TRUPANION, INC. 10-Q

Item 1. Financial Statements TRUPANION, INC. Condensed Consolidated Statements of Operations (in thousands, except share data) (unaudited) Three Months Ended March 31, 2024 2023 Revenue $ 306,121 $ 256,329 Cost of revenue: Veterinary invoice expense (1) 233,569 194,137 Other cost of revenue (1) 36,325 35,846 Total cost of revenue 269,894 229,983 Operating expenses: Technology and development (1) 6,960 4,900 General and administrative (1) 14,673 21,017 New pet acquisition expense (1) 16,843 21,642 Depreciation and amortization 3,785 3,202 Total operating expenses 42,261 50,761 Loss from investment in joint venture ( 103 ) ( 71 ) Operating loss ( 6,137 ) ( 24,486 ) Interest expense 3,596 2,387 Other income, net ( 2,843 ) ( 1,902 ) Loss before income taxes ( 6,890 ) ( 24,971 ) Income tax benefit ( 38 ) ( 191 ) Net loss $ ( 6,852 ) $ ( 24,780 ) Net loss per share: Basic and diluted $ ( 0.16 ) $ ( 0.60 ) Weighted average shares of common stock outstanding: Basic and diluted 41,917,094 41,107,889 (1) Includes stock-based compensation expense as follows: Veterinary invoice expense $ 924 $ 853 Other cost of revenue 466 465 Technology and development 1,254 708 General and administrative 3,449 8,219 New pet acquisition expense 2,059 2,086 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 March 31, 2024 2023 Net loss $ ( 6,852 ) $ ( 24,780 ) Other comprehensive income (loss): Foreign currency translation adjustments ( 1,332 ) 1,555 Net unrealized gain (loss) on available-for-sale investments ( 652 ) 491 Other comprehensive income (loss), net of taxes ( 1,984 ) 2,046 Comprehensive income (loss) $ ( 8,836 ) $ ( 22,734 ) See accompanying notes to the condensed consolidated financial statements. 2 TRUPANION, INC. Condensed Consolidated Balance Sheets (in thousands, except share data) March 31, 2024 December 31, 2023 Assets (unaudited) Current assets: Cash and cash equivalents $ 146,455 $ 147,501 Short-term investments 128,734 129,667 Accounts and other receivables, net of allowance for doubtful accounts of $ 1,093 at March 31, 2024 and $ 1,085 at December 31, 2023 278,492 267,899 Prepaid expenses and other assets 17,084 17,022 Total current assets 570,765 562,089 Restricted cash 23,106 22,963 Long-term investments 13,007 12,866 Property, equipment, and internal-use software, net 104,365 103,650 Intangible assets, net 17,221 18,745 Other long-term assets 18,013 18,922 Goodwill 42,983 43,713 Total assets $ 789,460 $ 782,948 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 8,348 $ 10,505 Accrued liabilities and other current liabilities 30,473 34,052 Reserve for veterinary invoices 62,275 63,238 Deferred revenue 249,135 235,329 Long-term debt - current portion 1,350 1,350 Total current liabilities 351,581 344,474 Long-term debt 127,482 127,580 Deferred tax liabilities 2,399 2,685 Other liabilities 4,627 4,487 Total liabilities 486,089 479,226 Stockholders’ equity: Common stock: $ 0.00001 par value per share, 100,000,000 shares authorized; 43,032,805 and 42,004,619 issued and outstanding at March 31, 2024; 42,887,052 and 41,858,866 shares issued and outstanding at December 31, 2023 — — Preferred stock: $ 0.00001 par value per share, 10,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 544,593 536,108 Accumulated other comprehensive income (loss) ( 1,581 ) 403 Accumulated deficit ( 223,107 ) ( 216,255 ) Treasury stock, at cost: 1,028,186 shares at March 31, 2024 and December 31, 2023 ( 16,534 ) ( 16,534 ) Total stockholders’ equity 303,371 303,722 Total liabilities and stockholders’ equity $ 789,460 $ 782,948 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 January 1, 2024 41,858,866 $ — $ 536,108 $ ( 216,255 ) $ 403 $ ( 16,534 ) $ 303,722 Issuance of common stock in connection with the Company's equity award programs, net of tax withholdings 145,753 — 127 — — — 127 Stock-based compensation expense — — 8,358 — — — 8,358 Other comprehensive income (loss) — — — — ( 1,984 ) — ( 1,984 ) Net income (loss) — — — ( 6,852 ) — — ( 6,852 ) Balance at March 31, 2024 42,004,619 $ — $ 544,593 $ ( 223,107 ) $ ( 1,581 ) $ ( 16,534 ) $ 303,371 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 314,544 — ( 713 ) — — — ( 713 ) Stock-based compensation expense — — 12,959 — — — 12,959 Other comprehensive income (loss) — — — — 2,046 — 2,046 Net income (loss) — — — ( 24,780 ) — — ( 24,780 ) Balance at March 31, 2023 41,327,702 $ — $ 511,940 $ ( 196,342 ) $ ( 4,255 ) $ ( 16,534 ) $ 294,809 See accompanying notes to the condensed consolidated financial statements. 4 TRUPANION, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended March 31, 2024 2023 Operating activities Net loss $ ( 6,852 ) $ ( 24,780 ) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 3,785 3,202 Stock-based compensation expense 8,152 12,331 Other, net ( 202 ) ( 397 ) Changes in operating assets and liabilities: Accounts and other receivables ( 10,718 ) ( 15,847 ) Prepaid expenses and other assets 287 ( 3,765 ) Accounts payable, accrued liabilities, and other liabilities ( 5,131 ) ( 5,148 ) Reserve for veterinary invoices ( 885 ) 4,606 Deferred revenue 13,998 22,936 Net cash provided by (used in) operating activities 2,434 ( 6,862 ) Investing activities Purchases of investment securities ( 19,193 ) ( 34,795 ) Maturities and sales of investment securities 19,005 73,793 Purchases of property, equipment, and internal-use software ( 3,065 ) ( 5,184 ) Other 516 100 Net cash provided by (used in) investing activities ( 2,737 ) 33,914 Financing activities Proceeds from debt financing, net of financing fees — 35,130 Repayment of debt financing ( 338 ) ( 607 ) Proceeds from exercise of stock options 372 140 Shares withheld to satisfy tax withholding ( 245 ) ( 853 ) Other ( 75 ) — Net cash provided by (used in) financing activities ( 286 ) 33,810 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash, net ( 313 ) 260 Net change in cash, cash equivalents, and restricted cash ( 902 ) 61,122 Cash, cash equivalents, and restricted cash at beginning of period 170,464 84,637 Cash, cash equivalents, and restricted cash at end of period $ 169,562 $ 145,759 Supplemental disclosures Noncash investing and financing activities: Purchases of property, equipment, and internal-use software included in accounts payable and accrued liabilities $ 694 $ 1,243 See accompanying notes to the condensed consolidated financial statements. 5 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 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. The financial data as of December 31, 2023 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 27, 2024 (the 2023 10-K). The Company's accounting policies are described in Note 1 to the audited financial statements included in the 2023 10-K. Operating results for the three months ended March 31, 2024 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 2023 10-K for additional discussion of these estimates and assumptions. 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. This ASU is effective for annual periods beginning after December 15, 2023, with early adoption permitted. The Company is still evaluating the impact of this ASU on its consolidated financial statements. In December 2023, the FASB issued ASU 2023-09 which expands upon the income tax disclosures through changes to the rate reconciliation and income taxes paid information. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is still evaluating the impact of this ASU 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: Three Months Ended March 31, 2024 2023 Stock options 386,312 615,913 Restricted stock awards and restricted stock units 1,262,794 813,718 6 3. 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 March 31, 2024 and December 31, 2023 (in thousands): Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value As of March 31, 2024 Long-term investments: Available-for-sale investments Foreign deposits $ 12,009 $ — $ — $ 12,009 $ 12,009 $ — $ — $ 12,009 Held-to-maturity investments U.S. treasury securities $ 998 $ — $ — $ 998 $ 998 $ — $ — $ 998 Short-term investments: Available-for-sale investments U.S. treasury securities $ 43,416 $ 77 $ ( 208 ) $ 43,285 Mortgage-backed securities and collateralized mortgage obligations 10,905 29 ( 97 ) 10,837 Other asset-backed securities 13,571 41 ( 61 ) 13,551 Corporate bonds 36,099 177 ( 132 ) 36,144 $ 103,991 $ 324 $ ( 498 ) $ 103,817 Held-to-maturity investments U.S. treasury securities $ 12,929 $ 2 $ ( 8 ) $ 12,923 Certificates of deposit 11,988 — — 11,988 $ 24,917 $ 2 $ ( 8 ) $ 24,911 7 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 Maturities of investments classified as available-for-sale and held-to-maturity were as follows (in thousands): As of March 31, 2024 Amortized Cost Fair Value Available-for-sale: Due under one year $ 4,084 $ 4,050 Due after one year through five years 87,440 87,388 $ 91,524 $ 91,438 Available-for-sale collateralized: Mortgage-backed securities and collateralized mortgage obligations $ 10,905 $ 10,837 Other asset-backed securities 13,571 13,551 $ 24,476 $ 24,388 Held-to-maturity: Due under one year $ 24,917 $ 24,911 Due after one year through five years 998 998 $ 25,915 $ 25,909 8 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 $ 0.5 million and $ 0.3 million as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, $ 24.9 million in available-for-sale investments have been in a loss position for more than twelve months, with total unrealized losses of $ 0.3 million. As of March 31, 2024, $ 39.4 million available-for-sale investments have been in a loss position for less than twelve months, with total unrealized losses of $ 0.2 million. 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. 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 $ 15.1 million and $ 24.0 million during the three months ended March 31, 2024 and 2023, respectively. 4. Other Investments The Company has invested $ 7.0 million in the preferred stock of a variable interest entity, Baystride, Inc. ("Baystride"), 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 5. Additionally, the Company has extended a $ 7.0 million revolving line of credit to Baystride 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 $ 3.3 million and $ 4.0 million as of March 31, 2024 and December 31, 2023, respectively. The Company has also entered into a series of agreements to provide ancillary services to, and receive reimbursement from, Baystride at cost. The Company provided $ 0.1 million and $ 0.2 million of these services for the three months ended March 31, 2024 and 2023, respectively. 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 preferred stock investment. The following table presents a rollforward of the allowance for credit losses for this investment. Balance as of January 1, 2023 $ — (Addition to) allowance for credit losses — Balance as of March 31, 2023 $ — Balance as of January 1, 2024 $ ( 1,674 ) (Addition to) allowance for credit losses — Balance as of March 31, 2024 $ ( 1,674 ) 9 5. 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 March 31, 2024 Fair Value Level 1 Level 2 Level 3 Assets Money market funds $ 81,906 $ 81,906 $ — $ — Fixed maturities: Mortgage-backed securities and collateralized mortgage obligations 10,837 — 10,837 — Other asset-backed securities 13,551 — 13,551 — Corporate bonds 36,144 — 36,144 — Foreign deposits 12,009 12,009 — — U.S. Treasury securities 43,285 — 43,285 — Preferred stock investment 5,326 — — 5,326 Total $ 203,058 $ 93,915 $ 103,817 $ 5,326 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 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 3, 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 4) 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 as of March 31, 2024, unchanged from December 31, 2023, 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 three months ended March 31, 2024 and the year ended December 31, 2023. 10 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 March 31, 2024 and 2023 (in thousands): Preferred Stock Investment Balance as of January 1, 2024 $ 5,326 Changes in fair value included in earnings — Balance as of March 31, 2024 $ 5,326 Preferred Stock Investment Balance as of January 1, 2023 $ 4,115 Changes in fair value included in earnings — Balance as of March 31, 2023 $ 4,115 Fair Value Disclosures - Other Assets and Liabilities The Company's other long-term assets balance also included notes receivable of $ 6.1 million and $ 6.8 million as of March 31, 2024 and December 31, 2023, 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 March 31, 2024. 6. 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. 7. Reserve for Veterinary Invoices The reserve for veterinary invoices is an estimate of the future amount the Company will pay for veterinary invoices that have not 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): 11 Three Months Ended March 31, Subscription 2024 2023 Reserve at beginning of year $ 31,549 $ 21,543 Veterinary invoices during the period related to: Current year 151,793 127,343 Prior years 563 1,645 Total veterinary invoice expense 152,356 128,988 Amounts paid during the period related to: Current year 128,639 108,483 Prior years 24,386 17,529 Total paid 153,025 126,012 Non-cash expenses 864 877 Reserve at end of period $ 30,016 $ 23,642 The Company had unfavorable development on veterinary invoice reserves for the subscription business segment of $ 0.6 million for the three months ended March 31, 2024, and unfavorable development on veterinary invoice reserves of $ 1.6 million for the three months ended March 31, 2023, 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): Three Months Ended March 31, Other Business 2024 2023 Reserve at beginning of year $ 31,690 $ 22,191 Veterinary invoices during the period related to: Current year 80,876 63,948 Prior years 337 1,200 Total veterinary invoice expense 81,213 65,148 Amounts paid during the period related to: Current year 55,059 44,564 Prior years 25,585 18,122 Total paid 80,644 62,686 Non-cash expenses — — Reserve at end of period $ 32,259 $ 24,653 The Company had unfavorable development on veterinary invoice reserves for the other business segment of $ 0.3 million for the three months ended March 31, 2024, and unfavorable development on veterinary invoice reserves of $ 1.2 million for the three months ended March 31, 2023, both of which were the result of ongoing analysis of recent payment trends. 12 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 March 31, 2024 Year of Occurrence 2022 and prior $ 698 2023 7,027 2024 22,291 $ 30,016 Other Business As of March 31, 2024 Year of Occurrence 2022 and prior $ 576 2023 5,867 2024 25,816 $ 32,259 8. 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 March 31, 2024 was approximately 10.46 % 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 March 31, 2024, 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. 13 Future principal payments on outstanding borrowings as of March 31, 2024 are as follows (in thousands): Year Ending December 31, March 31, 2024 2024 $ 1,012 2025 1,350 2026 1,350 2027 72,113 2028 57,125 Thereafter — Total $ 132,950 9. 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 March 31, 2024 2023 Veterinary invoice expense $ 924 $ 853 Other cost of revenue 466 465 Technology and development 1,254 708 General and administrative 3,449 8,219 New pet acquisition expense 2,059 2,086 Total expensed stock-based compensation 8,152 12,331 Capitalized stock-based compensation 206 628 Total stock-based compensation $ 8,358 $ 12,959 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, 2023 714,382 $ 66.64 Granted 761,553 26.92 Vested ( 200,289 ) 69.84 Forfeited ( 12,852 ) 56.94 Unvested shares as of March 31, 2024 1,262,794 $ 42.28 As of March 31, 2024, the Company had 1,262,794 unvested restricted stock units. Stock-based compensation expenses of $ 56.1 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 quarter ended March 31, 2023. 14 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, 2023 408,970 $ 14.09 $ 6,715 Granted — — — Exercised ( 22,658 ) 16.41 338 Forfeited — — Outstanding as of March 31, 2024 386,312 13.95 5,275 Exercisable as of March 31, 2024 386,312 $ 13.95 $ 5,275 As of March 31, 2024, stock options outstanding and stock options exercisable had a weighted average remaining contractual life of 2.4 years. 10. Stockholders' Equity Common Stock and Preferred Stock As of March 31, 2024, the Company had 100,000,000 shares of common stock authorized and 42,004,619 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 March 31, 2024, 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 months ended March 31, 2024 and 2023, respectively. 11. 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 March 31, 2024 Foreign Currency Translation Net Unrealized Gain (Loss) on Available-for-Sale Securities Total Balance as of January 1, 2024 $ ( 76 ) $ 479 $ 403 Other comprehensive income (loss) ( 1,332 ) ( 652 ) ( 1,984 ) Balance as of March 31, 2024 $ ( 1,408 ) $ ( 173 ) $ ( 1,581 ) For the three months ended March 31, 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) 1,555 491 2,046 Balance as of March 31, 2023 $ ( 1,233 ) $ ( 3,022 ) $ ( 4,255 ) 15 12. 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. Operating income (loss) of the Company’s segments were as follows (in thousands): Three Months Ended March 31, 2024 2023 Subscription business: Revenue $ 201,134 $ 165,210 Veterinary invoice expense 152,356 128,988 Other cost of revenue 19,776 17,103 Technology and development 4,573 3,158 General and administrative 9,641 11,073 New pet acquisition expense 16,826 21,591 Depreciation and amortization 2,487 2,064 Subscription business operating loss ( 4,525 ) ( 18,767 ) Other business: Revenue 104,987 91,119 Veterinary invoice expense 81,213 65,149 Other cost of revenue 16,549 18,743 Technology and development 2,387 1,742 General and administrative 5,032 9,944 New pet acquisition expense 17 51 Depreciation and amortization 1,298 1,138 Other business operating loss ( 1,509 ) ( 5,648 ) Loss from investment in joint venture ( 103 ) ( 71 ) Operating loss ( 6,137 ) ( 24,486 ) Interest expense 3,596 2,387 Other income, net ( 2,843 ) ( 1,902 ) Loss before income taxes $ ( 6,890 ) $ ( 24,971 ) 16 The following table presents the Company’s revenue by geographic region of the member (in thousands): Three Months Ended March 31, 2024 2023 United States $ 255,974 $ 216,925 Canada and other 50,147 39,404 Total revenue $ 306,121 $ 256,329 Substantially all of the Company’s long-lived assets were located in the United States as of March 31, 2024 and December 31, 2023. 17