 10,921 11,965 Total operating expenses 171,456 164,933 139,371 Gain (loss) from investment in joint venture ( 219 ) ( 253 ) ( 171 ) Operating loss ( 40,659 ) ( 43,001 ) ( 35,196 ) Interest expense 12,077 4,267 10 Other expense (income), net ( 7,701 ) ( 3,072 ) 14 Loss before income taxes ( 45,035 ) ( 44,196 ) ( 35,220 ) Income tax expense (benefit) ( 342 ) 476 310 Net loss $ ( 44,693 ) $ ( 44,672 ) $ ( 35,530 ) Net loss per share: Basic and diluted $ ( 1.08 ) $ ( 1.10 ) $ ( 0.89 ) Weighted average shares of common stock outstanding: Basic and diluted 41,436,882 40,765,355 40,137,505 (1) Includes stock-based compensation expense as follows: Veterinary invoice expense $ 3,667 $ 4,145 $ 4,538 Other cost of revenue 1,612 2,339 2,610 Technology and development 2,846 4,742 3,056 General and administrative 17,717 12,831 8,862 New pet acquisition expense 7,319 9,336 9,160 63 Trupanion, Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2023 2022 2021 Net loss $ ( 44,693 ) $ ( 44,672 ) $ ( 35,530 ) Other comprehensive income (loss): Foreign currency translation adjustments 2,712 ( 4,412 ) ( 496 ) Net unrealized gain (loss) on available-for-sale debt securities 3,992 ( 4,966 ) 502 Other comprehensive income (loss), net of taxes 6,704 ( 9,378 ) 6 Comprehensive income (loss) $ ( 37,989 ) $ ( 54,050 ) $ ( 35,524 ) 64 Trupanion, Inc. Consolidated Balance Sheets (in thousands, except share data) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 147,501 $ 65,605 Short-term investments 129,667 156,804 Accounts and other receivables, net of allowance for credit loss of $ 1,085 at December 31, 2023 and $ 540 at December 31, 2022 267,899 232,439 Prepaid expenses and other assets 17,022 14,248 Total current assets 562,089 469,096 Restricted cash 22,963 19,032 Long-term investments 12,866 7,841 Property, equipment, and internal-use software, net 103,650 90,701 Intangible assets, net 18,745 24,031 Other long-term assets 18,922 18,943 Goodwill 43,713 41,983 Total assets $ 782,948 $ 671,627 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 10,505 $ 9,471 Accrued liabilities and other current liabilities 34,052 32,616 Reserve for veterinary invoices 63,238 43,734 Deferred revenue 235,329 202,692 Long-term debt - current portion 1,350 1,103 Total current liabilities 344,474 289,616 Long-term debt 127,580 68,354 Deferred tax liabilities 2,685 3,392 Other liabilities 4,487 4,968 Total liabilities 479,226 366,330 Stockholders’ equity: Common stock: $ 0.00001 par value per share, 100,000,000 shares authorized; 42,887,052 and 41,858,866 shares issued and outstanding at December 31, 2023 and 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 536,108 499,694 Accumulated other comprehensive income (loss) 403 ( 6,301 ) Accumulated deficit ( 216,255 ) ( 171,562 ) Treasury stock, at cost: 1,028,186 shares at December 31, 2023 and 2022 ( 16,534 ) ( 16,534 ) Total stockholders’ equity 303,722 305,297 Total liabilities and stockholders’ equity $ 782,948 $ 671,627 65 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, 2021 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 (loss) — — — — 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 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 632,994 — ( 2,124 ) — — — ( 2,124 ) Stock-based compensation expense — — 35,026 — — — 35,026 Repurchases of common stock ( 95,021 ) — — — — ( 5,755 ) ( 5,755 ) Other comprehensive income (loss) — — — — ( 9,378 ) — ( 9,378 ) Net loss — — — ( 44,672 ) — — ( 44,672 ) Balance at December 31, 2022 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 845,708 — 1,118 — — — 1,118 Stock-based compensation expense — — 35,296 — — — 35,296 Other comprehensive income (loss) — — — — 6,704 — 6,704 Net loss — — — ( 44,693 ) — — ( 44,693 ) Balance at December 31, 2023 41,858,866 $ — $ 536,108 $ ( 216,255 ) $ 403 $ ( 16,534 ) $ 303,722 66 Trupanion, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Operating activities Net loss $ ( 44,693 ) $ ( 44,672 ) $ ( 35,530 ) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 12,474 10,921 11,965 Stock-based compensation expense 33,161 33,393 28,226 Other, net 1,347 1,051 ( 1,927 ) Changes in operating assets and liabilities: Accounts and other receivables ( 35,440 ) ( 66,982 ) ( 66,170 ) Prepaid expenses and other assets ( 1,907 ) ( 5,227 ) ( 3,055 ) Accounts payable, accrued liabilities, and other liabilities 1,644 3,136 8,796 Reserve for veterinary invoices 19,485 4,227 10,768 Deferred revenue 32,567 56,153 54,385 Net cash provided by (used in) operating activities 18,638 ( 8,000 ) 7,458 Investing activities Purchases of investment securities ( 165,936 ) ( 273,006 ) ( 95,672 ) Maturities and sales of investment securities 190,270 239,210 57,869 Cash paid in business acquisition, net of cash acquired — ( 15,034 ) — Purchases of property, equipment, and internal-use software ( 18,280 ) ( 17,088 ) ( 12,355 ) Other 1,585 ( 1,598 ) ( 1,755 ) Net cash provided by (used in) investing activities 7,639 ( 67,516 ) ( 51,913 ) Financing activities Proceeds from debt financing, net of financing fees 60,102 69,138 — Repayment of debt financing ( 1,717 ) ( 571 ) — Repurchases of common stock — ( 5,755 ) — Proceeds from exercise of stock options 2,655 2,290 3,607 Shares withheld to satisfy tax withholding ( 1,536 ) ( 4,359 ) ( 4,732 ) Other ( 378 ) — — Net cash provided by (used in) financing activities 59,126 60,743 ( 1,125 ) Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net 424 ( 1,459 ) 252 Net change in cash, cash equivalents, and restricted cash 85,827 ( 16,232 ) ( 45,328 ) Cash, cash equivalents, and restricted cash at beginning of period 84,637 100,869 146,197 Cash, cash equivalents, and restricted cash at end of period $ 170,464 $ 84,637 $ 100,869 Supplemental disclosures Income taxes paid (refund) $ 611 $ 2,498 $ 282 Interest paid 12,100 3,353 16 Noncash investing and financing activities: Purchases of property, equipment, and internal-use software included in accounts payable and accrued liabilities 887 1,324 729 67 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 in the United States, Canada, Continental Europe, 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. 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 not held in trust for a third party 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, 2023, the Company was in compliance with all requirements. Accounts and Other Receivables 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. These policies are typically annual policies, with monthly payment terms through the end of the twelve-month period. The Company had $ 249.8 million and $ 220.8 million accounts receivable associated with underwriting these policies as of December 31, 2023 and 2022, respectively. During the year ended December 31, 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. Deferred Acquisition Costs The Company incurs certain costs, including premium taxes, 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, 2023 and 2022 were $ 7.4 million and $ 6.0 million, respectively. Amortized deferred acquisition costs classified within new pet acquisition expense amounted to $ 6.0 million, $ 4.9 million, and $ 4.7 million and amortized deferred acquisition costs classified within other cost of revenue amounted to $ 45.6 million, $ 33.9 million, and $ 30.5 million, for the years ended December 31, 2023, 2022, and 2021, respectively. Investments 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 income (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 were $ 0.3 million in realized gains and $ 0.9 million in realized losses on sales of fixed maturity securities during the year ended December 31, 2023, and no realized gains or losses on sales of fixed maturity securities during the years ended December 31, 2022 and 2021. 68 Each reporting period, the Company evaluates whether declines in fair value of its investments below carrying value are the result of expected credit losses. This evaluation includes the Company's ability and intent to hold these investments until recovery of carrying value occurs, including an evaluation of all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts. Expected credit losses are recorded as an allowance through other expense (income), net on the Company's consolidated statements of operations. 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, Equipment, and Internal-Use Software Property, equipment, and internal-use software primarily consists of building, land and land improvements, office equipment, internal-use software related to the Company’s website, and internal support systems. Internal-use software is 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. The Company has recognized no impairment loss on goodwill and indefinite-lived intangible assets for the years ended December 31, 2023, 2022, and 2021. Asset Impairment Long-lived assets, including property, equipment, internal-use software, and finite-lived 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, including property, equipment, internal-use software, and finite-lived intangible assets for the years ended December 31, 2023, 2022, and 2021. 69 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 adjusts 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 for which revenue is recognized pro-rata over the twelve-month policy 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. For the year ended December 31, 2023, premiums from policies sourced by general agents accounted for 34 % of our total revenue, and one general agent sourced members whose premiums accounted for over 10% of our total revenue. 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 and pay 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 and the estimated cost of processing these invoices. Veterinary invoice expense also includes amounts paid by unaffiliated general agents on our behalf, 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. Other Expense (Income), Net Other income, net, was $ 7.7 million, $ 3.1 million, and nil , including interest income of $ 9.0 million, $ 3.0 million, and $ 0.3 million offset by credit losses of $ 1.7 million, nil , and nil for the years ended December 31, 2023, 2022, and 2021, respectively. 70 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 $ 16.9 million, $ 25.5 million and $ 23.6 million, in the years ended December 31, 2023, 2022 and 2021, 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 $( 0.1 ) million, $( 2.8 ) million, and $ 1.6 million were recorded in accumulated other comprehensive loss (income) as of December 31, 2023, 2022, and 2021, respectively. Reclassifications Certain reclassifications have been made to prior-year amounts to conform to current-year reporting classifications. These reclassifications had no impact on net earnings, total assets, total liabilities, or total shareholders' equity. 71 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. 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 2023, 2022, and 2021 was $ 167.6 million, $ 135.9 million and $ 112.0 million, respectively, and deferred revenue relating to this arrangement at December 31, 2023 and 2022 was $ 9.5 million and $ 6.4 million, respectively. Reinsurance revenue was 15 %, 15 %, and 16 % of total revenue in 2023, 2022, and 2021, respectively. Cash designated for the purpose of paying claims related to this reinsurance agreement was $ 11.2 million and $ 7.2 million at December 31, 2023 and 2022, 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, 2023, the account balance was CAD $ 15.7 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, 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. government, U.S. government agencies and high-credit-quality issuers of debt securities. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 related to improving segment disclosures. This ASU enhances disclosures about significant segment expenses, allows for multiple measures of a segment's profit or loss, and requires additional disclosures about the Chief Operating Decision Maker. The ASU is effective for annual periods beginning after December 15, 2023, including interim periods within that reporting period, with early adoption permitted. As of year-end, the Company is still evaluating the impact on its consolidated financial statements. In December 2023, the FASB issued ASU 2023-09 which improves and expands upon the income tax disclosures, primarily related to the rate reconciliation and income taxes paid information. The ASU is effective for annual periods beginning after December 15, 2024, including interim periods within that reporting period, with early adoption permitted. As of year-end, the Company is still evaluating the impact on its consolidated financial statements. 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, 2023 2022 2021 Stock options 408,970 629,650 807,205 Restricted stock awards and restricted stock units 714,382 1,112,552 1,087,627 72 3. Business Combinations PetExpert 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 estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): November 16, 2022 Current assets, net of cash acquired $ 295 Property and equipment and other long-term assets 27 Amortizable intangible assets 5,121 Goodwill 9,541 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 developed technologies and customer relationships with an estimated useful life of 5.0 years. The goodwill recognized is attributable primarily to going concern value such as assembled workforce, future technology development, future customers, and expected synergies from incorporating the operations into the Company’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. 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. This line of credit was due and paid in full in May 2023. Smart Paws 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. 73 4. Property, Equipment, and Internal-Use Software, Net Property, equipment, and internal-use software, net consisted of the following (in thousands): December 31, 2023 2022 Land and improvements $ 15,911 $ 15,911 Building and improvements 48,974 48,963 Software 40,097 34,779 Office equipment and other 6,129 6,814 Construction in progress 34,627 21,415 Property, equipment and internal-use software, at cost 145,738 127,882 Less: Accumulated depreciation ( 42,088 ) ( 37,181 ) Property and equipment, net $ 103,650 $ 90,701 Depreciation expense related to property, equipment, and internal-use software was $ 6.7 million, $ 6.1 million and $ 7.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. 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. The following is a summary of goodwill by reportable segment for the years ended December 31, 2023 and 2022 (in thousands): Subscription Business Other Business Total Balance as of January 1, 2022 $ 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 Effects of foreign currency 1,730 — 1,730 Balance as of December 31, 2023 $ 43,713 $ — $ 43,713 74 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 Weighted Average Useful Life Remaining as of December 31, 2023 December 31, 2023: Licenses $ 4,773 $ — $ 4,773 N/A Leases 848 ( 848 ) — — Trade name 1,294 ( 412 ) 882 6.8 Developed technologies 17,278 ( 9,023 ) 8,255 2.6 Customer relationships 8,379 ( 4,855 ) 3,524 2.1 Patents, trademarks, and other 2,459 ( 1,148 ) 1,311 5.0 Total Intangibles $ 35,031 $ ( 16,286 ) $ 18,745 2.8 December 31, 2022: Licenses $ 4,773 $ — $ 4,773 Leases 2,959 ( 2,866 ) 93 Trade name 1,228 ( 266 ) 962 Developed technologies 16,770 ( 5,164 ) 11,606 Customer relationships 7,980 ( 3,001 ) 4,979 Patents, trademarks, and other 2,768 ( 1,150 ) 1,618 Total Intangibles $ 36,478 $ ( 12,447 ) $ 24,031 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. Insurance licenses are renewed annually upon payment of various fees assessed by the issuing state. Renewal costs are expensed as incurred. Insurance licenses are considered an indefinite-lived intangible asset given the planned renewal of the certificates of authority and applicable licenses for the foreseeable future. Amortization expense associated with intangible assets was $ 5.7 million, $ 4.8 million, and $ 4.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, 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: 2024 $ 5,345 2025 4,556 2026 1,482 2027 1,311 2028 164 Thereafter 443 Total $ 13,301 6. 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 December 31, 2023 and 2022 (in thousands): 75 Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of December 31, 2023 Long-term investments: Available-for-sale investments Foreign deposits $ 11,869 $ — $ — $ 11,869 $ 11,869 $ — $ — $ 11,869 Held-to-maturity investments U.S. treasury securities $ 997 $ 8 $ — $ 1,005 $ 997 $ 8 $ — $ 1,005 Short-term investments: Available-for-sale investments U.S. treasury securities $ 44,425 $ 326 $ ( 64 ) $ 44,687 Mortgage-backed securities and collateralized mortgage obligations 10,460 69 ( 75 ) 10,454 Other asset-backed securities 12,422 67 ( 53 ) 12,436 Corporate bonds 36,404 332 ( 123 ) 36,613 $ 103,711 $ 794 $ ( 315 ) $ 104,190 Held-to-maturity investments U.S. Treasury securities $ 13,179 $ 21 $ ( 15 ) $ 13,185 Certificates of deposit 12,298 — — 12,298 $ 25,477 $ 21 $ ( 15 ) $ 25,483 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 $ 17 $ ( 203 ) $ 42,647 Mortgage-backed securities and collateralized mortgage obligations 8,015 8 ( 105 ) 7,918 Other asset-backed securities 11,286 8 ( 85 ) 11,209 Municipal bond 1,000 — ( 6 ) 994 Corporate bonds 37,793 95 ( 357 ) 37,531 $ 100,927 $ 128 $ ( 756 ) $ 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 76 Maturities of investments classified as available-for-sale and held-to-maturity were as follows (in thousands): December 31, 2023 Amortized Cost Fair Value Available-for-sale: Due under one year $ 2,420 $ 2,408 Due after one year through five years 90,278 90,761 $ 92,698 $ 93,169 Available-for-sale collateralized: Mortgage-backed securities and collateralized mortgage obligations $ 10,460 $ 10,454 Other asset-backed securities 12,422 12,436 $ 22,882 $ 22,890 Held-to-maturity: Due under one year $ 25,477 $ 25,483 Due after one year through five years 997 1,005 $ 26,474 $ 26,488 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 $ 0.3 million and $ 0.8 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, $ 18.9 million in available-for-sale investments have been in a loss position for more than twelve months, with total unrealized losses of $ 0.2 million. As of December 31, 2023, $ 25.9 million available-for-sale investments have been in a loss position for less than twelve months, with total unrealized losses of $ 0.1 million. As of December 31, 2022, no available-for-sale investments had been in a loss position for more than twelve months. As of December 31, 2022, $ 76.3 million available-for-sale investments had been in a loss position for less than twelve months, with total unrealized losses of $ 0.8 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 $ 114.7 million and $ 43.0 million during the years ended December 31, 2023 and 2022, respectively. 7. Other Investments Preferred Stock Investment 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 entity and is, therefore, not the primary beneficiary. The Company has the option to purchase all of the outstanding common stock issued by the entity in August 2027 at an amount approximating its expected fair value. The preferred stock investment in the entity is redeemable, and therefore, 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 $ 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 $ 4.0 million and $ 6.3 million as of December 31, 2023 and 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 $ 0.4 million and $ 0.8 million of these services for the years ended December 31, 2023 and 2022, respectively. 77 Allowance for Credit Loss The Company regularly evaluates its investments for expected credit losses. The Company considers past events, current conditions, and reasonable and supportable forecasts in estimating an allowance for credit losses. Additionally, the Company considers the ultimate collection of cash flows from its investments and whether the Company has the intent to sell, or if it is more likely than not the Company would be required to sell the security prior to recovery of its amortized cost. Such evaluations are revised as conditions change and new information becomes available. Based on these considerations, the Company has established an allowance for credit losses related to its investment in the preferred stock of a variable interest entity. The following table presents a rollforward of the allowance for credit losses for this investment. Balance as of January 1, 2022 $ — (Addition to) allowance for credit losses — Balance as of December 31, 2022 — (Addition to) allowance for credit losses ( 1,674 ) Balance as of December 31, 2023 $ ( 1,674 ) 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, 2023, the Company has contributed $ 1.3 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. 78 8. Fair Value Fair Value Disclosures 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, 2023 Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 67,360 $ 67,360 $ — $ — Fixed maturities: Mortgage-backed securities and collateralized mortgage obligations 10,454 — 10,454 — Other asset-backed securities 12,436 — 12,436 — Corporate bonds 36,613 — 36,613 — Foreign deposits 11,869 11,869 — — U.S. Treasury securities 44,687 — 44,687 — Preferred stock investment 5,326 — — 5,326 Total $ 188,745 $ 79,229 $ 104,190 $ 5,326 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 investment 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 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 (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. The estimated fair value was $ 5.3 million and $ 4.1 million as of December 31, 2023 and 2022, respectively, and is recorded in other long-term assets on the Company's consolidated balance sheet. 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, 2023 and 2022. 79 The following table presents the change in fair value of the Company’s investment carried at fair value and classified as Level 3 as of December 31, 2023 (in thousands): Preferred Stock Investment Balance as of January 1, 2021 $ 7,949 Unrealized gain included in other comprehensive income (loss) 493 Balance as of December 31, 2021 $ 8,442 Unrealized loss included in other comprehensive income (loss) ( 4,327 ) Balance as of December 31, 2022 $ 4,115 Reversal of cumulative unrealized loss included in other comprehensive income (loss) 2,885 Credit loss included in earnings ( 1,674 ) Balance as of December 31, 2023 $ 5,326 Fair Value Disclosures - Other Assets and Liabilities The Company's other long-term assets balance also included notes receivable of $ 6.8 million and $ 9.3 million as of December 31, 2023 and 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 December 31, 2023. 9. 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. 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 haven't been processed or received but 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): 80 Year Ended December 31, Subscription 2023 2022 2021 Reserve at beginning of year $ 21,543 $ 22,407 $ 19,925 Veterinary invoices during the period related to: Current year 540,396 439,679 357,859 Prior years 2,800 ( 2,799 ) ( 1,411 ) Total veterinary invoice expense 543,196 436,880 356,448 Amounts paid during the period related to: Current year 506,294 414,778 333,182 Prior years 23,001 18,739 16,109 Total paid 529,295 433,517 349,291 Non-cash expenses 3,896 4,227 4,675 Reserve at end of period $ 31,548 $ 21,543 $ 22,407 The Company had unfavorable development on veterinary invoice reserves for the subscription business segment of $ 2.8 million for the year ended December 31, 2023, favorable development on veterinary invoice reserves of $ 2.8 million for the year ended December 31, 2022, and favorable development on veterinary invoice reserves of $ 1.4 million for the year ended December 31, 2021, all 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): Year Ended December 31, Other Business 2023 2022 2021 Reserve at beginning of year $ 22,191 $ 17,264 $ 9,004 Veterinary invoices during the period related to: Current year 287,361 211,729 129,826 Prior years 498 1,128 ( 212 ) Total veterinary invoice expense 287,859 212,857 129,614 Amounts paid during the period related to: Current year 256,616 190,031 112,574 Prior years 21,744 17,899 8,780 Total paid 278,360 207,930 121,354 Non-cash expenses — — — Reserve at end of period $ 31,690 $ 22,191 $ 17,264 The Company had unfavorable development on veterinary invoice reserves for the other business segment of $ 0.5 million for the year ended December 31, 2023, unfavorable development on veterinary invoice reserves of $ 1.1 million for the year ended December 31, 2022, and favorable development on veterinary invoice reserves of $ 0.2 million for the year ended December 31, 2021, all 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 cumulative number of veterinary invoices represents the total number received as of December 31, 2023, 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 2020 through 2022 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, 2023. 81 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 2020 2021 2022 2023 2023 2023 Year of Occurrence (unaudited) (unaudited) (unaudited) 2020 $ 279,236 $ 278,325 $ 277,839 $ 278,342 $ — 1,205,693 2021 $ 354,083 $ 351,797 $ 352,320 $ — 1,482,674 2022 $ 438,148 $ 439,448 $ 1,342 1,775,110 2023 $ 542,362 $ 30,206 1,981,465 $ 1,612,472 $ 31,548 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 2020 2021 2022 2023 2023 2023 Year of Occurrence (unaudited) (unaudited) (unaudited) 2020 $ 72,289 $ 72,026 $ 72,255 $ 72,352 $ — 536,416 2021 $ 129,814 $ 130,650 $ 130,577 $ — 906,658 2022 $ 211,724 $ 212,163 $ 945 1,289,524 2023 $ 287,365 $ 30,745 1,414,664 $ 702,457 $ 31,690 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, 2023. Information for years 2020 through 2022 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 2020 2021 2022 2023 Year of Occurrence (unaudited) (unaudited) (unaudited) 2020 $ 261,780 $ 276,589 $ 277,839 $ 278,342 2021 $ 334,187 $ 350,925 $ 352,320 2022 $ 417,419 $ 438,106 2023 $ 512,156 $ 1,580,924 Total amounts unpaid and recorded as a liability $ 31,548 82 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 2020 2021 2022 2023 Year of Occurrence (unaudited) (unaudited) (unaudited) 2020 $ 63,362 $ 72,013 $ 72,255 $ 72,352 2021 $ 112,562 $ 130,157 $ 130,577 2022 $ 190,026 $ 211,218 2023 $ 256,620 $ 670,767 Total amounts unpaid and recorded as a liability $ 31,690 11. 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; (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 December 31, 2023 was approximately 10.5 % 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 December 31, 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 December 31, 2023 are as follows (in thousands): Year Ending December 31, December 31, 2023 2024 $ 1,350 2025 1,350 2026 1,350 2027 72,113 2028 57,125 Thereafter — Total $ 133,288 83 12. 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, 2023, 2022 and 2021 was as follows (in thousands): Year Ended December 31, 2023 2022 2021 Veterinary invoice expense $ 3,667 $ 4,145 $ 4,538 Other cost of revenue 1,612 2,339 2,610 Technology and development 2,846 4,742 3,056 General and administrative 17,717 12,831 8,862 New pet acquisition expense 7,319 9,336 9,160 Total expensed stock-based compensation 33,161 33,393 28,226 Capitalized stock-based compensation 2,135 1,633 676 Total stock-based compensation $ 35,296 $ 35,026 $ 28,902 As of December 31, 2023, the Company had 714,382 unvested restricted stock units. Stock-based compensation expense of $ 44.6 million related to unvested restricted stock units are expected to be recognized over a weighted average period of approximately 2.4 years. 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 year ended December 31, 2023. 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, 2023, 2022, and 2021. 84 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, 2021 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 Granted — — — Exercised ( 174,721 ) 12.82 10,931 Forfeited ( 2,834 ) 18.87 — Outstanding as of December 31, 2022 629,650 13.53 21,410 Granted — — — Exercised ( 213,848 ) 12.47 3,720 Forfeited ( 6,832 ) 12.80 — Outstanding as of December 31, 2023 408,970 14.09 6,715 Exercisable at December 31, 2023 408,970 $ 14.09 $ 6,715 As of December 31, 2023, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 2.5 years. The fair value of options vested were as follows for the years ended December 31, 2023, 2022, and 2021. The Company didn't grant any stock options in these three years. Fair Value of Options Vested (in thousands) Year: 2021 $ 313 2022 $ — 2023 $ — 85 Restricted Stock Awards and Restricted Stock Units A summary of the Company’s restricted stock award and restricted stock unit activity for the years ended December 31, 2023, 2022 and 2021 is as follows: Number of Shares Weighted Average Grant Date Fair Value per Share Unvested shares as of January 1, 2021 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 Granted 623,401 84.11 Vested ( 516,077 ) 72.81 Forfeited ( 82,399 ) 81.91 Unvested shares as of December 31, 2022 1,112,552 84.46 Granted 366,870 26.77 Vested ( 669,413 ) 72.52 Forfeited ( 95,627 ) 79.60 Unvested shares as of December 31, 2023 714,382 $ 66.64 13. Stockholders ’ Equity Common Stock and Preferred Stock As of December 31, 2023, the Company had 100,000,000 shares of common stock authorized and 41,858,866 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, 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 year ended December 31, 2023. The Company repurchased 95,021 shares under this program during the year ended December 31, 2022. 86 14. Accumulated Comprehensive Income (Loss) A summary of the components of accumulated other comprehensive income (loss) is as follows (in thousands): Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of January 1, 2021 $ 2,120 $ 951 $ 3,071 Other comprehensive income (loss) ( 496 ) 502 6 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 ) Other comprehensive income (loss) 2,712 3,992 6,704 Balance as of December 31, 2023 $ ( 76 ) $ 479 $ 403 87 15. Segments The Company has two aggregated 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. O perating income (loss) of the Company’s segments were as follows (in thousands): Year Ended December 31, 2023 2022 2021 Subscription business: Revenue $ 712,906 $ 596,610 $ 494,862 Veterinary invoice expense 543,196 436,880 356,448 Other cost of revenue 70,490 60,804 51,216 Technology and development 13,765 16,555 11,942 General and administrative 36,256 25,964 22,579 New pet acquisition expense 77,172 88,959 78,148 Depreciation and amortization 8,021 7,205 8,494 Subscription business operating loss ( 35,994 ) ( 39,757 ) ( 33,965 ) Other business: Revenue 395,699 308,569 204,129 Veterinary invoice expense 287,859 212,857 129,614 Other cost of revenue 76,044 72,453 57,367 Technology and development 7,638 8,578 4,924 General and administrative 23,951 13,415 9,314 New pet acquisition expense 200 541 499 Depreciation and amortization 4,453 3,716 3,471 Other business operating loss ( 4,446 ) ( 2,991 ) ( 1,060 ) Gain (loss) from investment in joint venture ( 219 ) ( 253 ) ( 171 ) Total operating loss ( 40,659 ) ( 43,001 ) ( 35,196 ) Interest expense 12,077 4,267 10 Other expense (income), net ( 7,701 ) ( 3,072 ) 14 Loss before income taxes $ ( 45,035 ) $ ( 44,196 ) $ ( 35,220 ) 88 The following table presents the Company’s revenue by geographic region of the member (in thousands): Year Ended December 31, 2023 2022 2021 United States $ 935,312 $ 764,349 $ 580,966 Canada and other 173,293 140,830 118,025 Total revenue $ 1,108,605 $ 905,179 $ 698,991 Substantially all of the Company’s long-lived assets were located in the United States as of December 31, 2023 and 2022. 89 16. Dividend Restrictions and Statutory Surplus The Company’s business operations are conducted through subsidiaries, one of which is an insurance company domiciled in New York, American Pet Insurance Company (APIC), and one of which is a segregated cell business, Wyndham Segregated Account AX, located in Bermuda. In 2022, the Company incorporated a new wholly-owned insurance subsidiary, GPIC Insurance Company (GPIC), domiciled in Canada. 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. 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. 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 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 the 12-month period immediately preceding the declaration or distribution of the current dividend increased by the excess, if any, of net investment income over dividends declared or distributed during the period commencing thirty-six months prior to the declaration or distribution of the current dividend and ending twelve months prior thereto, and not including realized capital gains. APIC paid dividends of $ 7.6 million to the Company during the year ended December 31, 2023. None of the Company's U.S. insurance subsidiaries paid dividends to the Company during the years ended December 31, 2022 and 2021. 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 $ 7.3 million, $ 6.9 million, and $ 5.6 million during the years ended December 31, 2023, 2022 and 2021, respectfully. The statutory net income for 2023, 2022 and 2021 and statutory capital and surplus at December 31, 2023, 2022 and 2021, for APIC were as follows (in thousands): As of December 31, 2023 2022 2021 Statutory net income $ 40,076 $ 35,227 $ 24,409 Statutory capital and surplus $ 199,613 $ 162,232 $ 124,189 As of December 31, 2023, APIC maintained $ 199.6 million of statutory capital and surplus which was above the required amount of $ 137.6 million of statutory capital and surplus to avoid additional regulatory oversight. During the year ended December 31, 2023, the Company funded $ 3.8 million, $ 0.2 million, and CAD $ 8.5 million of statutory capital to APIC, ZPIC and GPIC, respectively. During the year ended December 31, 2022, the Company funded $ 8.0 million and $ 7.8 million of statutory capital to ZPIC and QPIC, respectively. ZPIC, QPIC and GPIC will each be required to maintain a level of surplus as determined by their respective domiciliary regulators. As of December 31, 2023, neither ZPIC, QPIC nor GPIC has begun underwriting any insurance policies. As of December 31, 2023, the Company had $ 14.6 million on deposit with various states in which it is licensed to write policies. 90 17. Income Taxes Loss before income taxes was as follows for the years ended December 31, 2023, 2022 and 2021 (in thousands): Year Ended December 31, 2023 2022 2021 United States $ ( 41,019 ) $ ( 43,794 ) $ ( 34,052 ) Foreign ( 4,016 ) ( 402 ) ( 1,168 ) $ ( 45,035 ) $ ( 44,196 ) $ ( 35,220 ) The components of income tax expense (benefit) were as follows (in thousands): Year Ended December 31, 2023 2022 2021 Current: U.S. federal & state $ ( 8 ) $ 82 $ 58 Foreign 464 814 2,066 456 896 2,124 Deferred: U.S. federal & state 7 11 ( 15 ) Foreign ( 805 ) ( 431 ) ( 1,799 ) ( 798 ) ( 420 ) ( 1,814 ) Income tax expense (benefit) $ ( 342 ) $ 476 $ 310 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, 2023 2022 2021 Federal income taxes at statutory rate 21.0 % 21.0 % 21.0 % U.S. state income taxes 7.9 3.5 7.5 Equity compensation ( 9.2 ) 2.5 30.4 Change in valuation allowance ( 19.1 ) ( 26.7 ) ( 58.4 ) Other, net ( 0.1 ) ( 1.7 ) ( 1.7 ) Credits 0.3 0.3 0.3 Effective income tax rate 0.8 % ( 1.1 ) % ( 0.9 ) % 91 The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands): As of December 31, 2023 2022 Deferred tax assets: Deferred revenue $ 10,017 $ 8,610 Accruals and reserves 2,190 1,860 Net operating loss carryforwards 71,231 63,772 Depreciation and amortization 2,310 1,421 Equity compensation 1,875 3,179 Credits 1,147 997 Other 1,995 1,661 Total deferred tax assets 90,765 81,500 Deferred tax liabilities: Deferred costs ( 1,549 ) ( 1,322 ) Intangible assets ( 3,103 ) ( 3,603 ) Other ( 3,471 ) ( 2,398 ) Total deferred tax liabilities ( 8,123 ) ( 7,323 ) Total deferred taxes 82,642 74,177 Less deferred tax asset valuation allowance ( 85,245 ) ( 77,507 ) Net deferred tax liability $ ( 2,603 ) $ ( 3,330 ) At December 31, 2023, the Company had U.S. federal, U.S. state, and foreign net operating loss carryforwards of $ 71.2 million (tax-effected) and U.S. federal income tax credits of $ 1.1 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 . Foreign net operating loss carryforwards will begin to expire in 2024. U.S. 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. As of December 31, 2023, 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, the majority of its U.S. State, and a portion of its foreign deferred tax assets as of December 31, 2023, 2022, and 2021 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, 2023, the Company recognized a net increase of $ 7.7 million in valuation allowance against its net deferred tax assets associated with U.S. federal and certain foreign and U.S. 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, 2020 through 2023, 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 and countries, and may be subject to audit or examination by the relevant authorities in respect to those particular jurisdictions primarily for 2018 and thereafter. For the year ended December 31, 2023, 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. 92 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, 2023 2022 2021 Balance, beginning of year $ 151 $ 138 $ 133 Increases (decreases) to tax positions related to prior periods ( 72 ) 8 — Increases to tax positions related to the current year 1 5 5 Balance, end of year $ 80 $ 151 $ 138 18. Employee Benefits The Company has a 401(k) plan for its U.S. employees. The plan allows employees to contribute a percentage of their pretax earnings annually, subject to limitations imposed by the Internal Revenue Service. The plan also allows the Company to make a matching contribution, subject to certain limitations. As of December 31, 2023, the Company has made no matching contributions to the 401(k) plan. 19. Related Parties In August 2018, the Company invested $ 0.3 million in a limited liability entity in exchange for a 17.5 % ownership interest. The investee is considered to be a related party, as the Company has the ability to exercise significant influence over the investee. In February 2020, the Company entered into a service agreement with the investee, under which the Company incurred $ 2.2 million and $ 3.5 million of expenses for consulting services provided by the investee related to pet acquisition during the years ended December 31, 2023 and 2022, respectively, recorded as new pet acquisition expense on the Company's consolidated statement of operations. 93 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.